Happy Friday. This is The Shake 🤝: the free weekly newsletter that packs a small but mighty punch 👊 

We got a quick one this week:

• Silent Killer: Home Insurance 🏡 

MARKET RADAR

Silent Killer: Home Insurance 🏡 

​​All across the developed world, insurance companies are sounding the alarms ⏰ 

Just when you think homes can’t get any more unaffordable: national carrier State Farm recently announced they are halting new home policies in California due to “climate change” concerns, among other factors.

FYI, State Farm covers more homes than any other insurer in the state. Effective immediately, this move signals threats to insurance availability and affordability for residents of the golden state.

A couple of other factors justified this move:

1. High housing costs make it difficult for insurers to bear the risk - the average CA home rose from $70k in 1970 to $450k today; 80% higher than the national average.

2. Inflation for construction material/labor and replacement costs

3. CA regulations require insurers to calculate rates on past history of the home/area NOT the future - so they can’t raise rates today to cover for future catastrophes

If you didn’t already know, CA is a difficult place for insurers. It limits price increases to <7%/year and makes it hard to drop customers who require more than that.

Most of the time, these restrictions are tolerable. But in high inflation environments like the past 3 years, these limits quickly become unbearable.

The solution would have been to eliminate the cap but 2022 was an election year and guess what, it’s easier to get re-elected when you’re campaigning on no price increases.

Surprise!

This combination of rapid price increases mixed with government policy capping insurance hikes made Q1 2023 one of the worst quarters in the company's history. Turns out State Farm paid out $1.30 on every $1 of insurance they sold nationwide!

In short, the decision to walk away from CA is a painful choice for State Farm but one that essentially had to be made. It will be interesting to see how many other insurers follow suit.

Outside of California

Florida is at the point of collapse with dramatic policy increases across the state due to insurance fraud, litigation costs, tightening underwriting restrictions, and storm risk.

• Florida accounts for only 9 percent of the country’s home insurance claims but 79% of its home insurance lawsuits, many of them fraudulent.

• Since 2017, six property and casualty companies that offered homeowners insurance in Florida liquidated. Five more are in the liquidation process.

• Citizens, the state-backed insurer of last resort, went from 400k policies in 2018 to over 1M policies in 2022 - writing 5k-6k new policies per week!

Midwest states like Kentucky face increasing flood risk, seeing policies more than triple YOY. Resulting in only 2.3% of households electing for coverage.

Louisiana is offering millions of dollars in subsidies to try and draw more insurers to the state. The state faces similar challenges to Florida without the influx of new residents, making it less desirable to insure.

Even developers in most of these states are pausing projects or penciling down as insurance costs hinder their ability to start and complete new developments.

All in all, residents are having a harder time finding insurance and it will cost more or cover less moving forward.

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^{DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.}