Total insured losses from the horrific Los Angeles wildfires currently exceed $30 billion, and they’re expected to go higher. This catastrophe, when all is said and done, easily will be among the top 10 costliest natural disasters in U.S. history on an inflation-adjusted basis.
Meanwhile, Allstate, the second largest insurer of homes in Illinois, next month is hiking its rates to insure homes here by an average of 14.3% for the majority of its policyholders.
This hefty increase is just the latest in a relentless series of hikes that has jacked the cost of homeowners coverage for the average Allstate customer by well over $1,000 annually since the beginning of 2021, according to company filings with the Illinois Department of Insurance.
An average policy priced at $1,216 a year five years ago now will cost $2,257 after this increase becomes effective.
Allstate isn’t alone, of course. State Farm, by far the largest insurer of Illinois homes, with about a third of the market, last year boosted its rates by double digits.
What do the increasing frequency of natural disasters in Florida, California, Texas and even North Carolina have to do with what homeowners in Illinois pay for risk protection? The answer is supposed to be nothing.
Allstate and other insurers routinely say their pricing in one state reflects the risks they shoulder in that state alone and not what happens in places far more prone to Mother Nature’s wrath.
But let’s just say there’s healthy public skepticism about that claim.
In other parts of the country, like Florida, the cost of insuring the roof over your head is becoming a full-blown crisis. It’s not uncommon there for monthly homeowners premiums to approximate the cost of a mortgage. There’s more discussion now than we’ve seen in ages — maybe ever — about whether the current insurance system, which mainly relies for the availability of coverage on private companies regulated state by state, is tenable over the long term given the realities of climate change and rising repair costs.
California is Exhibit A in how not to provide for a healthy marketplace. The nation’s largest state for decades has been the toughest in terms of insurance regulation, with publicly elected insurance commissioners routinely using the powerful tools available to them to keep rates artificially low even as risks grew exponentially. The result was that State Farm, the nation’s largest home insurer, just last summer stopped covering about 1,600 high-priced residences in LA’s tony Pacific Palisades neighborhood, which just months later was ravaged by fires.
By contrast, Illinois for decades has imposed some of the nation’s least onerous rules on insurers, a fact that in part accounts for why State Farm and Allstate are headquartered here, between them employing well over 10,000 in the Chicago area and in downstate Bloomington. Unlike most states, the Illinois Department of Insurance has no say over what property and casualty insurers charge.
By and large, that system has served Illinois consumers well. Auto rates in Illinois, for example, are middle-of-the pack in the U.S.
When it comes to threats to our homes, Illinois thankfully isn’t vulnerable to hurricanes, earthquakes and wildfires. But it’s far from immune to weather-related damage. Hailstorms have become far more frequent in recent years. Tornadoes are a yearly risk.
Nationwide, Allstate’s cost to cover wind and hailstorm events (outside of hurricanes and tornadoes) soared to more than $5 billion in 2023 from just $2 billion in each of the three years before, according to the company’s own Securities & Exchange Commission filings.
All of this is to say there’s evidence to support higher homeowners insurance costs in Illinois. Still, Illinois’ lack of rate regulation opens the doors to insurers taking advantage of this state’s light touch to push through steeper hikes than are justified in order to make up for other states’ stiffer rate-hike resistance.
There are rumblings in Springfield that Gov. JB Pritzker’s administration this year will offer legislation to toughen the state’s approach to insurance regulation. Last year, a signature Pritzker initiative gave the Department of Insurance approval authority over health insurers.
We don’t think Illinois ought to abandon its long-standing reliance on market forces to give consumers reasonable prices to insure their homes and cars and instead embrace a California-style command-and-control approach. But we do think requiring more transparency from insurers would be welcome.
When raising prices, the Allstates and State Farms of the world should simultaneously provide regulators and the public with user-friendly information on how much they’re paying out in claims in Illinois, as well as what they’re paying for the reinsurance coverage that helps them fulfill their obligations in the most catastrophic events. And they should provide useful comparisons with rate changes and loss experiences in the rest of the country. They need to actively counter the broad perception that fires in Los Angeles are affecting insurance rates in Naperville.
Like utilities and health care, car and home insurance aren’t optional for almost all consumers. We just saw how price inflation for everyday goods affected the outcome of a presidential election. One way to address understandable anger at these seemingly relentless insurance rate hikes is to reassure the public in black and white that there’s good reason this necessary protection is costing so much.
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