Wildfire Risk in California Drives Insurers to Pull Policies for Pricey Homes

AIG told insurance brokers in an email late last year that some policyholders instead may be eligible for coverage via another AIG unit. The other unit operates alongside other so-called excess-and-surplus lines insurers, which have more freedom on policies’ rates and terms than do insurers in the broader, tightly overseen home-insurance market.

The policies could cost three to five times what AIG’s clients now pay, with less-generous coverage, brokers said.

“AIG is the first high-net-worth carrier to say ‘we’ve had it, we’re divorcing ourselves from California’s regulated market,’ ” said Jim Tolliver, an insurance broker in San Francisco with Woodruff Sawyer & Co., who fears others will follow suit.

Chubb Ltd. CB -0.65% , the biggest high-end insurer in the state, is continuing to non-renew some policies. But, “we are still accepting new customers across the state in areas where we have a fair chance of earning an adequate return,” Paul Krump, a Chubb vice chairman, said last week.

In an earnings call in October, Chubb Chief Executive Evan Greenberg said the insurer’s California shrinkage was “not a small amount” in locations “both highly exposed and even moderately exposed to wildfire.” He said “someone else will have the pleasure of writing” business for which “we cannot charge an adequate price for the risk.”

Chubb, which declined to provide policyholder figures, aims to offer excess-and-surplus policies to many policyholders who aren’t renewed.

The moves by AIG and Chubb follow years of non-renewals by mass-market insurers. California regulators have been encouraged that parts of the broader market are showing signs of stabilizing, thanks to recent rate increases. Allstate Corp. , Farmers Insurance and some others have committed to adding policyholders.

Some insurers are frustrated that California regulators require them to set home-insurance rates based on their historical loss experience, not projections of future losses that are determined by catastrophe modeling. Such models can reflect detailed, location-specific data that the insurers feel they need amid escalating wildfire activity tied partly to climate change.

State regulators say insurers can obtain adequate rate increases under the current system, and in general are concerned about modeling’s accuracy and fairness to minorities.

“We are very disappointed that a diversified company with massive global resources like AIG is not staying the course to help support safer, more resilient communities here in California,” said Michael Soller, a deputy insurance commissioner. The state has been trying to help consumers reduce wildfire risk, and has pushed insurers to provide discounts for mitigation measures.

In 2020, the state insurance department approved an average 17.5% rate increase for AIG’s home policies. A subsequent request from AIG for a 42% increase remains pending.

Finding replacement coverage can be difficult in California, particularly for the biggest and most-expensive homes.

“I am sure there is enough blame to go around: the insurance department, the insurance companies, the policyholders,” said Jeffrey Green, a managing director at a financial-services firm who lives in Napa County and is subject to AIG’s non-renewals this year. But “you’re going to devastate people if they are uninsured and their homes burn down.”

Mr. Green and his wife, Jane, have spent tens of thousands of dollars trimming trees, installing a fire hydrant to draw from a swimming pool and taking other steps to reduce the risk of their house burning down.

The house survived wildfire in 2020 even as nearby properties were destroyed. Still, a six-figure claim resulted for smoke and other damage.

In buying policies with tightly regulated terms and conditions, Californians with homes estimated to cost greater than $10 million to rebuild often pay $20,000 to $40,000 in annual premiums, while those with $30 million and higher residences often pay more than $100,000, brokers said. All total, tens of thousands of Californians with homes at such values are insured by a half-dozen or so carriers that specialize in the high end, and some are insured through insurers focused on the broader market.

AIG told state officials that its move is due “not only to heightened wildfire risk exposure in California, but also to the costs of servicing high-value homes” and the impact of global catastrophes on its reinsurance costs, Mr. Soller said. AIG’s email to brokers cited wildfires and mudslides of the past five years, in particular. AIG declined to comment.

Write to Leslie Scism at [email protected]