(Bloomberg) -- Californians looking to buy a house face some of the country’s most expensive real estate prices and wildfires that threaten scores of housing tracts. Now there’s another obstacle: finding an insurer willing to cover their dream home.

State Farm General Insurance Co. said it’s no longer accepting new applications for property and casualty coverage in California last week, a year after Allstate Corp. also paused new policies, worsening what FAIR Plan, a state-mandated insurance pool, called a “looming insurance unavailability crisis.” 

“We have a lot of people going naked, which means they have no insurance,” said Bill Dodd, a Democrat state senator representing fire-scarred Napa County and other parts of Northern California. “What my constituents want is insurance.”

The FAIR Plan, which offers minimal coverage and high rates is meant to be a provider of last resort, but enrollments have surged 70% since 2019 to 272,846 homes in 2022. 

It’s a blow for the nation’s most populous state, which is already struggling with an exodus of residents, many of whom are escaping the high cost of living.

The Golden State is grappling with a roughly 1 million-unit housing shortfall, in part fueled by rising costs and zoning restrictions that have choked off new construction projects. On top of that, a series of catastrophic wildfires in recent years have increased calls from insurers to weaken the state’s consumer-friendly policies that have held down rates for decades. 

Rate Increase

The average homeowners’ policy is $1,300 in California compared to over $2,000 in other states with wildfire risk and $4,000 in hurricane-prone Florida, according to Insurance Information Institute. 

But new home buyers could be forced to pay more, regardless of their home’s proximity to wildfire dangers. Before State Farm’s announcement, the company requested a 28% rate hike on homeowners’ insurance, while Allstate has filed for a 39.6% increase. 

The insurance crunch is affecting buyers across the state already, even in areas where the wildfire risk is low. In San Francisco, realtors say they have seen deals fall through because would-be buyers couldn’t get insured.

“What we’re hearing is that now, when buyers present an offer on a property we’re not only asking them for pre-approval for a lender, we’re also asking them if they’ve spoken to their insurance agent if they’ll insure the property,” said Joske Thompson, a realtor at Compass Inc. with 40 years experience in the area. 

Home insurance is an essential step of purchasing a home. Mortgage lenders generally require proof of insurance before approving the transaction to protect their investment in the property. Without insurance buyers would be forced to make an all-cash purchase in most cases. 

Finding a Compromise

As the state’s insurance woes accelerate, the industry is taking aim at California’s marquee consumer protection law, Proposition 103, a ballot measure voters approved in 1988. The law has saved consumers tens of billions of dollars in reduced insurance rate hikes, according to the state’s insurance regulator. 

“In the last six years, we lost 20 years’ worth of underwriting profit, and that was due to the catastrophic wildfires that we’ve faced,” said Janet Ruiz, a spokesperson with the Insurance Information Institute. 

Harvey Rosenfield, the author of Prop 103 and founder of the Consumer Watchdog advocacy group, said climate change might require insurance companies to raise rates, but he argued that companies are using wildfire impacts to gouge customers.

“Insurance companies are very opportunistic,” he said. “They have seized on climate change as an excuse to escape from the regulatory protections that voters enacted.” 

State lawmakers and industry representatives must find a compromise that would keep the insurance market viable while protecting consumers from excessive rate hikes, but that may mean Californians will have to pay more for home insurance in the future, said Dodd.

“You bite the bullet and you move forward,” said Dan Dunmoyer, president of the California Building Industry Association. Without rate increases, more insurers may leave the state, affecting everything from mortgage lending to housing supply, he said.“You have a market that is teetering on collapse.”

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