The Insurance Squeeze

How California’s Property Insurance Crisis is Reshaping Real Estate

This article was submitted just as the wildfires in Southern California were erupting. For a comprehensive look at the current crisis and practical advice for dealing with it, see our Learning Lab Emergency Webinar, Recovering from the SoCal Wildfires, which was broadcast on January 24, 2025, and which can be found in the Learning Lab archives on the CMA website. – Editor

California, celebrated for its breathtaking landscapes, thriving economy, and iconic real estate market, is facing a mounting crisis in its property insurance sector. Once an afterthought to close the deal, insurance has now become a critical concern for homeowners, property investors, brokers, and lenders. What was previously a straightforward step in the buying or lending process has turned into a significant obstacle, reshaping investment strategies and financial security.

The Consequences

• Homeowners are struggling to secure or afford adequate insurance coverage, leaving many exposed to devastating losses.
• Investors are watching profits dwindle as premiums soar, while comprehensive policies become harder to obtain.
• Brokers are seeing deals collapse as buyers balk at skyrocketing insurance costs – or fail to find coverage at all.
• Lenders are tightening their requirements, mandating supplemental policies to mitigate risk, which slows down approvals and adds complexity to an already challenging market.

What’s Driving the Crisis?

1. Mother Nature’s Fury
   California’s property insurance market is a casualty of the state’s increasingly unpredictable climate. Over the past decade, the state has faced prolonged droughts, catastrophic floods, and relentless wildfires that have obliterated entire communities. The damage is staggering – billions of dollars in property losses each year, with no end in sight. The frequency and intensity of these natural disasters are testing the limits of the insurance industry’s risk models.
   Example: The 2020 wildfires alone caused an estimated $12 billion in insured losses, forcing many insurers to rethink their presence in the state.
   Update: The January 2025 fires including the Palisades Fire, Eaton Fire, Park Fire amongst others that are popping up literally “like wildfire” are estimated to have caused ver 50 billion dollars in losses.
2. Regulatory Challenges
   California’s consumer-friendly insurance regulations, while designed to protect policyholders, have added layers of complexity for insurers. Companies cannot increase remiums without approval from the California Department of Insurance, often leaving them unable to adjust rates quickly in response to escalating risks. These regulatory delays, while beneficial to consumers in the short term, have led some insurers to reduce their presence or exit the market entirely.
   Case in Point: State Farm and Allstate, two of the nation’s largest insurers, have ceased issuing new homeowner policies in California, citing unsustainable financial risks.
3. Economic Pressures
   Insurers are paying out far more in claims than they collect in premiums, a situation exacerbated by rising reinsurance costs (the insurance purchased by insurers to mitigate their own risks). The math simply doesn’t add up: as payouts increase and premiums remain regulated, insurers are retreating from the California market to cut their losses.

Adapting to the New Reality

The crisis has left every stakeholder – homeowners, investors, brokers, and lenders – scrambling to adjust. Here’s how we can adapt to this evolving landscape:

For Homeowners

• Harden Homes Against Risks: Invest in fire-resistant materials, defensible space, and flood-resistant upgrades to reduce exposure and potentially lower premiums.
• Explore Coverage Options: Work with brokers to identify alternative or specialty insurers willing to provide policies for high-risk areas.
• Advocate for Change: Join community efforts to push for reforms that strike a balance between consumer protection and insurer sustainability.

For Property Investors

• Diversify Portfolios: Move beyond high-risk regions and consider properties in areas less vulnerable to natural disasters. A balanced portfolio can mitigate financial exposure.
• Leverage Specialty Insurers: While traditional insurers retreat, specialty insurers and surplus lines carriers are stepping in to fill gaps. Collaborating with experienced brokers can help investors secure tailored solutions.
• Advocate for Regulatory Reform: Align with industry groups to lobby for policies that stabilize the insurance market, ensuring it remains viable for both insurers and property owners.

For Brokers

• Proactively Educate Clients: Inform buyers and sellers about the insurance challenges they may face, helping manage expectations and reduce surprises during the transaction process.
• Build Insurance Networks: Partner with brokers and providers who specialize in high-risk areas to offer clients a range of options.
• Highlight Resilient Properties: Showcase homes with fire-resistant features, defensible space, and other risk-reduction measures to attract buyers.

For Lenders

• Partner with Insurers: Collaborate with specialty insurers to offer integrated solutions for high-risk properties, Simplifying the insurance process for borrowers.
• Reevaluate Underwriting Criteria: Adjust risk models and loan requirements to reflect the realities of California’s insurance market.
• Expand Loan Products: Develop creative lending options that account for supplemental insurance costs or properties reliant on FAIR Plan policies.
• Prepare for Market Adjustments: Be aware that high insurance costs and wildfire risks may lead to decreased demand in certain areas, potentially affecting property values.
• Promote Legislative Advocacy: Join efforts to advocate for reforms that make insurance more accessible, such as expanding the California FAIR plan or incentivizing insurers to remain in the
  state.

A Crossroads for California Real Estate

California’s property insurance crisis is reshaping the real estate landscape, forcing homeowners, investors, brokers, and lenders to reevaluate their strategies. Rising premiums, limited coverage options, and increased risks are turning insurance from a background detail into a central consideration.

While the road ahead is challenging, there are opportunities for those who adapt. For homeowners, resilience is key – both in fortifying their properties and advocating for change. For investors, diversification and innovation will help navigate these turbulent waters. For brokers and lenders, collaboration and creativity will be essential to keeping transactions alive.

A Path Forward

California’s property insurance crisis highlights the urgent need for a collective response. Climate change and economic pressures won’t be resolved overnight, but by working together – whether through policy advocacy, technological innovation, or smarter investment strategies – the state’s real estate market can adapt and thrive.