California’s home insurers paid out more than they collected in premiums

California’s homeowners insurers cumulatively paid out more than twice as much in claims and expenses as they collected in premiums in both 2017 and 2018, a legacy impacting 2023’s market conditions, according to the Insurance Information Institute (Triple-I).

Tthe claims and expenses paid in 2017 and 2018—due largely to wildfire-related losses—were so extreme that the average combined ratio for the period was 108.1.

A combined ratio is the percentage of each premium dollar an insurer spends on claims and expenses. A 108.1 ratio means California’s insurers paid out $1.08 in claims and expenses for every dollar collected in premiums within that timeframe (2013-2022).

The combined ratio for California’s homeowners insurers stood at 241.9 in 2017 and 213.4 in 2018, the Triple-I Issues Brief notes, citing AM Best data.

To accurately underwrite and price coverage, insurers must be able to set premium rates prospectively.

Insurers have earned healthy underwriting profits on their homeowners insurance business in all but two of the 10 years between 2013 and 2022

One or two years that include major catastrophes can wipe out several years of underwriting profits—thereby contributing to the depletion of policyholder surplus if rates are not raised.

Unlike most states, California’s homeowners insurers are unable to price risk prospectively and instead must rely on historical data alone, in accordance with the regulations adopted after voters approved Proposition 103 in 1988.

The policyholder surplus is the amount of money remaining after an insurer’s liabilities are subtracted from its assets.

The surplus acts as a financial cushion above and beyond reserves, protecting policyholders against an unexpected or catastrophic situation.

The three costliest wildfires in U.S. insurance history occurred in California in 2017 (Tubbs Fire) and 2018 (Camp and Woolsey Fires).

Since 2018, California has seen the five largest wildfires in the state’s history, as defined by acres burned. None of them are listed among the costliest for insurers.

Top 10 Costliest Wildland Fires In The United States

  Estimated insured loss, $ mn
YearNameDollars when occurredIn 2021 dollars (2)
2018Camp Fire$10,000$10,750
2017Tubbs Fire8,7009,560
2018Woolsey Fire4,2004,520
1991Oakland Fire (Tunnel)1,7003,350
2017Atlas Fire3,0003,300
2020Glass Fire2,9503,070
2020CZU Lightning Complex Fire2,5002,600
2017Thomas Fire2,2502,470
2020LNU Lightning Complex Fire2,2502,340
2007Witch Fire1,6002,080
Source: Aon

With fewer private insurance options available, more Californians are resorting to the state’s Fair Access to Insurance Requirements plan, which offers less coverage for a higher premium.

This is a large and potentially profitable market in which insurers want to do business, the Triple-I Issues Brief adds.

To make that possible in light of ongoing wildfire trends—as well as events like early 2023’s anomalous rains and, more recently, Hurricane Hilary—the state needs to continue making investments that reduce risk. It also needs to update its regulatory regime to allow accurate, prospective pricing.

Nataly Kramer   by Nataly Kramer