Wildfires, inflation, outdated regulations: this combination of risks is what insurers cite as they flock out of California — yet the state is on the cusp of its biggest insurance regulatory reform in decades, which insurers are signaling could lead to their return.

It’s a crisis that has been brewing for years, with seven of the top 12 insurers pausing or limiting policies since 2022, including USAA, Nationwide, Farmers, and Chubb. Two insurance giants, State Farm and Allstate, have stopped issuing new homeowners and apartment policies altogether in California, and State Farm plans to cut 72,000 policies beginning in July. 

“With fewer insurers in California markets, home buyers are forced to pay more for hazard insurance. About one in six home sales are affected by lack of availability statewide, particularly in rural and vacation markets where more sales are affected and transactions are more likely to fall through,” the chief economist at CoreLogic, Selma Hepp, tells the Sun, adding that its likely home prices will slow in areas with greater risk of natural hazards. 

As insurers leave the state, many homeowners have been forced to turn to the state’s insurer of last resort, called the California FAIR Plan, for fire coverage for homeowners who cannot obtain regular insurance. In recent months, the FAIR Plan has been receiving an “astronomical” surge in applications, overwhelming the system so much that the director of the American Agents Alliance called it a “ticking time bomb.” 

“In California, over the last 10 years, it averaged out that for every dollar that an insurer was taking in, they were paying out $1.08 in claims and expenses,” a director of strategic communications at the Insurance Information Institute, Janet Ruiz, tells the Sun. As the industry pays out more revenue than it brings in, along with inflation, risks from natural disasters, including wildfires, and the high costs of rebuilding homes, the status quo was “not sustainable,” she says. 

Many in the insurance industry attribute California’s crisis to a 1988 voter measure that experts say prevents insurers from being able to profit. California is the only state that requires insurers to price coverage based on historical wildfire loss data, rather than forward-looking modeling technologies to predict catastrophe risk. 

A regulatory reform called the Sustainable Insurance Strategy — spearheaded  by the state’s insurance commissioner, Ricardo Lara — is on track to be enacted by the end of this year, which Ms. Ruiz says will lead “to more insurers being able to insure.” 

Allstate, which has paused new homeowner policies since 2022, recently testified as much. 

“If the regulations were in effect today, we would begin selling new homeowner insurance policies tomorrow,” an Allstate senior vice president, Gerald Zimmerman, said at a hearing in April. “Let me repeat that: As soon as we can use catastrophe modeling and incorporate the net cost of reinsurance into our rates, we will be open to business in nearly every part of California.”

A representative of Allstate confirmed to the Sun that the company is working with the state’s insurance department and will begin offering home insurance policies to “more Californians” once “rates fully reflect the cost of providing protection to consumers.”

“California is battling a 21st-century insurance crisis with 20th-century rules,” the insurance department said in a statement. “With climate change affecting every aspect of our lives, just relying on what we did in the past won’t improve insurance choices for homeowners and businesses. California’s insurance crisis is decades in the making and we are staying on track to implement all changes this year so insurance companies start writing more policies in all areas.”

State Farm, too, has said it’s working with the state’s insurance regulators. When it cut back on thousands of policies, the insurer noted that it had been affected by “the limitations of working within decades-old insurance regulations.” 

Mr. Lara’s office was not responsive to requests for comment, but he has said that relying on historical data “fails to account for wildfire mitigation.”

“Under outdated rules, the growth of climate-driven mega fires has supercharged insurance costs for many Californians while making insurance harder to find,” he said. 

Combating risks in California that have led to the insurance crisis is likely to require more than regulations. “It’s all hands on deck in California, the insurance industry, the building industry, the fire services,” Ms. Ruiz says.  “It takes a lot of work, and there’s a lot of land in California, but it is the key to long-term resilience in California.”

Individuals taking their own steps to mitigate fire risks is essential, she adds, especially since communities can take years to “even get back on their feet” after a wildfire. 

“It’s not necessarily legislative that’s going to make a difference, It’s really the actions of the people,” she says, including fire education and landscaping in a way so that shrubs and wooden fences aren’t directly next to houses. 

“It’s all in progress and it takes time,” she says, but “all the wheels are turning.”