In a big shock to the insurance industry, Allstate and State Farm have announced that they will be leaving California as an insurance market. This comes amid increased damage caused by various disasters in the state, including wildfires and mudslides.
State Farm announced on May 27th that they would no longer issue new policies for their customers in the state of California. When asked their reasoning, they cited the increased number of disasters and the challenges in the reinsurance market. “State Farm General Insurance Company made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market," the insurance company said in a statement.(1)
Shortly thereafter, Allstate announced they would be pulling out, citing similar concerns. They had been quietly doing so since January, but with State Farm’s announcement, they revealed this information as well. AIG has since revealed they have stopped auto renewing coverage in the state and several auto insurers are leaving as well, citing increased premiums.
This pull out comes amid several disaster laden California has been beset by several bad years of wildfires. In 2021, California experienced at least 7,396 wildfires, which burned nearly 2.6 million acres of land, according to the California Department of Forestry and Fire Protection, with 2022 adding an additional 7,490 wildfires that burned 362,455 acres.(2)(3) Then the massive flooding and mudslides caused by the 2022-2023 Winter added to the woes, amplified by the fire scars caused by the wildfires of the previous three seasons with Accuweather estimating the total economic losses at $30 Billion.(4)
These losses are compounded by lack of coverage and the state regulations in California. Only two percent of homeowners had flood insurance at the time of the floods and mudslides. This plus the fact that many were in areas that were not considered high risk for flooding. As evidenced by the floods and mudslides many had to pay out of their own pockets.
The other issue facing insurance companies is the fact that California’s regulations require more to be covered by their policies. According to the California Department of Insurance (CDI), insurance companies that cover property may be required under California law to cover living expenses such as emergency shelter and food, personal property and valuables, as well damage to the property and other buildings or structures on it; the removal of trees, shrubs and debris, and water damage not caused by a flood. Allstate said the state doesn't allow insurers to quickly adjust their rates to cover the increased costs for disasters.(5) Compounding this, is that if they leave, at the earliest they wont be able to come back until 2028 at the minimum due to the state laws currently in place.
The insurance giants leaving California after the years of disasters is a warning sign for other disaster-prone states, in particular Florida and Louisiana. These states are vulnerable to hurricanes that are increasingly becoming more destructive. Insurance carriers might start looking at limiting coverage in these states leaving many in the lurch as state regulations require certain amounts of coverage.
State Farm and Allstate leaving California is a warning sign that insurance coverage may be increasingly harder to get and leave many homes and businesses at risk.