The QBE Insurance Corp., an Australian-based multinational insurer, has announced its withdrawal from the whole U.S. home insurance market. This translates to 37,774 homeowners in California who will be dropped from April 2025. The company ceased underwriting new homeowners insurance policies in California last month, effectively turning its strategy to ‘ narrow its market focus’ as it exited the whole American residential insurance system.
Probable relief via partnership agreement
These impending cancellations have seen more than 50% of QBE’s affected customer base in California qualifying for an exemption and not losing their coverage under a proposed deal with Builders Reciprocal Insurance Exchange (BRIE), a Texas-based insurer trying to enter California. BRIE has a pending authorization application to operate in California and would take on a good number of QBE’s existing policyholders under this proposed transfer agreement.
The transferring regulatory process has to take place under strict regulatory timelines that require QBE in this case to give customers notice of at least 75 days before coverage is dropped. The insurer will soon start notifying the nonrenewal “as soon as practicable” after BRIE receives its California operating certificate and approval to write homeowners policies in the state.
QBE’s market position and strategic withdrawal
QBE was only about 0.36% of the whole California home insurance market when viewed as of 2024. This makes QBE one of the smaller insurers in the state, but in and of itself, it is a great multinational company that dates back in its ancestry to marine insurance in Australia during the 1880s. Withdrawal, though, is part of reorganization of the broader strategic restructuring of QBE’s North American operations.
This segment of the North America middle-market withdrawn by QBE in 2024 earned approximately $500 million in gross written premium. The company noted that this business had had indecisive performing results for a number of years and refocused the business on three core North American units: specialty, crop, and commercial insurance. This strategy shift included a restructuring charge of approximately $100 million before tax.
The most recent financial accounts are indicative of the company realizing an $18 million gain on sale in association with the exit from its North American homeowners portfolio, depicting a structured withdrawal from the residential property insurance business across the entire United States.
Pattern of insurance market withdrawal
Thus, QBE’s exit seemed into and within a clearly troubling pattern of major insurers from California’s homeowners insurance market. Insurers declined to renew about 2.8 million homeowner policies in the state from 2020 to 2022. Of these, well over half a million were in Los Angeles County only.
Therefore, the move by the company mirrors similar ones by other insurers trying to exit the Californian hazardous market. Two of the subsidiaries of Tokio Marine Holdings will exit in April 2024 after insuring 12,556 homes, although they have lined up Mercury Insurance to take care of the “overwhelming majority” of their customers. Nationwide’s subsidiary Crestbrook followed suit since June 2024, specializing in high-value properties but offering the option to migrate to Acceptance Casualty Insurance Co., a surplus line insurer.
Context of the general insurance crisis
The withdrawal comes amid a homeowners insurance crisis in California, all of which stems from rising wildfire risks and increased losses in the industry. Early analysis suggests that the Los Angeles wildfires alone could be between $135-150 billion in damages, possibly the most costly wildfire in history in the United States.
Significant general insurers such as State Farm, Allstate, Farmers, USAA, Travelers, Nationwide, and Chub have stopped accepting the writing of new policies, if at all, or have curtailed their operations in California significantly. These companies represented more than 34% of California home insurance policies written in 2023. State Farm, the largest, stopped writing new policies in May 2023 and dropped more than 30,000 existing policies, including 1,626 in Pacific Palisades.
Increasing reliance on State plan
As a result, hundreds of thousands of Californians have had no option but to use the California FAIR Plan-the insurer of last resort in the state. FAIR Plan insured 452,000 properties as of September 2024-more than doubling from the 203,000 insured four years before. The exposure of the program has reached an astounding $458 billion while collecting less than $1.4 billion annually in premiums.
The financial weakness of the FAIR Plan was uncovered recently during the fire debacle in Los Angeles, with losses projected at about $4 billion. Commissioner Ricardo Lara has already approved a $1 billion assessment against insurance companies which will eventually be passed down to consumers through higher premiums across California.
Regulatory response and future outlook
California Insurance Commissioner Ricardo Lara recently ordered some changes in regulations that require insurers to write insurance coverage to high-risk areas equivalent to at least 85% of their statewide market share. However, these statutes also permit insurers, for the first time, to factor in reinsurance costs in their rate calculations, and as a consequence, the premium increases could be very substantial.
By these estimates, the Consumer Watchdog said changing regulations could mean a 40%-50% hike in insurance rates, although the industry feels that this kind of adjustment is necessary for adjusting the market to the reality of wildfire risks in California and certain level of stability within the market.
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