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State Farm, the largest property insurer in the US, will no longer accept new applications for home insurance in California, citing the risks of apocalyptic wildfires as well as the exorbitant costs of construction.

The company “made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market,” State Farm said in a statement on May 26. The move came into effect the very next day.

ອ່ານ​ເພິ່ມ​ເຕິມ

State Farm will still serve existing customers and also offer personal auto insurance. But the company’s decision compounds the pain of Californian homeowners, who already saw AIG exit the state’s home insurance market last year and who have to contend with increasingly ruinous fires.

California witnesses thousands of wildfires every year, and their frequency and intensity has of late been accelerated by climate change. Vegetation dries out, becoming more susceptible to burn, and strong winds fan the flames. Wildfires burned through roughly 362,000 acres in 2022, compared with 2.5 million acres in the previous year. In 2020, California had a historic count of 10,431 wildfires, burning a total of more than four million acres.

The cost of building homes is rising

As with many other goods and services, the cost of home construction has risen sharply after the pandemic. This year, as of March, it was 30% more expensive to build a home as compared to pre-pandemic levels in 2019, according to a report (pdf) by Linesight, a global construction consultant firm.

The prices of materials have contributed to this inflation. In January 2020, the St. Louis Federal Reserve’s index of construction material prices stood at 233, but rose steeply to 346 in March 2022. Although the index is down from that high, it has risen again in recent months, from 326 in December 2022 to 334 in April 2023.

ເລື່ອງຍັງສືບຕໍ່

In 2022, the US construction industry contracted by 8.2%, due to a decline in residential demand. Going forward, the Linesight report predicted, the industry is likely to contract by 0.9% because of “continued decline in the residential sector, ongoing labor shortages, worker unrest and elevated interest rates.”

US insurers are worried that climate change is ruining their financial goals

In its statement, State Farm said that its decision to halt new applications for home insurance in California was necessary to “improve the company’s financial strength.”

The state government has tried to minimize the effect of insurers’ actions upon homeowners. Last October, for example, California enforced new regulations to drive down the cost of insurance. “The long-term goal of the Department of Insurance is protecting consumers,” Michael Soller, spokesperson of California’s department of insurance, told CNN. But he pointed out that State Farm’s decision to stop accepting new applications is beyond his agency’s control.

ເພີ່ມເຕີມຈາກ Quartz

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