As major insurers retreat from high-risk states, surplus lines insurers are stepping in to fill the coverage gap. The increasing frequency of hurricanes, wildfires, and other extreme weather events has made it more difficult for traditional insurance companies to sustain operations in states such as California, Florida, and Louisiana. While surplus lines carriers provide a necessary alternative, their rapid expansion also raises concerns about long-term stability—especially if politicians find ways to interfere in the market.
State-imposed price controls have long distorted the admitted insurance market, making it harder for insurers to price risk accurately. In California, Proposition 103 requires state regulators to approve rate increases, often delaying or outright rejecting hikes insurers argue are necessary to reflect rising risks. Research shows that from 2017 to 2022, California had the most significant rate suppression in the nation, putting financial strain on insurers.
Florida faces similar challenges. Strict rate caps and regulatory red tape have driven private insurers away, forcing more homeowners into Citizens Property Insurance Corp., the state-backed insurer of last resort. Governor Ron DeSantis has described Citizens as financially unstable, yet state policies have deterred private carriers from staying in the market. The result: insurers either withdraw entirely or reduce their exposure to catastrophic risks.
For years, regulatory constraints in states like California and Florida effectively shifted some insurance costs onto other states with less regulation. One example is Enid, Oklahoma, a small town that ranks among the most expensive places in the U.S. to insure a home relative to property values. Unlike New Orleans, which sits below sea level, or Riverside County, California—where wildfire losses are projected to reach $319 million this year—Enid does not face extreme disaster risks. Yet, it shoulders disproportionately high premiums.
Research suggests this cost shifting may no longer be sustainable. A study by economists at Chicago Booth, Harvard Business School, and the Federal Reserve Board examined state-level rate regulations and found they created market distortions. "The market is incentivizing all sorts of crazy behavior," Harvard’s Ishita Sen told The New York Times.
That benefit, however, appears to have run its course as major insurers exit states that prevent them from pricing risk accurately.
As traditional insurers pull back, surplus lines carriers are growing rapidly. Once a niche market for high-net-worth individuals or specialized risks, surplus lines are now a mainstream option for homeowners. According to S&P Global Market Intelligence, surplus lines’ share of total U.S. property premiums rose from 5% in 2018 to 9% in 2023. In disaster-prone states, the shift is even more pronounced: surplus lines account for 21% of property insurance in Florida, 23% in Louisiana, and 14% in California.
The surge is particularly notable in high-risk areas. In California, demand for surplus lines policies jumped by 2,500% in Bakersfield and 1,500% in San Jose. Florida has seen non-admitted homeowners’ policies rise 73% over the past 14 years. "Surplus lines have acted as a pressure valve," says Benjamin McKay, CEO of the Surplus Line Association of California. "They provide homeowners with choices and help ease strain on the admitted market and the FAIR Plan."
Wholesale brokers are also benefiting. "We’re seeing a significant inflow of requests for E&S coverage from both traditional and high-net-worth homeowners," said Joel Cavaness, chairman for the Americas at Arthur J. Gallagher & Co.
Yet surplus lines come with risks. Unlike traditional insurers, they are not backed by state guaranty funds, meaning policyholders have no recourse if a carrier fails. Some surplus lines insurers rely heavily on reinsurance and have low capital reserves.
Bloomberg found Orion180’s risk-based capital ratio, for example, was just 1.47 in 2023, well below industry norms. "We’re dealing with a whole new crop of players that aren’t backed by the guaranty fund or a multi-hundred-billion-dollar corporation," says Doug Heller of the Consumer Federation of America. "It’s really concerning."
State regulators are beginning to acknowledge the unsustainable trajectory of their insurance markets. California recently introduced new rules allowing insurers to use forward-looking risk models and pass along reinsurance costs to policyholders. But these reforms come with a catch: insurers must offer coverage in high-risk areas, which may not be enough to lure them back. Insurance Commissioner Ricardo Lara’s delay in approving a long-sought rate hike for State Farm may be the final straw for the insurer, which has already stopped writing new policies in the state.
Florida has attempted to stabilize its market by shifting policies away from Citizens Property Insurance Corp. toward private insurers. Yet Citizens still holds nearly 1 million policies as of early 2025. Meanwhile, homeowners are facing steep rate hikes, with multiperil insurance premiums rising 6.6% and wind-only policies up 14.5%.
The growing reliance on surplus lines underscores a broader challenge: balancing affordability with financial sustainability in an era of escalating climate risks. If states continue to limit premium increases for admitted carriers, surplus lines insurers will keep expanding. But how long will that last? History suggests politicians won’t be able to resist meddling when there are votes to be won.
California’s homeowners insurance crisis is a direct result of political intervention. Proposition 103, narrowly approved by voters in 1988, mandated a 20% rollback in insurance rates and required state approval for any rate increases. At the time, it was the most expensive state election campaign in history. The measure also turned the insurance commissioner into an elected position—politicizing insurance regulation.
While the law was meant to protect consumers, it made it harder for insurers to adjust premiums to reflect growing wildfire risks. Insurers like State Farm and Allstate have responded by scaling back coverage. State Farm’s policyholder surplus fell from $4 billion in 2016 to just over $1 billion recently. It is now seeking a 22% rate hike, but regulators have yet to approve it.
The California FAIR Plan, originally designed as a temporary backstop, has seen its policy count surge as traditional insurers retreat. However, its high premiums and limited coverage make it a last resort rather than a viable long-term solution.
Governor Gavin Newsom has proposed reforms to allow more flexible pricing, but the changes may be too little, too late. Vox writer Kelsey Piper recently called California’s price controls an example of governance failure, noting that they left residents with the sinking realization that "no matter how bad things get, the real grown-ups can’t be called in to save the day because they don’t exist."
Florida’s homeowners insurance market has been shaped by years of legislative interference. After insurers fled the state following hurricanes in the early 2000s, the government created Citizens Property Insurance Corp. as an insurer of last resort. But Citizens grew rapidly, exposing the state to major financial risk. Even Governor DeSantis has referred to the system as "insolvent."
Rampant litigation has also plagued the market. At its peak, Florida accounted for 79% of the nation’s homeowners insurance lawsuits while representing just 9% of claims. Fraudulent claims and lawsuits led to skyrocketing premiums and insurer insolvencies.
Recent legislative reforms have attempted to curb abuse. New laws limit assignment-of-benefits claims, reduce attorney fee incentives, and provide a $1 billion reinsurance fund. Yet homeowners still face some of the highest premiums in the country.
Louisiana has seen nine insurers go insolvent since 2020 due to major hurricanes. More than 120,000 policyholders have turned to Louisiana Citizens Property Insurance Corp., which raised rates by 63% in 2023.
State lawmakers have repealed rules restricting insurers from canceling policies after three years, hoping to attract more carriers. The state also launched a $45 million incentive program to lure insurers back. But given Louisiana’s high exposure to hurricane risk, insurers remain hesitant.
Whether state intervention by publicity seeking politicians can be curtailed remains to be seen. While some reforms aim to stabilize markets, political risk remains a wildcard. As climate risks escalate, the challenge will be finding a balance between affordability and market sustainability—before insurers, and homeowners, run out of options.
