Why Regulatory Interference Drives Property Insurance Market Instability

Many states are facing a growing affordability and availability crisis in property insurance markets, and it’s not just because of climate change.

While climate change is leading to more severe and frequent natural catastrophes, the insurance industry has made significant improvements in modeling and pricing the increasing risk of catastrophic exposure. Insurers, however, are facing increasing challenges in managing risk due to government mandates and regulatory interference. Regulators in some states, like California, are not allowing the voluntary market to function properly, leading to less choice and higher costs for consumers.

Regulatory actions are exacerbating the effects of natural disasters by magnifying losses and prolonging market disruption. This is especially notable in California, where regulatory environments restrict insurers’ ability to manage solvency risks through their overall exposure in high-risk areas. In the aftermath of unprecedented wildfire losses in California, insurers have faced a never-before-seen level of government interference through various regulatory changes. These actions, combined with California’s notoriously difficult and costly environment for legal system abuse and claims fraud, have led to a deeper and unnecessarily prolonged homeowners insurance crisis in the state.

Following record-breaking wildfire losses, the California Legislature passed a series of bills intended to provide increased consumer protections and expand policy benefits after a declared disaster. However, these changes, such as implementing nonrenewal moratoria and extending timeframes for policyholders to collect full replacement cost and additional living expenses, resulted in significantly higher costs and reduced insurers’ ability to manage exposure. Given the significant expansion of coverage benefits and the unparalleled number of multimillion-dollar properties in California’s wildland-urban interface, insurers in the state are increasingly seeing rampant solicitation of homeowners by public adjusters and attorneys during and after wildfires, which fuels legal system abuse and claims fraud — two key cost drivers in the property insurance market.

The collective impact of these issues has created a need for significantly higher premiums in California to ensure that companies are able to pay future claims. However, the California Department of Insurance has been slow to approve rate filings, creating alarming adequacy concerns. For the system to work properly, insurance rates must accurately reflect the risk assumed and be developed through sound standards of actuarial practice.

In California, property insurers have paid out tens of billions in wildfire claims in the past five years (2017-2021), resulting in an estimated $13.2 billion cumulative underwriting loss for homeowners insurers. APCIA analysis suggests losses have been so significant that the California homeowners insurance market, on a cumulative basis, has not generated a profit dating back to the 1991 Oakland Tunnel fire. Recent regulatory proposals would pose additional financial pressure on insurers, further straining insurers’ ability to operate efficiently.

While certain things that impact insurance, like stubbornly high inflation or more frequent and severe natural catastrophes, are out of our control, regulators and insurers need to work together to address other cost drivers, including legal system abuse and claims fraud, and promote disaster mitigation to reduce future losses.

Insurers are an essential part of society as they provide the financial protection needed to help families, businesses and communities recover and rebuild after a disaster, and we value the important role regulators play in the industry by overseeing market conduct and solvency. But regulatory actions that are outside the scope of market conduct and solvency only compound the current problems, like legal system abuse and claims fraud, and negatively impact consumers.

By working together to address key cost drivers and promote regulatory stability, insurers and regulators can help restore a healthy insurance marketplace and ensure consumers have access to affordable coverage options so they can protect the things that matter most to them.