California Homeowners Market Building Challenges for Insurers

A tightening marketplace for homeowners coverage in California, plus scares of mold, have put a squeeze on those serving this market.

The squeeze was caused by years of losses and expenses that exceeded premium income. Unfortunately most insureds are unaware of this fact.

The homeowners’ market place is now experiencing the same double-digit premium increases as the commercial market place has. Not only are buyers facing significant increases but State Farm, the largest writer of homeowners insurance in California, caught the industry’s attention earlier this year, when it stated it would not write any new business for the moment.

Another large writer has filed for a mold limitation and another is being very restrictive on the new business they will write. All of them have had significant rate increases approved in California and there are even more in the pipeline. The buyers in many cases have not even seen the effect of all of these increases that will come at the time of their renewals.

Mold is just beginning to become the new asbestos of the insurance industry and it is just starting its run in the homeowners’ arena.

An article in the Los Angeles Times indicates that water damage claims are up 102 percent since 1997 and mold losses will far outdistance water losses in amounts paid in a very short time.

Once this gets going in California, it should be as much of an issue as it has become in Texas. Mold is present in many homes and once it is discovered there will be a rush to find an insured cause so that the insurance industry can pay for the problem.

Recently I saw a claim where remodeling and expansion of a house uncovered mold and the rush to find an insured cause was on. This kind of claim will have to be addressed either in premium or in underwriting before we can begin to see a light at the end of the tunnel.

While mold is sitting there as a potential time bomb, the ever expanding building in all areas are putting more and more homes at risk to large brush fires like those that destroyed many homes in Colorado and more recently in California this month.

The canyons and forests are being built up with new homes and the fire protection and brush clearance is not there in most cases. I even see wood shake used in some new homes in heavy brush areas because the buyer likes the look. Homes are being built in remote areas with little water and or with little fire department support. When the fires occur there is no one to fight them initially and little water to be had.

The enormous size and value of homes is also causing some capacity problems and once another big one burns down or maybe a few at the same time we will see another capacity problem for the big ones. I’ve read there are now over 1 million homes with a replacement value of over $500,000 in California alone.

A major problem today is the fact that many homes are badly underinsured from a replacement cost standpoint. Insurance companies on average often don’t appreciate what they have at risk and may be falling further behind each year as inflation and code changes far exceed the nominal increases that are
made by some companies. Many agents and insured are not in a hurry to insure to value since they have extended replacement costs of 25-100 percent and most homes rarely burn to the ground so why worry about insuring to value.

One recent example I saw involved a homeowner who was insured for replacement cost on his $1,000,000 dwelling. He got an independent appraisal and learned it would cost $3,000,000 to replace. He asked his agent to increase coverage and the agent said he did not have the authority and he could not get it through his company referral process. The insured had to go elsewhere and we placed an attractive piece of business with an “A” value of $3,000,000. The prior carrier was getting 1/3 of what they should have for the risk. It is reasonable to estimate that the average underinsured value in California is about 25-50 percent. If values were raised by that amount the loss ratio problem would be diminished.

As the fire season heats up, brush issues are going to be a major problem.

Many carriers just rely on brush maps and are not fully aware of they severe exposures and limited clearance that many of their homes present.

After the next major brush fire in California where many homes are involved, I expect we will see another round of tightening by all carriers once they realize how badly they are exposed from an aggregate stand point. This coupled with the under- valuations will create the next Oakland Hills or Northridge type problems.

On the earthquake front, coverage for homeowners is becoming more and more of an issue as companies have filled up their aggregates in the Los Angeles and San Francisco areas. Many carriers are not writing new earthquake business in these areas, others are increasing deductibles to reduce their exposures and premium is going up as capacity runs out.

Here again, I believe valuations are going to hurt the industry, as calculations on probable maximum losses (PML’s) are only as valid as the input. If values are off by 25-50 percent on average, where is the PML? There has not been a major quake on the San Andreas Fault in the Los Angeles area since 1854 and in the San Francisco area since 1906.

When this occurs, which it will, those without insurance that have property damage will wish they had it as no one is going to bail them out in a major event.

You would not know it by the problems most carriers are having, but several carriers are actually making money on their book of homeowners business in California.

We have seen a few carriers start writing business on a surplus lines basis in the state over the last few years and I anticipate we will see at least one new one by the end of June.

The homeowners market in California will certainly continue to be a newsmaker in the coming months and years as mold, fires, and earthquakes offer the potential for major problems for both companies and those they insure.

Ken Nitz is a broker at Swett & Crawford with an emphasis on high-valued homes.