California housing takes ‘major hit’ after wildfire insurer exits

Home insurers have already exited the markets along the east coast as hurricane risks rise. But California’s State Farm exit last month due to wildfire risk caused a stir.

“So now that they’ve pulled out, it’s going to be a real problem, especially in these markets where you’re paying a premium for it,” Josh Altman, co-founder of The Altman Brothers, told Yahoo Finance Live (video above). “Now this is going to be a blow to these properties.”

State Farm cited “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure and a tough reinsurance market” for its decision.

State Farm’s move follows AIG’s announcement last year that it was exiting the California market. AIG recently said it was limiting property insurance coverage to New York, Delaware, Florida, Colorado, Montana, Idaho and Wyoming, according to the Insurance Journal.

And last week, Nationwide announced “it takes [action] to mitigate risk and manage personal and commercial insurance portfolios in the current environment. While no details were provided regarding which personal insurance lines will be affected, the changes vary by state and territory, according to the Insurance Journal.

As more insurers leave California, this could turn into a looming problem as costs rise, making home ownership more expensive than it is now with mortgage rates at 6.75%, Scott Sheldon, branch manager at New American Funding, told Yahoo Finance.

Smoke rises as the factory fire burns on the outskirts of Weed, California, U.S., September 2, 2022 in this photo obtained from social media.  Michael Gaio/via REUTERS THIS IMAGE WAS PROVIDED BY A THIRD PARTY.  COMPULSORY CREDIT.

Smoke rises as the factory fire burns on the outskirts of Weed, California, U.S., September 2, 2022 in this photo obtained from social media. (Michael Gaio/via REUTERS)

Property damage from wildfires and inflation is causing distress to primary insurers and reinsurers, putting “the cost and availability of reinsurance as a risk financing mechanism…under persistent pressure.” …to do profitable business in wildfire-prone areas,” according to a Gallagher report.

For example, the average cost to build a typical single-family home last year was $153 per square foot, according to a policy survey by the National Association of Home Builders. This marked the highest level in the series’ history and was up 43% from $114 in 2019.

Add to that the growing losses from more frequent and intense natural disasters – from forest fires to hurricanes. A study by CoreLogic projects that annual losses nationwide could reach $23.5 billion per year by 2050.

As a result, home insurance premiums are getting more and more expensive. In 2022, these premiums increased by 10.72% in the first quarter, according to an S&P Global Market Intelligence analysis. The situation is even worse if there are few insurers in a market willing to cover your home.

“When your fire insurance doubles your mortgage payment every month, that’s a big deal,” Altman said. “You’re going to see a drastic decline in these markets more than ever before.”

Other homeowners across the country are experiencing escrow shortages due to rising home insurance premiums, as well as rising property taxes.

Even the rich and famous are not immune to the risk of wildfires and the associated costs. Celebrities such as Miley Cyrus, Gerard Butler and Neil Young lost their homes to wildfires in 2018.

“The famous Mulholland Drive – try to get fire insurance in Mulholland right now,” Altman said. “It’s almost impossible.”

Ronda Lee is a senior personal finance reporter for Yahoo Money and an attorney with experience in law, insurance, education and government. Follow her on Twitter @writesronda

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