Posted by Editor: FDBobko
March 14, 2024
 Adam Underwood
Update on the State of Insurance in CA
Article by Stacy Trevenon
Kevin told how 20 years ago, his wife told him how her best friend Susan Berkowitz was dating a very sharp local guy who was in sales, that he should talk to about working for him. So they had lunch, and since this guy was a “people” person, Kevin offered him a job—or rather, a career; an insurance license. Today, that young guy is married with three children, one of whom is ready to attend college in Santa Barbara, has learned about insurance and is a “mind-bogglingly” good independent agent. So we were all were asked to give a warm Rotary welcome to his pal, the new owner of his business, Adam Underwood, and I sum up what he said.

Adam said he’d been in the business for 20 years, having started in 2004, and is the owner of Coastside Insurance agencies. Hopefully someday you’ll see something like “Kevin and son,” Kevin laughed. 

Both of them, primarily Adam, talked. In 20 years this is the hardest insurance market he’d ever seen due mostly to the wildfires and losses in California. He first started seeing carriers take action on policies about 10 years ago, mostly with homes in very exposed rural areas. Homeowners were skeptical about wildfires in their areas, which makes insurance a “hard sell,” but now people are seeing the losses.

Over the last five years, those non-renewals and company actions have dramatically accelerated, and gone from rural and mountain areas into downtown Half Moon Bay. So the insurance companies are serious about trying to limit their exposure, which is impacting people “all over” the state.  Right now, he said, many preferred carriers aren’t writing any new business in the property market for homes. He said you’ve heard about State Farm, Allstate’s not writing any new business.  The majority of his preferred carriers – quite a few – are not offering any new business at all. If you called him up today and said, Hey, quote my auto, my home, my umbrella, he would say, Yeah, I can, but I’m not going to be able to find one company to put that with;  I’d have to package it all together. So it’s brutal; it’s tough. It’s very challenging for us as agents, for the consumer, especially if they find themselves needing to buy insurance.

Some carriers have tried to fill the void left by the preferred markets; the majority of them are excess and surplus lines carriers. We do have one preferred market that’s picked up some of these homes; they specialize in properties and homeowners, and even those, now, are starting to hit capacity. They’ve gobbled up a bunch of market share, and they’re starting to say, we can’t take any more homes in this zip code because every broker around is throwing business where they can and so they’re being overexposed.

What can consumers expect to see, and may have already seen? You can expect your rates to increase pretty dramatically over the next few years. He mentioned a struggle with the department of insurance, mostly due to Prop 103, a law passed back in the 1980s, that said that insurance companies have to have their rates approved by the Department of Insurance, which holds “a ton of power” as far as allowing companies to increase their rates. Those rate increase approvals are and have been hard to get, for years. The department of insurance often would tell companies to lower their rates; or, “we’ll give you 2 percent if you ask for 10.” 

The result has been that the homeowner premiums in California are quite a bit lower than the national average. And that needs to change, with the landscape we have as far as the losses that are being incurred.  Carriers have said they’re not going to approve rate increases that they need to stay profitable; they’re just going to stop writing insurance.  You can’t keep us from writing business, so we’re going to stop. That’s kind of where we’re at.

Over the last 10 years the combined loss ratio for all the California insurance companies is 108 percent. The combined loss ratio is your expenses plus your claims compared to the premiums. So over the last 10 years they have lost money, especially in 2017 and 2018,  which have seen the Camp Fire. The loss ratios in those years were 242 percent and 213 percent. 

In the last couple of years, insurance companies are still trying to dig out from those catastrophic losses. In future, the potential for these kind of catastrophic losses is high, especially with the number of homes being built, the urban/wildland interface, rural areas. People want to live there, it’s beautiful --- but any wildfire exposes property to loss. Last winter didn’t help our cause: (it) was brutal with the number of storms we had, which piled on the losses. So the insurance companies said, if that’s going to be our new winter, coupled with the losses we have in summer, what are we doing? 

That’s where we’re at; it’s challenging. What can consumers do? As homeowners, make sure you keep your insurance in force, pay your bills, maintain your homes, get a roof when needed, maintain your wiring, your heating. Something I’m seeing a lot now is, sometimes the carriers are not only not writing business, but they’re re-underwriting … Consumes get questionnaires, asking when their heating or wiring was last updated; I’ve had some carriers doing satellite imagery, photos of roofs. Using that, which is read by AI, it gets a score that, depending on the reading, says that the roof needs work.

When Adam goes out, he takes a photo of the roof and gives that to an underwriter. The roof may be fine, though perhaps with discoloration from water stains. Often the owner agrees to stay with the same policy. Insurance companies may hope the customers don’t fight that; they’re trying to reduce exposure in California. “They’re trying to lose policies. That’s the reality,” Adam said.

Warren suggested compensation for losses? and the need to do something different due to the average 180 percent loss. He contrasted the hypothetical picture with years of catastrophic claims; is it possible greediness on the part of the insurance companies trying to recoup that? Adam supposed that they are trying to “find profitable footing,” as they cannot continue to lose money. He said he is starting to see rate increases coming through; i.e. State Farm recently announced 20 percent across-the-board rate increases that will hit some consumers more. All the carriers may start doing that.

Kevin O’Brien noted that the 108 combined ratio is acceptable for most insurance companies, as they are making money on their investments. But, he added, the  200 is unacceptable. Most insurance companies are stock companies, looking at stock value. They can’t recoup the losses of 2017-2018. Mutual companies like State Farm are a different story, with the customers being the shareholders. It’s not like a utility, like PG&E; the problem is that no one can predict wildfires or storms, and climate change is also a factor. You have to understand that State Farm is in the 20s percent of all the (insured) homes in California. They have a “lot!” of business here. They all are.

Kevin cited the example of homes in Ocean Colony, where he lives, not having insurance against wildfire exposure, and asked, What does that create for you? Adam answered that they have to go out and approach other markets, get all new information to show new carriers the heating/plumbing/roof updates in the last 20-25 years, and then find the best options available. It’s a very limited market. Typically, there are hard conversations about why the consumers have to pay double or more of what they paid before.

Kevin asked about the Fair Plan: Adam noted that the Fair Plan is a carrier of last resort; it covers fire, wind, vandalism, and that’s it. You need a separate “difference in conditions” policy that gives liability, interior water damage, theft, the rest of the coverages you’d have in a normal homeowner policy. Of the two, you get what you have in a standard homeowner policy. They’re not easy to deal with: you have to get and submit time-stamped color photos and submit them within a week of being taken. They make it hard to work with them; it’s available but not cheap.

Ralph Ely  offered a story: in 2018, he had a five-unit apartment house in El Granada and one of the units caught on fire; he called the fire department and went there but Adam – “my insurance man” — was already there, which was good. But late last year he found that they were dropping him, as he lived “too close” to a wildfire (risk) area. They tried six to seven other companies, but those “give any excuse,” such as, the building’s too old  -- 150-rather, 60 years – and so they just don’t want the business. Older buildings have gotten to be challenging too, Adam said. Travelers recently said that in the case of any lessors-risk building over 35 years old, regardless of updates, they don’t want it; rebuilt, they don’t care.

In much of the United States there are old, old houses, Ralph noted. Adam noted three markets now that are taking on new business: one, for homes 50 years old or older, for which they want proof of updates, permits, contractor receipts, not taking your word for it. Ralph mentioned that in his case he did get insurance at three times the premium, which was high to begin with. 

Ginger went to the example of the state insurance commissioner: is there any attempt to make that person accountable? That’s up to the voters, isn’t it? Adam answered, half joking. But that’s an elected position, and the insurance commissioner has ambitions, and he wants to be seen as on the side of consumers. However, there are unintended consequences.

A lot of attention is being placed on the insurance department, Kevin said, because California is too big a market for the insurance companies to ignore. They all want to do business here, but they can’t under adverse circumstances, so they’re letting the insurance department know that something needs to be done with rates and stuff like that. It used to be that insurance departments would approve two or three percent rates regularly if not annually. That’s why you would see a little rate increase that you could handle.  But then if they say it can’t be justified, pretty soon the insurance rates would increase (he cited Allstate.) Then the insurance departments would counter by saying, if you aren’t going to write one we won’t let you write the other, causing problems for the consumers. 

Adam mentioned that there are pressures put on the insurance companies from global re-insurance companies, causing pressure on the carriers to reduce exposures as well and causing re-insurance rates to skyrocket too. Some earthquake companies have stopped writing because they couldn’t find re-insurance.  

Kevin asked listeners, are you familiar with re-insurance?  That means, insurance that the insurance companies buy because they have too much exposure. He gave an example, and then someone cited power companies not burying wires, causing a positive effect on insurance rates. Ideally, said Adam. 

Ginger spoke of the fires and PG&E and rate increases, and Adam discussed those who say they have “tons” of clearance that lets them avoid, say, wildfires, versus the proprietary wildfire mapping tools companies use to look at nearby wildfire exposures.

Discussion followed about exposures within a mile of one’s house, or even the Ocean Colony golf course. Ginger mentioned that 15 years ago Kevin couldn’t write homeowner’s insurance on her house in Pacifica. Adam noted that there are areas like Vallemar in Pacifica that no one will touch. Kevin mentioned that when he bought his house it had a wood-shake roof, illustrating how much things have changed in California: now, you couldn’t put a wood-shake roof on your house, unless you put fireproofing on it.

“A mile of a tree,” someone incredulously exclaimed.

Adam mentioned open space east to the hills, is in a wildfire zone. Ralph brought up the Texas fire, which was in an area rife with sagebrush and where a lot of houses were hit. He mentioned an instance where a building was “200 feet too close to a wildfire area,” and so the premium jumped from 10 grand to 20 grand because it was within that 200 feet. “200 feet difference made a $10,000 difference,” Adam said.

“Try explaining that to somebody,” Kevin said. “I’m glad I sold my business to Adam,” and everyone laughed in support.

Warren Barmore asked if it was the insurance companies that were coming up with these fire danger zones, and why are some places in a danger area and others not? Every carrier is different, Adam answered, and some are non-renewing and others are increasing rates. If you were trying to buy a house now as new business, would your insurance company write it? Maybe, maybe not. Every company has their own proprietary maps. Some share an ISO fire line – you can Google CalFire fire maps and find brush areas – it’s pretty ugly.

Steve Wilson’s wife Kathy asked, are there special considerations for properties with landmark status? They really don’t want those, Kevin said, and all laughed. Adam said the older buildings are challenging already; many applications ask if the building is a designated historical landmark; and then they won’t do it because that increases the value and the replacement cost is harder to figure out. There are specialty companies that will do it, but you will pay a lot more.

Kevin said that Adam mentioned access and surplus lines, and he explained that these are non-admitted companies that don’t play by the same rules, don’t have to have their rates approved by the California Department of Insurance. They’re not backed by the California Guarantee Fund for Financial Solvency, so if they went bankrupt with outstanding claims, the state won’t bail them out. Carriers including Lloyd’s of London, Scottsdale, Lexington, Westchester, owned by Chubb, fill a niche; and are a massive part of our business. 

Steve Wilson told Adam he’s doing a great job and asked about the availability of earthquake insurance. Steve said from his law practice, he’d seen that rate increases were spread across the entire industry, not just limited to homeowners’ policies. 

Adam said that in recent years he had seen the rates go down but now we are seeing them go up again, and earthquake insurance has become more available, with more companies looking to write it and take a bit of exposure away from the Fair Plan. Commercial earthquake is super hard; there’s not many companies that want to write  commercial earthquake coverage but residential earthquake is still quite relatively affordable, in comparison to where it was 10 years ago. But there’s more options.

Kevin said, the California Earthquake Bond that provides earthquake insurance for homes has had amazingly great experience, because that’s the way earthquake works, right? “You have no losses, you have no losses, you have no losses and then you have a catastrophe.”

Adam answered, CA recently realized that they are pretty overexposed. If and when a catastrophic quake occurs, they’ve started to make some pretty serious limitations to their policies and lower the amount of personal property you can have. They’ve whittled some stuff out of their policies.

Ralph asked, are there any companies that reward efforts to fireproof properties? Adam said, there’s a law recently passed that requires insurance companies to give discounts for certain wildfire hardening measures, and the Fair Plan’s offering those to people as well. They’re hard to qualify for; you have to have closed eaves on your house. Ralph asked, a sprinkler system? Adam said emphatically, No, no, strangely enough. He had a client on Tunitas Creek Road who installed an exterior fire retardant system on the house and it did nothing to lower their premium or to increase eligibility for them. But as far as mitigation steps, there’s a long list of things you can do, like clearing brush and closing your eaves. Closing the eaves is a tough one; pretty much every house around here has open eaves, not totally closed, so embers can get in. There’s been a law passed, but most people don’t qualify unless they want to incur expense. 

“Not a happy message,” said Ralph, again drawing laughter. “It’s what I do every day,” rejoined Adam.

Dave Dickson asked, If you have State Farm like I do, is there an inevitability that they’ll  refuse to renew it? Adam said that State Farm has always been “extremely good” at not dropping its customers. He said he hasn’t come across a State Farm policy that hasn’t been renewed for wildfire exposure; they definitely drop for claims. So don’t file small claims, handle what you can handle, keep you house maintained.

“Take a high deductible, that’ll save you money on your premiums, and it’ll keep you from filing what they call a nuisance claim,” Kevin deadpanned. Adam agreed and recommended $2,500 deductibles though more and more are recommending $5,000 on the  homeowners.

Ralph asked, is there a reason commercial is better than residential? Adam said, they’re equally hard. He has three carriers who will write a new homeowner policy right now; one standard, two excess and surplus lines. It’s tough, all the way around.

Kevin thanked Adam amid applause, and told him that 15 children will be inoculated against polio on his behalf.