California’s Homeowners Insurance Shift: Population, Inflation and Admitted Insurer Exits

February 5, 2024 by

The excess and surplus lines homeowners insurance market in California has undergone significant changes in recent years.

The number of policies has changed substantially in over the last decade — first increasing, then declining rapidly.

However, new data suggests the market may be increasing again as new policies rebound at a high pace.

What factors are influencing California’s changeable E&S homeowners insurance industry?

Up until 2019, there was consistent demand from homeowners for E&S insurance in California. But then, the number of new policies being purchased started to decline, hitting a low point in 2020.

More recently, the tide seems to be turning again. Our analysis shows that residential population changes, inflation fluctuations and admitted insurer exits all shape turbulent demand patterns.

Population Changes and Increasing Expenses

Several factors contribute to the fluctuations in the E&S homeowners market in California. Increasing inflation, which accelerated in 2020, has pushed up costs of living. This may lead homeowners to reconsider additional expenses like specialized insurance. Concurrently, California’s residential population has leveled off and declined slightly since around 2019, indicating a decrease in potential homeowners insurance market participation.

Further analysis shows that residential population size and inflation together explain roughly 41% of the changes in the number of new E&S homeowners insurance policies in California. Specifically, as California’s population declines, the number of new policies falls.

Inflation also plays a role. When inflation rises, the number of new policies decreases. Our findings indicate that a reduction of 1,000 in California’s residential population correlates to 1.2 fewer new E&S homeowners insurance policies on average. A one-unit increase in inflation (as measured by the Consumer Price Index) correlates to 8.7 fewer new policies on average.

As would be expected, our findings also show that residential population size seems to have a bigger impact on the E&S homeowners market compared with inflation. So, the key drivers of new E&S homeowners insurance demand appear to be the number of potential customers in California and inflation.

Major Insurer Exits and Their Impact

Recent developments have added further complexity to the situation.

To delve deeper into these emerging trends, we segregated the data on the number of monthly E&S policies to differentiate new business from renewal policies. While renewals have remained stable, there has been a notable increase in new policies, indicating substantial growth in new business.

For example, new business transactions increased more than three times in 2023 in December (5,294) compared with June (1,493). This divergence stands in stark contrast to previous patterns. The past few months have seen some sizable shifts, with considerable month-to-month elevations in new business transactions, most markedly in July (39%), August (30%), September (16%), October (12%) and November (43%) of 2023.

The specific catalysts behind this sharp increase in new business, at first glance, remain elusive. Diving deeper, some indicators provide some clarity.

Recent exits by major admitted insurance players (including industry giants like Allstate and State Farm) from California’s market might be playing a pivotal role. These moves have opened an opportunity for E&S insurers to provide supplementary coverage and support homeowners where admitted carriers are retreating.

The pullback of these major insurers is providing an opportunity for E&S carriers to fill gaps in coverage. As these large companies minimize their coverage, voids emerge — critical shortfalls that E&S insurers appear to be backing up and bolstering through expanded capacity.

While the future remains uncertain, the latest data signals an increase in the E&S homeowners insurance market in California after a previous decline in policies written. With admitted insurers exiting, E&S providers have an opportunity to provide coverage and support to homeowners.

In fact, E&S insurance is filling a critical gap by insuring homes that admitted insurers are retreating from or unwilling to cover.

As inflation and residential population fluctuations continue to exert influence, insulation from future volatility requires vigilant monitoring of not just direct competition but broader socioeconomic forces. Though fluctuations may persist, continual analysis of internal and external drivers can help E&S insurers brace for the ups and downs ahead.