California insurance industry battered by wildfires, inflation

With California rocked by persistent inflation and natural catastrophes like wildfires and earthquakes, PropertyCasualty360.com spoke to Mike Zukerman, the president and CEO of CSAA Insurance Group, about the state of insurance in California.

Prior to his appointment as CEO, Zukerman served as the company’s executive vice president and chief legal officer for 12 years. In addition, he actively contributes to industry and business leadership, serving on the boards of the American Property Casualty Insurance Association (APCIA), the California Chamber of Commerce, and the Bay Area Council (BAC).

PropertyCasulty360.com: How are wildfires and climate change impacting California's insurance industry?

Zukerman: There’s no question that the increase in wildfires, as well as atmospheric rivers and other extreme weather events, fueled by climate change, are having a significant impact on California’s home insurance market. However, these are only a few components of a very complex scenario.

There are a variety of other significant contributing factors — including inflation, a market that has been underpriced for a very long time due to regulatory constraints, a history of inadequately maintained forests, an aging power infrastructure, legal system abuse, fraud, and home building in areas that are more prone to wildfire — all of which have merged to create a very challenging insurance market for customers and carriers.

PropertyCasulty360.com: How has inflation impacted the state's insurance sector?

Zukerman: Inflation is an aspect that hasn’t received as much attention as some of the other contributing factors, but it has definitely played a large role. Inflation significantly drove up the cost to repair homes and cars, and rates did not increase at the same pace.

Inflation impacts the cost of capital, such as reinsurance and debt, which has a big impact on a carrier's ability and willingness to continue to write insurance, especially in a high-value home market like California. You have to have capital to support new policies. When these costs go up and insurers are paying out more than what’s coming in, you see companies exiting the market.

PropertyCasulty360.com: What types of coverage have been impacted most by climate change and inflation? Where are Californians having trouble getting insurance?

Zukerman: In California, a lot of the discussion has been around the home market, but there are issues with the auto market as well — and the two are linked. Inflation caused the cost of auto repairs to rise significantly. Many carriers in California couldn't get the auto rate increases they needed to meet these rising prices. A lot of companies that had been profitable for years in auto lost a lot of money in 2022 and 2023. And that, in turn, affected their ability to support new and existing home policies. It’s a domino effect.

Areas with significant wildfire impact include homes in areas of high wildfire risk. Although development in communities with an elevated risk for wildfire will continue, the insurance industry should be allowed to appropriately price for increased risk. Otherwise, insurance policies will no longer be available for properties in these areas, which will prevent new homes from being built, and make it difficult to buy or sell existing homes in these communities.

PropertyCasulty360.com: What carriers have left the state and why?

Zukerman: A lot of the reasons are outlined above, and I can’t comment further on other carriers or their motives for leaving the California market – but I think it’s important to mention why CSAA Insurance Group has remained in California. At CSAA, we don’t have shareholders, so we exist to serve only our policyholders and our community. I’m an optimist — I think we’re entering a new period for the California market.

We believe that it’s critical that all the key insurance stakeholders — insurers, regulators, consumer advocacy groups, homeowners — help provide solutions that ensure Californians can find and afford home insurance. CSAA is working proactively to help find creative solutions to reduce wildfire risk, such as the California Wildfire Innovation Fund and our Wildfire Landscape Design Contest.

California Insurance Commissioner Ricardo Lara has also announced a series of welcome reforms, including allowing the use of forward-looking catastrophe models in ratemaking, and speeding up reviews for rate filings. Other positive developments include increased federal and state funding and programs for effectively managing forests and wildfire mitigation, efforts by utilities to reduce ignition points, and the fire service’s ongoing and amazing work defending people and property on the frontlines of devastating wildfires.

Homeowners have a role to play too, and can take meaningful steps to make their homes more resilient. CSAA will preserve any homeowners’ policy in California where the homeowner secures a “Wildfire Prepared Home designation” from the Insurance Institute for Business & Home Safety (IBHS).

There’s a lot of work yet to do together, but I’m very excited and encouraged by what’s ahead.

PropertyCasulty360.com: How have California's fire prevention methods impacted wildfire risk? Are they making it easier to insure folks?

Zukerman: California’s state fire service (CAL FIRE) has done an incredible job defending our state from wildfire. We've had several potentially big fires this year in California, and they were all over it. Budgets, staff and firefighters have increased, and technology has improved, and they've done a really amazing job.

On top of that, many of the forest lands in California are federal, and both the federal and state governments have done a lot of forest and wildfire management work. Anything any of us can do to reduce wildfire risk will benefit all of California.

PropertyCasulty360.com: Are the average reinsurance rates much higher in California than in other states?

Zukerman: Due to the elevated wildfire risk, reinsurance rates for California risks are among the highest in the country. However, it’s also important to remember that home insurance rates in California have remained relatively low compared to many other states.

PropertyCasulty360.com: Are there forward-looking models insurers can use to better calculate risk?

Zukerman: Until recently, the California Department of Insurance hadn’t allowed for the use of forward-looking catastrophe models in rate making. Risk models were based solely on historical experience. However, with the significant increase in wildfire and the impact of climate change we’ve seen in recent years, modeling rates based on previous decades – when we had far fewer impacts from wildfires in both number and size – just don’t work anymore.

PropertyCasulty360.com: Do you expect carriers to return to California? Why?                                                                                                                                  

Zukerman: Like so many others, I want to see a stable marketplace where customers can find and afford insurance, so I eagerly anticipate the return of other carriers.

With all the positive movement we’re seeing now – the regulatory changes, the increased speed of rate approvals, the use of forward-looking models, the efforts we’re seeing from CAL FIRE and utilities, enhanced forest management at the state and federal levels – I am more hopeful than I’ve been in a long time. In the end, we all want a healthy insurance market in California, and I truly believe we’re headed for better times.

See also:

• Severe weather, natural catastrophes are ‘blind spots’ for P&C insurers
• How homeowners can fight a non-renewal or find alternative insurance
• Homeowners are upgrading at risk of being underinsured