How Will Southern California Fires Affect California Homeowners Insurance?
Posted by David Schneider | December 3, 2007

The recent wildfires throughout Southern California have caused over $1 billion in estimated damages. As many struggle to pick up the pieces, the inevitable onslaught of homeowners insurance claims are pouring into the offices of California insurance providers. Those properly insured can find consolation in the fact that their insurance policy will cover most, if not all, of the cost to rebuild their homes.

With over $1 billion in potential losses facing California homeowners insurance providers, many are worried that homeowners will see a rate hike because of the fires. While this is a possibility, state officials and experts say increased premiums are unlikely.

Experts Believe Homeowners Insurance Fees Will Not Increase

California has long been the largest market for homeowners insurance. Despite occasional mass insurance payouts for past fires (such as in 2003) and earthquakes, insurance companies enjoy some of the highest profits in California. Thanks to past financial success, insurance companies have more than enough cash reserves on hand to pay the claims of these most recent fires. In fact, profits between 2004 and 2006 are about $6 billion dollars for homeowners insurance companies.

Another factor that works in favor of California homeowners is the fact that the insurance industry in California is one of the most scrutinized and highly regulated in the nation. State authorities may be reluctant to approve rate increases. This is especially true given recent efforts to decrease California insurance rates in the past year.

Skeptical California Homeowners Fear Higher Insurance Rates

Despite the reassurance by state officials, many homeowners are worried about increased rates. Given past experience with rate hikes, few can blame them. After the 1994 Northridge earthquake, many insurers threatened to pull out of the market. The state had to create a special authority to sell earthquake coverage in order to convince them to stay. Others point to increased rates and canceled coverage on the Gulf Coast after Hurricane Katrina in 2005. While profits have rebounded since then, many believe insurance providers will attempt to recoup current losses by raising rates.

Dropped Homeowners Insurance Coverage Also a Possibility

There have already been reports of major insurers threatening to cancel coverage if homeowners in high-risk areas fail to take precautionary measures. For now, a law passed after the 2003 fires protects the coverage of those whose homes suffered recent damage. This law prevents insurance companies from canceling coverage for at least one policy period. However, the law does not protect individuals whose homes were undamaged. This makes dropped coverage and more stringent coverage requirements a possibility for many.

Looking at the issue with the glass half full, the high profit margins enjoyed in California will likely make insurance companies reluctant to leave the market. Even so, Allstate Corp. announced earlier this year (prior to the fires taking place) that they would no longer underwrite new homeowners insurance policies in California, attributed to the risks imposed from natural disasters. Allstate is also attempting to gain approval for a 12 percent rate increase for current customers. Despite this, no other companies have yet to show indications of dropped coverage or increased rates. Whether or not this fact holds true remains to be seen.