In a recent CNBC interview, USAA’s outgoing CEO Wayne Peacock and incoming CEO Juan Andrade addressed the rising insurance costs and risks in California, amid recent wildfires in Los Angeles. The conversation shed light on the complex factors impacting the state’s insurance market, including inflation, climate change, and regulatory pressures, and the impact on USAA’s ability to serve its members.
Peacock identified multiple factors contributing to the escalating insurance costs in California. “You’ve got more expensive real estate, you have more real estate built … into the fire zones, and then there are all manner of conditions and situations in California that make that even more challenging,” he said. He also highlighted the inflationary pressures driving up the costs of both homes and cars, making repairs and purchases more expensive. Furthermore, the risk of extreme weather events, such as wildfires, has increased, complicating the ability to set appropriate insurance rates in the state.
“We’re seeing today that the cost of the built environment has gone up, and the risk associated with things like weather events has gone up,” he said. Peacock explained that aligning these factors with suitable insurance rates in California had become a challenge.
Andrade pointed out the key role of reinsurance in maintaining the stability of the insurance market. He attributed the rising costs of reinsurance to climate risk and inflation. “Companies have to charge adequate rates for the exposure that they take,” Andrade said.
In addition to higher reinsurance costs, the California FAIR Plan, the state’s insurer of last resort, has been overwhelmed by demand. With insurance companies pulling back from high-risk areas, homeowners have turned to the FAIR Plan, but its policies come with higher premiums and limited coverage. As of September 2024, the FAIR Plan’s exposure for residential properties had increased by 61%, reaching $458 billion.
To address the crisis, the California Department of Insurance recently announced new regulations aimed at encouraging private insurers to write policies in fire-prone areas. These new rules mandate that insurers cover at least 85% of their market share across the state, including high-risk zones. The regulations also allow insurers to factor the rising cost of reinsurance into their pricing.
However, these changes have been met with criticism. Consumer Watchdog, a California-based advocacy group, warns that the new rules could lead to rate hikes for homeowners, with estimates suggesting increases of 40% to 50%. The group also raised concerns that insurers may still find ways to avoid covering the highest-risk areas.
The CNBC discussion also touched on California’s regulatory environment. The state’s FAIR Plan has been struggling with high levels of exposure. While Peacock refrained from making any definitive statements about the FAIR Plan’s future, he warned that the situation could strain insurers operating in California if it remains unsustainable. “There will be an impact to insurers who are in the market should there be strain or bigger challenges for the FAIR Plan,” he said.
The CEOs both emphasized the importance of addressing the regulatory environment to create a more viable insurance market. “We have to create a more healthy market in California,” Peacock said.
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