How California’s Rising Insurance Premiums Threaten Affordable Housing

When Sarah Letts went to renew the property insurance for her organization’s 32 apartment buildings last year, she got a sticker shock: a 33% increase.

This year? Her carrier, Great American Insurance Group, dropped the policy entirely.

Letts said she might have understood if the nonprofit she helms, Hollywood Community Housing Corporation, was based in a forested area, but the affordable housing properties are all on urban infill sites within Los Angeles County and have been upgraded with sprinklers and seismic reinforcements where needed.

“We are not abutting a fire hazard,” she said.

Now, with less than a month to go before the current policy runs out, she’s scrambling. “We will get [property insurance] because we’re obligated to get it,” Letts said. “But the frightening part is, how much will we pay?”

Across the state, affordable housing providers report massive increases in insurance premiums — often regardless of where their buildings are located. And for nonprofits in rural areas with a more pronounced wildfire risk, it’s an “existential” crisis, according to Seana O’Shaughnessy, the president and CEO of Community Housing Improvement Program, which manages nearly 3,000 homes and apartments across seven counties in Northern California.

She said the state’s volatile insurance market calls into question the state’s ability to meet Gov. Gavin Newsom’s ambitious goal of building 2.5 million new homes by 2031.

“Without a stable insurance market, we aren’t able to build and meet the affordable housing needs of our state, and we aren’t able to operate effectively,” O’Shaughnessy said. “So this cannot be overstated, how important figuring out and fixing and stabilizing insurance is for our industry.”

Newsom’s office declined to comment for this story, deferring instead to the California Department of Insurance, which has recently held hearings to address rising premiums, as well as carriers leaving California, an issue that’s impacting all property owners.

Affordable housing providers, however, say they are at a particular disadvantage. Unlike for-profit apartment owners, who can raise rents to offset increased costs, the very nature of affordable housing means rents are restricted.

“Our margins in the affordable housing industry are very thin,” O’Shaughnessy said. “So, that means the nonprofit has to subsidize [increased costs].”

Industry groups that track the number of carriers and spending on premiums don’t separate affordable housing from other forms of commercial property. That means apartment buildings are lumped into the same category as gas stations and grocery stores. But according to the analytics firm CoreLogic, commercial property insurance premiums increased 45% since 2018, though the increases were not uniform across sectors.

Letts said she is girding for a 100% increase in premiums when she eventually does find a carrier, if not a 150% increase. Such an increase would raise the annual cost of insuring her organization’s properties from $500,000 to somewhere between $1 million to $1.5 million.

For the Community Housing Improvement Program’s 17 apartment buildings, property insurance premiums have more than tripled since 2017, according to the organization.

In the Bay Area, nonprofit Burbank Housing’s Director of Asset Management, Julie Heredia, said premiums doubled since 2018 across its portfolio of more than 70 properties.

And in Northern California, Ryan LaRue, the executive director of Rural Communities Housing Development Corporation, said property insurance premiums for its portfolio of 33 properties doubled between 2021 and 2022 alone.

“It’s a disaster,” LaRue said. “It’s a lose-lose for anyone in our part of the industry.”

Rising premiums

Driving the premium increases are inflation, rising interest rates and the ballooning cost of reinsurance, the insurance that carriers get to cover their losses, said Sheri Scott, a principal and consulting actuary at Milliman, an actuarial firm.

Unlike in other states, California doesn’t allow insurance companies to include the cost of reinsurance in determining its fire insurance rates.

“And if insurance companies aren’t able to include that cost of doing business in their insurance rates, that could create an issue where insurance companies don’t feel they’re able to get the appropriate rate for the risk,” Scott said.

Great American Insurance Group, the carrier that declined to continue providing coverage to Hollywood Community Housing Group, did not respond to requests for comment about its decision to discontinue the nonprofit’s policy. In the single-family home market, large carriers, including Allstate, State Farm, Farmers and AIG, cited economic conditions and the increasing frequency and severity of weather events such as floods and wildfires as reasons for declining to sell new policies in the state.

According to the National Oceanic and Atmospheric Administration, since 1980 there has been an average of 8.1 weather events nationally that amounted to $1 billion or more in damage. Over the past five years, the average was 18. And, as of July 11 this year, 12 events cost $1 billion or more.

“We are seeing a higher frequency of events and a higher severity of these events when they occur than we ever historically have had,” said Justin Dove, a broker specializing in real estate with Arthur J. Gallagher & Co., a risk management services firm.

Seven of California’s 10 most destructive wildfires occurred within the past decade, according to Cal Fire. But, insurance carriers in the state are barred from using catastrophe models to estimate their expected future losses to develop insurance rates. Instead, they must look at the previous 20 years of losses, a practice other states have long abandoned, Scott said.

“There are no other states that use that methodology anymore,” she said. “They have since modernized their procedures in what insurance companies use so that they can use catastrophe models.”

Deputy Insurance Commissioner Tony Cignarale said the Department of Insurance is currently looking at allowing insurers to use catastrophe modeling, as well as to include the cost of reinsurance in setting rates. Allowing the latter change might improve the availability of insurance, but not necessarily affordability.

“With reinsurance, it is an additional cost. So, in theory [premiums] would rise,” Cignarale said. “The question is, how much would be allowable to add on to an individual policyholder’s premium? That’s another area that the [insurance] commissioner is looking at to ensure that it’s not excessive.”

And while insurance groups say allowing catastrophe modeling won’t necessarily raise rates — it may lower rates for some property owners — Cignarale said more information is needed.

“We’re going to take a deeper dive into these catastrophe models and see, are there good models? Are there bad models? Is there a way to make sure that there’s transparency, so that the public, as well as the insurance commissioner, can see what’s under the hood and make sure that there aren’t any negative algorithms there that may be unfair to policyholders just for the sake of increasing rates and premiums?” he said.

There’s no timeline for when the Department of Insurance will finalize or implement any proposed changes, Cignarale said.

In the meantime, the department in March announced the FAIR Plan — California’s insurance coverage of last resort. The plan is available to property owners who can’t secure fire insurance, though it doesn’t cover other hazards, such as floods or general liability — and it would raise its coverage cap to $20 million for commercial property owners. The FAIR Plan is expected to begin offering the new coverage by the end of the year.

In October of 2022, Insurance Commissioner Ricardo Lara began enforcing new regulations requiring insurance carriers to provide discounts to property owners who mitigate their own risk of wildfires. The companies are now in the process of getting those proposed discounts approved by the department.

“That’s really the goal,” Cignarale said. “If you can reduce the risk, then you can reduce the insurance companies’ need to either restrict writing or increase premiums on consumers.”

But even with all these changes, it isn’t clear whether it would translate into lower premiums for property owners, or if the changing climate and increasing risk from wildfires and other extreme weather will discourage carriers from returning to the state.

Still, affordable housing providers say they aren’t going out of business — at least not yet.

“We always figure it out, but I don’t know that we should have to figure it out,” O’Shaughnessy said. “This is something that the state has to help figure out so that we can continue to provide essential housing for folks. We’ll do it as long as we have to, but we do need help.”