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‘Insurers Have Left The State In Droves’ As Natural Disasters Take Toll On California Property

California’s weather patterns over the last few years have seesawed between raging fires and torrential downpours, causing millions of dollars in property damage and making insurance companies reconsider their positions in the state, with at least one well-known company, Allstate, trying to press pause on new commercial policies.

Allstate last year sought approval from the California Department of Insurance to cease writing new business coverage in California entirely for the foreseeable future, a request the company confirmed to Bisnow but that the CDI has yet to approve. 

A flooded road near Windsor, California, during heavy rains in January.

“Wildfires, more frequent and severe accidents, and inflation-juiced repair prices are causing insurance claim costs to soar in California without the premium to cover them,” an Allstate spokesperson said in a statement. “We’re pausing all new commercial insurance policies in California so we can continue to protect current customers.”

Allstate doesn’t write many commercial policies in California, although the company declined to share how much property it insures in the state, so the pullout isn’t a seismic shift on its own. But the move is a sign of strain in the state’s insurance industry that is likely to worsen with the weather. 

Insurers operating in California have always had to consider a certain amount of risk from earthquakes, but with wildfires becoming more frequent and severe recent flooding that brought an estimated $31B in economic losses, including property damage, those risks are growing. And with more risk come higher rates for property owners, whether because of regular price hikes or the increases that come with decreased competition as insurers withdraw.

“For properties that have catastrophic exposure — they're in some kind of geography where there's higher risk of flood or fire or hail or something like that — I've been quoted 30% to 50% rate increases with almost definite changes to the deductible structure,” Dunleer Group CEO and founder B.J. Turner said. “And then properties that don't have that catastrophic exposure, we're probably going to see rate increases of about 10% to 25%.”

Dunleer is a Los Angeles-based investment company with a $500M portfolio focused on industrial and multifamily properties.

“Rates have skyrocketed in California,” BayRock Multifamily CEO Stuart Gruendl said. “Many insurers have left the state in droves because of losses, claims, political failures in our regulations, etc. So it's hard to get a competitively priced blue-chip insurance policy.” 

Gruendl said that rising costs of premiums also impact returns on construction projects, particularly in builders risk policies. 

“Most developers don't understand how expensive they are,” he said. “They're exorbitant. They're never long enough. They don't give you a long enough term because construction projects take longer. So it's horrible. And it really dampens the return prospects on projects, new projects being built.” 

While commercial insurance for Class-A property is expensive, for Class-B and C properties, obtaining adequate coverage often feels impossible, Gruendl said.

“It's too hard to get property insurance, so we have property insurance pooled with partners on life companies and stuff like that,” he said. “But those have gone up as well. On Class-B or C properties? Forget it. I've seen 25% and 30% annual increases on Class-B and C property. They don't want to be in business in California.”

Of course, the problem isn’t unique to California. Florida’s hurricane-related insurance troubles are well-documented, and rates are up all over the country because of macroeconomic and geopolitical challenges, not just natural disasters. 

“Inflation, the Russia/Ukraine conflict, ongoing supply chain challenges and a volatile interest rate environment will exert mounting pressure on commercial insurance rates throughout the year,” Insurance Information Institute Director of Strategic Communications Janet Ruiz told Bisnow via email. 

The average premium increase across all lines nationwide in Q3 2022 was 8.1%, up from 7.1% the preceding quarter, Insurance Journal reported. And Q3 2022 was the 20th consecutive quarter of increased premiums for property and casualty lines, according to a report from the Council of Insurance Agents and Brokers.

Smoke from the August Complex wildfire in September 2020 in Mendocino County, California.

But the Golden State does bring a unique set of challenges for both insurers and people trying to purchase insurance.

For one thing, it’s just more expensive to rebuild in California, meaning any dollars recouped from an insurance claim don’t go as far.

“I think it comes down to cost,” Insurance Office of America general counsel Ryan Kirby said. “The cost to rebuild is so high. The price is going to be 10 times here what it is in, say, Wisconsin or Nebraska. It’s just a different game out here.”

Archipelago Director of Risk Engineering Erin Ashley said for developers and property owners to mitigate risks, one of the biggest challenges in California is the ubiquity of older property, which often costs much more to upgrade and future-proof against environmental hazards. 

However, Ashley expects California’s unique combination of weather hazards to lead to some shifts in local building codes. 

“I think that traditionally, building codes have been very much focused on life safety, and we're seeing a shift on building codes now embracing sustainability and resilience," she said. "And so, instead of just being life safety and property protection, we're going to see now mandatory requirements.”

In the meantime, insurers are also expecting bad weather to create more gaps in coverage for businesses in the future, likely straining profitability for businesses and commercial property owners. 

While business owners can often purchase additional coverage for business interruptions due to losses caused by natural disasters, many insurance companies increasingly avoid offering that coverage entirely, Venable LLP partner Ryan Lapine said. 

“What we've seen is that many insurers in areas susceptible to losses from flooding, earthquakes and mudslides are simply not writing policies for business interruption with that coverage at all,” he said. “And so, a lot of folks are unprotected. It's really a pretty tricky environment at present.”

“There’s also the issue of reinsurance being more expensive,” Ruiz wrote. “Reinsurance rates for property catastrophe business is expected to increase by well over 10% when contracts are renewed this month, according to a commentary from Fitch Ratings, driven by insured losses of about US$120 billion in 2022 and the increasing frequency and severity of natural catastrophe claims.” 

Lapine said that while insurers have a legal obligation in California to find coverage for policies as it exists, they also have a business obligation to look for eligible exclusions, and if the costs of paying out claims continue to rise, it’s more likely that insurers will continue to cease offering coverage in the state. 

That cessation, in turn, has reverberations for commercial property.

“It's hitting the entire industry very, very widely,” Dunleer's Turner said. “That's a tough one to swallow. Even if you have properties that don't have catastrophic exposure, you're still going to feel it pretty dramatically — and that’s on top of the 40% increase over the last five years.” 

“We have to view new acquisitions through somewhat of an insurance lens to make sure that we have adequate and sufficient insurance and such that it's also cost-effective," he said. "The way that the cost of insurance is going right now, it can be almost the tail that wags the dog, because if it's too much, you can't do the deal.”