The top property and casualty insurers in California wrote about $3.2 billion more in premiums in the state last year than they did in 2022.

It is a trend that will likely continue to rise in the immediate future, frustrating property owners who have to pay them and providers who have to shell out more and more for natural disaster damages in the state. It’s a situation that has provoked insurance providers to scale back their business here or leave the state entirely.

Danone Simpson, founder and chief executive of Calabasas-based insurance brokerage Montage Insurance Solutions, said it is partially the casualty of California being historically underinsured in comparison to the rest of the nation.

“We don’t have the hurricanes and other risks in other states,” she explained. “Now with the fires and floods that have been happening, we have been underinsured and that’s why they’re increasing premiums or non-renewing their customers.”

What the numbers show

The state’s 24 largest insurance carriers wrote more than $79.3 billion in California premiums last year, according to the Business Journal’s research. This represents a 4.16% increase from premiums written in 2022.

The biggest year-over-year increase came from the largest insurer here by premium, Illinois giant State Farm. The agency wrote nearly $1 billion more in premiums last year.

Locally, two Los Angeles-based insurers were in the Top 10 for the state in terms of premiums written. Farmers Insurance Group, located in Woodland Hills, wrote nearly $7.55 billion in premiums last year – an increase of a little more than $500 million. And Mid-Wilshire-based Mercury General Corp. wrote more than $3.59 billion in premiums last year, up by about $348 million. (See page 16 for the Business Journal’s annual List of Property/Casualty Insurers ranked by 2023 premiums written.)

Farmers posting a premium increase is noteworthy, given that the company announced last year it would stop adding new customers in California. It would seem to indicate that it either retained a significant amount of its existing customers or simply charged enough of a premium increase to more than offset any policy attrition.

The marked increase in the number and severity of natural disasters in California – the devastating wildfires and rain-induced flooding and mudslides – would be on its own a challenge for insurers. But it’s a situation compounded by the fact that construction materials and labor to build structures remains painfully high right now.

“What’s happened is underwriters look at historical statistics and they’re seeing that there’s not only more fires, but the cost of replacing homes in California is huge,” Simpson said. “That’s what has created this need in California to increase the limits of properties located near fire zones.”

And property values in California, driven largely by an enormous supply and demand imbalance, will stay among the highest in the nation for years to come.

“Some of that is the climate changes and the increased risk for fires, but the pandemic and all kinds of logistical concerns with shipping have really driven up replacement costs as well,” insurance attorney Sean Andrade, managing partner of Arts District litigation boutique Andrade Gonzalez LLP, previously told the Business Journal. “It costs more to get things done in general, so they’re seeing a lot of increases on their costs side with claims, and also just an increase in the number of claims.”

Adjustments will continue

As Farmers last year scaled back its policy strategy, it also had to find other ways of reeling in costs.

The company announced nearly a year ago an 11% employee reduction, which included 369 workers who reported to the Woodland Hills headquarters directly or remotely. Farmers this month added 84 more layoffs effective Oct. 7, including 17 California residents, who report to Woodland Hills remotely. Other smaller carriers and subsidiaries in the county also engaged in layoffs last year.

At the same time, the narrative has shifted a bit in terms of what companies are offering in the state.

Farmers this month resumed the writing of new commercial multi-peril policies in a variety of business operations – including auto service and repair, habitational, manufacturing, real estate and wholesale distribution – in California. The provider also resumed writing new auto insurance policies in California starting in July.

Eric Coleman, who in April joined Farmers as its president of business insurance after previously working in senior leadership for Nationwide Mutual Insurance Co., attributed this shift to productive talks with the California Department of Insurance that ultimately allowed the company to raise its rates commensurate with exposure levels and material cost.

“As a leading insurer of small businesses, we are excited to be re-opening these key lines of our commercial insurance offerings to new customers in California and help provide business owners with more choices when shopping for coverage options,” Coleman said in a statement. “Farmers has operated in California for nearly a century, and while challenges remain, we are encouraged by the positive changes taking place in the state’s commercial insurance marketplace.

“We have been consistent in our belief,” he added, “that a fundamental condition for offering coverage is that rates need to reflect the risk exposure we are insuring.”

Simpson said she can relate to the pains of rate growth. She recently had to re-up property insurance for Montage and her own home, each of which saw 30% increases from last year. To add insult to injury, maximum payouts are also dropping.

“If people had $10 million (max payouts) for years, they’re lowering it to $1 million,” she said. “If there’s been threats of a claim, they get very nervous about that.”

Working to find solutions

As a brokerage owner, Simpson hits the market to find policies for her customers. She takes a hands-on approach with Montage – brokers scour providers for quotes, provide all of them to clients and frequently check in on those clients to make sure their assets are accurately reflected.

That last detail, Simpson said, is important, because many brokers are inclined to simply renew a contract with the same numbers and without shopping their customers around. Because that practice won’t account for changes in property value or specific assets, that can have the effect of underinsuring. If that happens every time, it compounds quickly.

“We market every carrier, every year. We don’t just roll over business like a lot of brokers do. We don’t just renew our clients as-is. It’s unbelievable how many companies out there renew as-is even on their homeowners,” Simpson said. “Make sure you have policy reviews with your brokers annually, make sure they’re quoting all carriers annually and make sure they’re bringing you the best policies and programs. Don’t just renew as-is.”

That diligence has helped Montage grow its clientele. Simpson recalled one new customer, whose previous carrier deemed him a non-renew, coming to Montage for insurance. As it happened, the same previous carrier offered the man a policy – it turned out, that carrier had erroneously lumped the man’s property in with a larger group deemed to be too risky.

“We obtained that business because we helped him stay with the carrier,” Simpson quipped.

Prices aren’t doomed to spike forever, experts contend. Andrade, in prior interviews, said California was ultimately too big of a market for the insurance industry to meaningfully ignore. New providers entering the market will likely ease pricing, he added.

Indeed, after exiting the state entirely, Allstate Insurance began offering auto insurance – at a 30% markup – in California again. Restaurant insurer Rainbow Insurance also entered California this year.

Simpson added that the industry will have to keep lobbying the state insurance department and commissioner as well. While that department has stubbornly kept rates lower for customers, eventually it will have to contend with the decreasing ability of carriers to offer policies here, she said.

“If they can get to their proper amount insured, they will level off (in price increases), I’m sure,” Simpson added. “We’ve been hearing threats of the market hardening for a while now. Renewals have been flat for years, and now we’re at the point where we’ve had too many hurricanes and other disasters. It’s not only California. It’s nationwide.”