Summary:
The casualty insurance industry is in a crisis.
In California, as of 2026, real property insurance rates have increased between 40% to as much as 150%
The financial burden of property insurance has been steadily increasing, with significant rises of 17.4% in the first half of 2024, 11.6% in 2023, and 5.9% in 2022. This cumulative increase of approximately 69% over four years presents a significant financial challenge for property owners, requiring immediate action to mitigate potential risks.
Due to natural disasters and inflationary pressures, the cost of the same coverage has nearly doubled in the last five years.
Lenders require sufficient coverage to provide for replacement costs.
Many property owners have raised their deductibles to $5,000 to $10,000 or more per claim.
Some consumers respond by underinsuring their properties. This bad decision, often based on naivety and ignorance, can have devastating consequences.
Article:
What is property hazard insurance?
Insurance is a form of protection in which insurance companies collect premiums in bulk and use them to reimburse for accidental losses. The business strategy is to collect more premiums and pay out fewer claims. The purpose is to generate a profit for the company and its shareholders. The insurance industry is subject to systematic regulation and operates nationally and globally. There are many types of coverage and policies to insure for different risks.
Real Property insurance is complex because it encompasses multiple coverage types, including residential, commercial, business, and personal. The insured categories include homeowners, Condo/co-op, commercial property, renters, mobile and manufactured homes, liability, and personal property.
Covered events are called perils. A peril is an event that causes damage or destruction to a home or property. Insured perils include fire, windstorms, hail, theft, vandalism, and earthquakes.
Insurance does not cover property damage that occurs over time due to lack of timely maintenance, wear and tear, deterioration, or defects. The covered claims arise from damage caused by sudden and fortuitous events that occur by chance. Understanding this concept clarifies the nature of insurance and how it operates. Insurance companies calculate the probabilities of claims and losses and issue coverage accordingly. Profits are the motivation.
Non-covered perils, such as flooding, earthquakes, riots, etc., require additional coverage known as“ riders” or special endorsements.’ These are add-ons to your standard policy, providing extra protection for specific risks. In such cases, the guidance of a skilled commercial lines insurance broker is essential, as it provides you with the necessary expertise and reassurance that you are in good hands.
The most crucial element of insurance is understanding your policy. By reading and understanding the insurance contract, you can empower yourself with knowledge about your coverage. It’s surprising how few people have read their policy, and this lack of understanding often leads to disappointment when a claim is denied. Understanding your policy can give you a sense of control and empowerment when facing potential claims, instilling confidence in your audience.
The underinsurance speed trap with devastating consequences is a pressing issue that demands immediate attention. Over the past decades, markets have remained stable, with little indication of inflationary pressures. We are now in an accelerated speed trap, with rapid increases in building costs and insurance premiums. This is due to a race between rising premiums and building costs, both of which are driven by inflationary pressures. During inflationary periods, there is constant pressure from rising construction costs, regulatory compliance requirements, and the cost of required building enhancements.
A Borrower may be focused on saving money, but should be advised of the adverse financial consequences of recovering losses in a claim when the property is grossly underinsured. If the Borrower follows the recommendations of his qualified insurance agent, good things may happen. What happens when a property owner experiences a hazard loss, tenders a claim to the insurance company, and discovers the condition of massive under-insurance? Blaming others is the answer, of course. Due to policy limits, the insurance company is fully aware that it has no liability for this underinsurance.
Inflation causes prices of building materials, appliances, heating and air conditioning, municipal approvals (including revised building codes), and labor to increase substantially; over time, this process compounds price increases.
Whether intentional, uninformed, or negligent on the part of the Borrower's insurance agent, real estate agent, or mortgage broker, the insured parties may find themselves underinsured and must pay a portion of the repair and reconstruction costs for the loss. Many owners may not have the financial resources to cover the shortage. The consequence may be to walk away from the property and hand the keys to the lender. This underscores the urgent need to address underinsurance to avoid such dire financial consequences, instilling caution in the audience.
The problem of underinsurance is a nationwide catastrophe. No one even talks about it. I don’t think that property insurance industry participants, including insurance agents and brokers, as well as real estate agents/brokers, are vocal enough about the magnitude of this national problem. But as accusations fly, Mr. Fiduciary, you should have told me I was underinsured; the legal community will high-five with delight.
The Borrower's Loan Broker:
My client objected to paying premiums for full replacement coverage. He is a general contractor who claims he can repair the damage at a significantly lower cost than the insurance carrier has quoted. Besides, he contends that the land will not burn down. Please reduce his replacement cost from $2,000,000 to $1,000,000. He is determined to save on insurance premiums.
After consulting a knowledgeable insurance broker who arranged the coverage, the lenders’ response underscores the broker’s crucial role. Their advice on adequate coverage is invaluable, reassuring in the often complex world of property insurance. It’s essential to seek professional advice when dealing with property insurance, and their guidance can be instrumental in ensuring you have the right coverage for your property, empowering you with the knowledge to make informed decisions.
Underinsurance is more prevalent now than before, driven by inflationary increases in construction costs. For example, lumber prices, other materials, and labor have increased dramatically. Municipal approvals and building standards/codes are much more stringent. Add-on municipal fees (taxes) have also increased.
The owner, acting as a contractor, may employ substandard workers, operate without adequate insurance, and skirt building and zoning compliance. The property owner may calculate $200 per square foot for replacement. However, in the retail market, where the insurance company is considering hiring a third-party contractor, the exact replacement cost ranges from $40 to $500 per square foot. These figures are for entry-level and production homes. High-end custom homes can cost $1,000 to $2,000 per square foot or more.
Lenders and mortgage companies may want to audit their loan portfolios to ensure that property coverage adequately offsets inflation. Lenders should review and discuss the methods and data sources used to calculate replacement cost. Most insurers and appraisers use Marshall & Swift cost data to estimate construction costs. Marshall & Swift monitors the factors that drive construction costs and the tract’s actual components. Marshall Valuation Service reflects data in hundreds of locations throughout the U.S. and Canada. AI apologizes, Mr. Borrower, but your insurance coverage must equal or exceed the loan amount and cover the replacement cost of the dwelling and its appurtenant structures.
The current state of the Insurance industry in California:
Carriers are suffering a triple whammy of negative factors. There are current historic increases in construction costs that outpace inflation and an increasing number of catastrophic events (natural disasters). Additionally, the reinsurance market has collapsed. Companies have sent non-renewal notices to current policyholders and declined to approve new insurance policies. State Farm is keeping its recent insurance book active.
AIG and Chubb are canceling or reducing insurance coverage for homeowners and businesses. State Farm and Allstate, America’s largest personal lines insurers, ceased accepting new applications for business, personal lines, and casualty insurance. Catastrophic events, including wildfire exposure, severe storms, hurricanes, tornadoes, floods, earthquake exposure, water damage, and automobile accidents, have become unmanageable without drastically increasing policy premiums.
State Farm suffered a record $13 billion underwriting loss in 2022, with $4.7 billion in losses the year before. Allstate lost $3.11 billion in 2022. Liberty Mutual Holding Co. lost $3.55 billion, and Berkshire Hathaway lost $3.10 billion...Chubb reported a loss of $2.182 billion in 2022. The Travelers lost $1.877 billion in 2022. Progressive lost $1.66 billion.