How surplus lines can help California's troubled home insurance market
Discover why the surplus lines sector has been growing its California home insurance market share in recent years.
California’s home insurance market witnessed seismic changes in recent years as major insurance carriers pulled back or completely exited a state. In addition to its long-standing wildfire risks, the state is battling a myriad of impactful factors, such as inflation and rising construction costs, that are rocking home insurance markets nationwide.
All of these movements have left agents and property owners scrambling to place coverages in an exceedingly difficult environment. After finding rejections in the admitted market, many agents immediately turn to California FAIR Plan Property Insurance, the state’s insurer of last resort. However, those policies might be better suited if placed with a surplus lines, or non-admitted, insurance company.
In recent years, the number of home insurance policies written by California’s surplus line carriers fluctuated from a high of nearly 60,000 in 2018 to a low of fewer than 20,000 in 2021. In 2022, the number of homes covered by the surplus lines sector increased to 39,000 and increased again in 2023 by an additional 10,000, according to Ben McKay, CEO and executive director of the Surplus Lines Association of California.
The association did a deep dive to determine what is driving home insurance policy-count variations in the surplus lines sector, and discovered that historically inflation and population shifts account for slightly around 41% of all policy-count changes, according to McKay.
He explained that for every reduction of 1,000 people in the state’s population, there is a corresponding decrease of around 1.2 homeowners’ policies in the surplus lines sector.
Concerning inflation, the association’s research found that for every unit of increase in inflation, there is a correlation of 8.7 fewer new policies, McKay said.
Inflation and a decreasing population are two trends California has been dealing with since 2021, a year that saw a relatively low number of home policies in the surplus line sector. Since that time though the surplus lines sector grew its home insurance policy count. Why did the market rebound when trends indicated it should have shrank more?
“The turnaround is a direct result of admitted carriers pulling back,” McKay explained, continuing: “The force of those carriers pulling back overwhelms the inflation and population shift effects.”
McKay recently spoke with PropertyCasualty360 about the current state of the California home insurance sector and the role the surplus lines sector can play in this challenging environment. The following interview has been edited for length and clarity.
PropertyCasualty360: What is the appetite of surplus line carriers to write these types of policies as they are watching their admitted counterparts pull back in the state?
McKay: It’s growing, at least that’s my sense. I’ve had many calls from carriers who are looking to move into the market. Surplus line carriers have an advantage and it’s not just rate and form freedom. It’s the fact that they are not required to back the FAIR Plan. If I’m an admitted carrier in California, I’m on my own risk — and have to make sure that most of those don’t see damage and have payouts — but I also am on the hook for my market share percentage of losses to the FAIR Plan. So, it’s sort of a double whammy.
If you look at the FAIR Plan, it has a $360 billion liability, 400,000 policies and only have $2 billion in wildfire reinsurance. It only has $800 billion in cash and it gets 2,200 calls a day from people inquiring about homeowners policies. There are various estimates on what type of rate increase the FAIR Plan would need in order to become actuarially sound and the numbers are as high as 70%.
So if you’re an admitted carrier, you’re on the hook not just for your own risk, but you have to factor in your pro rata share of the FAIR Plan. That’s a tough formula to make work. But surplus lines carriers only have to assess the risk in their portfolios.
PropertyCasualty360: What factors go into deciding if a policy should go into the FAIR Plan or into the non-admitted market?
McKay: It is very specific in statute, but most people are unaware of it. The statute says pretty definitively that the retail agent should first try and place the policy in the admitted market. If they get three declinations from the admitted market, or in other words three admitted carriers that write homeowners won’t write this policy for whatever reason, then the agent is, by law, supposed to seek coverage in the surplus lines market. And only if they can’t get coverage in the surplus lines market, are they to go to the FAIR Plan.
That’s the legal construct that’s been created, but as a practical reality most retail agents who write personal lines don’t know how to access the surplus lines marketplace. Once they can’t place it in the admitted market, they tend to go directly to the FAIR Plan, which is sort of the back door to the admitted market, because those carriers are on the hook for the FAIR Plan.
PropertyCasualty360: Is the FAIR Plan growing quicker than the California surplus lines sector as far as policies in the home sector go?
McKay: They are certainly, but I’m not sure what its growth rate is. I know that it is getting 2,200 calls a day, so they are overwhelmed. They’re hiring up and they have 400,000 policies right now.
You compare that with the 49,000 (California home insurance) policies we have. Yes, I think that it is growing faster, would be my assumption, and certainly it is much, much bigger.
PropertyCasualty360: What steps do agents and brokers need to take and what should they know about placing home policies in the non-admitted market?
McKay: Ideally, they would have a surplus lines broker on speed dial who could help identify a market for them. We are actually working with retail agents right now to create lists and make it easier for them to find surplus lines brokers who have homeowners markets to place these policies in.
That is obviously a little bit trickier for some retail agents because some are captive and are beholden to a carrier. If that carrier pulls out or limits new writing, they’re sort of stuck.
Typically, if you’re a captive agent and your carrier doesn’t write in that market you can go to another carrier, but they (the agent) may not have the right knowledge because that’s not their normal course of business. They are normally placing business just with that captive carrier. So there’s some education that has to happen, maybe even more so with the captives.
PropertyCasualty360: Thanks for taking the time today, Ben, that was about all the questions I had. Is there anything you’d like to add about the California homeowners market and the role the surplus lines sector can play?
McKay: One of the issues that we’re involved in is trying to depopulate the FAIR Plan, which is trying to move some of those policies in the surplus lines marketplace. This would help on the admitted side because it would reduce that exposure that admitted carriers have. The fewer policies that are in the FAIR Plan, the smaller the exposure that admitted carriers face.
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