In November of last year, Allstate paused writing new homeowners policies in California. State Farm, the state’s largest homeowners writer, stopped accepting new applications for insurance back in May. Such decisions could not have been made lightly: California is the third-largest homeowners insurance market in the country, and State Farm and Allstate combined for over 25 percent of the homeowners direct written premium in the state in 2022 (based on 2022 direct written premium for homeowners multi-peril from Statutory Pg. 14).

Executive Summary

In September, the California Department of Insurance announced a set of reforms called the Sustainable Insurance Strategy to support the California property market, citing a plan to engage in public meetings to explore incorporating California-only reinsurance costs into rate filings among the reforms. Here, consulting actuaries Rob Zolla and Aaron Koch responded to a request from Carrier Management with an article that sets the stage for anticipated discussions by reviewing the impacts of California's prohibition of reinsurance costs from both a theoretical and practical perspective.

Some of the challenges facing the California market come from deteriorating loss experience in the state, as rapid growth of housing units in the Wildland-Urban Interface and the impacts of wildfires and other disasters have led to greater insurance payouts than in recent years. However, insurers have also faced challenges due to the California regulatory approach toward approving insurance rates. Unlike many other states, the California Department of Insurance (CDI) forbids the inclusion of reinsurance costs in a company’s calculation of how much premium it needs to charge customers for most lines of business. (California Code of Regulations. Title 10. ยง 2644.25. Reinsurance). As the costs of natural disasters have continued to climb, this admittedly technical restriction on the premium calculation has made it more difficult for insurers to receive approval for needed rate increases, and thus operate successfully in the market.

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