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).

“Insurers have earned healthy underwriting profits on their homeowners insurance business in all but two of the 10 years between 2013 and 2022,” states Triple-I’s just-released Issues Brief, Proposition 103 and California’s Risk Crisis. “However, the 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,” the Issues Brief states, “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.

“With fewer private insurance options available, more Californians are resorting to the state’s FAIR [Fair Access to Insurance Requirements] plan, which offers less coverage for a higher premium,” the Issues Brief states.

“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.”

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About the Insurance Information Institute

With more than 50 insurance company members — including regional, super-regional, national, and global carriers — the Insurance Information Institute (Triple-I) is the #1 online source for insurance information in the U.S. The organization’s website, blog and social media channels offer a wealth of data-driven research studies, white papers, videos, articles, infographics and other resources solely dedicated to explaining insurance and enhancing knowledge.

Unlike other sources, Triple-I’s sole focus is creating and disseminating information to empower consumers. It neither lobbies nor sells insurance. Triple-I offers objective, fact-based information about insurance – information that is rooted in economic and actuarial soundness. Triple-I is affiliated with The Institutes Risk and Insurance Knowledge Group.

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“#Insurers have earned healthy underwriting profits on their homeowners #insurance business in all but 2 of the 10 years between 2013 and 2022,” states @iiiorg just-published #California Issues Brief.