How Insurance Works in California
The California Department of Insurance regulates the operations of over 1,400 insurance companies in the state. The Department ensures insurance rates are fair and accessible to all Californians. The major insurance policies available in California are:
- Health insurance
- Auto insurance
- Residential property insurance
- Commercial insurance
- Life insurance
- Disaster insurance
The cost of insurance policies in California varies by insurer. Typically, insurance companies use various factors like age, gender, location, industry, claims history, type of home, health status, car model/type, and credit history to determine insurance premiums. Individuals can save on insurance premiums by taking advantage of discounts, adopting security measures, and opting for group policies. Contact a California-licensed insurance agent or insurance broker before purchasing an insurance policy. They can help you compare insurance quotes from several insurance companies to get an affordable but comprehensive policy that suits your needs.
HEALTH INSURANCE in CA
About 92% of Californians have health insurance, and most got coverage from their employers. The remaining 8% (3.2 million) lack access to comprehensive California medical insurance and end up paying for health services out of their own pocket. Individuals without health insurance might struggle with healthcare costs that can consume a large portion of their annual income. The purpose of California health insurance is to cover health services, medical bills, and treatments so that the insured would not have to bear the responsibility of health costs alone. Health insurance works by covering both the urgent care and the ongoing medical care.
California residents can purchase health insurance policies as either:
- A Group policy or
- An individual or family policy
In California, group policies are employer-based health care coverages bought by employers, unions, or associations on behalf of their employees or members. It includes vision services, pharmacy benefits, and dental services. Sometimes, a group health policy can extend to employees’ family members or dependents. The policy is usually issued in the group's name, and the employees only receive certificates of coverage. Note that all group health plans comply with the California Affordable Care Act (ACA) requirements. As such, employees can qualify for group health care coverage regardless of their health conditions. In contrast, an individual/family policy is a policy a person buys outside an employer or association. The policy only covers the insured person and their family members.
Residents can enroll for health coverage through the state-run health care insurance marketplace called Covered California. Individuals who purchase health coverage through the marketplace usually qualify for premium subsidies (premium tax credits) and cost-sharing reductions based on their income level. However, not all health coverage, including group health coverage, can be purchased through Covered California. Hence, speak to a California-licensed health insurance agent who can help you purchase the right health care insurance coverage that will suit your needs. They can also recommend alternative and/or supplemental health plans that will benefit you.
| Common Types of Health Insurance Coverage in California | |
| Major Health Insurance | Some major health insurance plans in California are:
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| Supplemental Health Insurance | Some supplemental health insurance plans in California are:
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Speak with a California-licensed health care insurance agent about how health insurance works and to help you buy insurance coverage.
AUTO INSURANCE in CA
Approximately 35 million vehicles are registered in California. These vehicles are prone to damage and theft and can cause injuries to others if involved in a car accident. For instance, in 2019, about 3,606 traffic fatalities occurred in the state, with 1,066 drivers involved in the fatalities under the influence of alcohol. In addition, motor vehicle theft in California increased from 168,046 in 2020 to 179,956 in 2021. Drivers without car insurance might find it difficult to pay out of pocket for vehicle-related damages and medical expenses for bodily injuries or replacement costs for their stolen vehicles if they do not have auto insurance policies. Car insurance is a policy that covers vehicle-related damages, injuries, and thefts.
Below are the common types of auto insurance policies available in California:
Liability Coverage: It protects drivers when they cause injuries to other drivers or damages to their vehicles. California car insurance law mandates all motorists to carry a minimum auto liability coverage of $15,000 per person, $30,000 per accident, and $5,000 per property damage. Driving without auto liability insurance may lead to fines, imprisonment, and huge out-of-pocket expenses in the event of auto theft and accidents.
Uninsured/Underinsured Motorist Coverage: This provides coverage when you are in an accident with an at-fault driver that lacks insurance or has insufficient coverage. Uninsured/underinsured motorist coverage includes the following:
- Uninsured motorist bodily injury (UMBI): It covers vehicle-related injuries when an accident occurs with an uninsured at-fault driver.
- Underinsured motorist (UIM): It provides bodily injury coverage if you are involved in an accident with a driver with insufficient insurance.
- Uninsured motorist property damage (UMPD): This covers damages to your car when you are in an accident with an uninsured at-fault driver, but payments are only made when the uninsured driver can be identified. The coverage limit is usually $3,500.
Medical Payments Coverage: It covers specific medical expenses for you and your passengers when you are in an accident, regardless of who is at fault.
Physical Damage Coverage: It covers vehicle-related damages. There are two types of physical damage coverage:
- Collision coverage: It reimburses you when your car is damaged due to a head-on collision or rear-end collision with another car or a physical object like a person, building, rock, or tree.
- Comprehensive coverage: It pays for vehicle-related damages caused by perils that do not involve a collision. For instance, comprehensive coverage covers flood-damaged cars. It also covers damages from windstorms, vandalism, fire, and theft.
Although most auto insurance companies allow insureds to pay their car premiums in installments (monthly, quarterly, semi-annually, or annually), insureds can opt for short-term car insurance policies. Short-term car insurance is a temporary auto insurance coverage that can last from an hour to several months. Insureds can ask for an extension after policies expire. Short-term insurance policies are usually good for people who want to drive a rented car or another person’s car at short notice.
California auto insurance companies use several factors like annual mileage, car type, driving history, age, and location to calculate premiums. For instance, teen drivers tend to pay higher premiums than experienced mature drivers because of their lack of driving experience, which makes them prone to accidents. Insureds can save on their car insurance costs by taking advantage of discounts like multi-car discounts, mature driver and good driver discounts, and safety discounts (installing airbags and anti-theft devices in your car). Speak to a California-licensed auto insurance agent who can give you more information on how to save cost on your auto insurance policy. They can help you get auto insurance quotes in California from several insurers to ensure you get a policy that suits your needs.
RESIDENTIAL PROPERTY INSURANCE in CA
There are over 14.5 million housing units in California. About 55.3% of these housing units are owner-occupied, while the remaining 44.7% (≈6.5 million) are available for rent. Residential property insurance covers property owners and renters when their homes or personal belongings are destroyed or damaged due to covered perils. For instance, residential property insurance covers roof hail damages, furniture, attached structures, and appliances destroyed due to covered perils.
| Common Residential Property Insurance Types in California | |
| Residential Property Owner Insurance | Homeowners Insurance |
| Condo Insurance | |
| Landlords Insurance | |
| Tenant Insurance | Renters Insurance |
Notably, residential property insurance is not mandatory in California, but purchasing it can reduce out-of-pocket costs when your home or personal belongings need repairs. Residential property insurance in California provides the following coverages:
Coverage A (Dwelling): It covers the home and attached structures if a covered peril damages it. This coverage is not provided in renters and condo insurance policies.
Coverage B (Other Structures): It covers detached structures like garages, sheds, and gates. This coverage is not provided in renters and condo insurance policies. In California, Coverage B is usually 10% of the coverage A limit, but insureds can buy more coverage.
Coverage C (Personal Property): It covers personal belongings in the home. All types of residential property insurance policies in California provide this coverage. In homeowners insurance policies, Coverage C is usually 50% of coverage A, but the coverage can be limited on some types of properties like antiques, fine arts, money, jewelry, furs, firearms, and silverware.
Coverage D (Loss of Use): This coverage is available in all types of residential property insurance policies in California. Coverage D covers additional living expenses if you have to temporarily leave your home due to damages caused by covered perils. It covers expenses like meals, housing, and warehouse storage. The loss of use coverage limit varies, depending on the type of residential property insurance policy. For instance:
- For homeowners insurance, Coverage D is usually limited to 20% of Coverage A
- For renters insurance in California, Coverage D is usually limited to 20% of Coverage C
- For condo insurance, Coverage D is usually limited to 40% of Coverage C
Coverage E (Personal Liability): This coverage is available in all types of residential property insurance policies in California. Coverage E covers you or your family members if they are liable for third-party injuries or property damages. It also covers lawsuits arising from such liability claims. In renters insurance policies, coverage E is usually subject to a minimum of $100,000.
Coverage F (Medical Payments to Others): This coverage is available in all types of residential property insurance policies in California. Coverage F covers medical expenses when a third party gets injured on your property. In renters insurance policies, Coverage F is usually subject to a minimum of $1,000.
Residential property insurance companies in California use several factors, like location, the age of the home, replacement cost, and claims history, to calculate insurance premiums. Hence, individuals should do their due diligence in contacting a California-licensed insurance property & casualty (P&C) agent who can enlighten them on ways to save on their residential property insurance premiums. This should be done before purchasing the policy.
| California Residential Property Insurance Inclusions and Exclusions | |
| Inclusions | Exclusions |
| Theft | Mold |
| Smoke | Wear and tear or maintenance |
| Volcanic eruption | Losses to house vacant for 60 days or more |
| Windstorm or hail | Flood |
| Breakage of glass | War |
| Riot or civil commotion | Losses to house vacant for 60 days or more |
| Falling objects | Tidal wave |
| Weight of ice, snow, sleet | Neglect |
| Sudden & accidental water damage | Water damage caused by seepage or leaks |
| Explosion | Earthquake or Earth movement |
| Vandalism and malicious mischief | Termites and rodent infestation |
| Fire or lightning | Nuclear hazard |
COMMERCIAL INSURANCE in CA
There are well over 4 million businesses registered in California - employing over 16 million residents. Small businesses account for over 4.1 million of the total (≈99.8%). An average of 1,400 new businesses are formed and registered in California weekly, and all of them need commercial insurance to fit its business needs: to comply with the legal and/or business requirements and to protect the business’ bottom line from unnecessary losses.
California commercial insurance protects the insured business against financial losses resulting from risks like property damage, theft, liability lawsuits, employee injuries, illnesses, and death.
When getting a commercial insurance policy, an insurance agent makes sure that you get enough coverage that will provide you with enough money to offset the full cost of the financial loss suffered during the claimed event.
| Common Business Insurance Coverages in California | |
| Commercial Property Insurance California | Real Estate (Landlord or Tenant) |
| Products and Inventory | |
| Business Interruption Insurance | |
| Builders’ Risk Coverage | |
| Commercial Crime Insurance | |
| Extra Expense Insurance | |
| Commercial Auto Insurance | |
| Inland Marine Insurance | |
| Business Liability Insurance in CA | General Liability (property damage + bodily injury) |
| Product Liability | |
| Professional Liability Insurance | |
| Umbrella Liability Insurance | |
| Owners’ and Contractors’ Protective Liability | |
| Directors and Officers Liability Insurance | |
| Errors and Omissions Insurance | |
| Cyber Liability | |
| Business Health Insurance in CA | Group Health Plans |
| Disability Income Coverage | |
| Workers Compensation Insurance | |
| Business Overhead Expense Insurance | |
| Health Insurance for Self Employed | |
| Occupational Accident Insurance | |
| Business Life Insurance in CA | Group Life Insurance Coverage |
| Buy-Sell Agreements Coverage | |
| Key Employee Life Insurance | |
Contact a California-licensed insurance agent before purchasing a commercial insurance policy. They will evaluate your business needs and the associated financial risk factors, to help you determine the right policy for your business.
LIFE INSURANCE in CA
Nearly 330,000 Californians died in 2021 due to drug overdose, diabetes, homicide, Alzheimer’s disease, alcohol-related conditions, and ischemic heart disease. In 2022, about 104 million people in the United States lacked life insurance policies. With the average California funeral cost ranging from $2,770 to $10,000, Californians without life insurance policies might leave their loved ones financially insecure if they suddenly pass away. Besides the death benefit, several living benefits come with life insurance. Individuals can use life insurance policies as financial and retirement planning tools with tax benefits while alive.
| Types of Life Insurance in California | ||||
| Policy Type | Premium | Face Amount | Cash Value | Living Benefits |
| Term | Low | Renewable | None | No |
| Whole | Level | Level (unchanged) | Yes | Yes |
| Universal | Flexible | Level (varies) | Yes | Yes |
| Variable | Level | Level (unchanged) | Yes | Yes |
| Indexed Universal | Flexible | Level | Yes | Yes |
Generally, individuals can purchase either term life insurance policies or cash value insurance policies. Term life insurance policies provide coverage for a specific period like 5, 10, or 20 years. Term life policy beneficiaries can only get death benefits if the insured dies during the policy term. This means that no death benefit will be paid if you live beyond your policy’s term. In contrast, cash-value life insurance is a permanent life insurance policy that lasts throughout the insured's life. It combines both death benefits and cash value accumulation features. The life insurance company pays death benefits to policy beneficiaries at the insured’s demise. However, the insured can borrow money from their cash value while still alive.
| Life Insurance Benefits in California | |
| Living Benefits of Life Insurance | Terminal Illness Rider: It provides financial protection when the insured is diagnosed with a terminal illness that they are unlikely to recover from. Terminal illness rider can be added to your life insurance policy at an extra cost. |
| Long-Term Care: It covers individuals when they are unable to perform basic “activities of living” (ADLs) like eating, bathing, dressing, continence, and moving. Typically, a long-term care rider comes at an additional cost. | |
| Accelerated Death Benefit (ADB): This allows you to access some funds from your death benefit to cater for medical bills when you have a serious illness. Most times, ADB does not come with an extra charge because it is included in the life insurance policy. | |
| Policy Surrender: This allows an individual who wants to cancel their policy to get a full refund of the amount in their cash value without cancellation charges. | |
| Disability Waiver of Premium: With this rider, an individual with qualifying disabilities can skip premium payments, and their coverage will remain intact with no reduction in their death benefit. Most disability waiver of premium costs additional premiums. | |
| Return of Premium: It allows an insured to get a refund of all the premiums paid if they outlive the policy term. Return of premium riders usually comes at an extra cost. | |
| Family Income Rider: It provides policy beneficiaries with an amount of money similar to the insured’s monthly income while still alive. Family income riders can be included in your life insurance policy at no cost. | |
| Accidental Death Rider: It guarantees an additional payout with the death benefit if the insured dies due to an accident. Accidental death riders typically come at an extra cost. | |
| Access to Cash Value: The insured can withdraw or borrow against their cash value account while still alive. | |
| Death Benefit of Life Insurance | Death Benefit: This is the amount paid out to the policy beneficiaries at the insured's death. |
Notably, individuals can use their life insurance policies for various purposes, depending on the type of policy they purchase (individual or commercial life insurance policy). For example, those who purchase individual life insurance policies can use them for death and living benefits. In contrast, purchasing a commercial life policy attracts discounted offers regarding group coverage. In addition, it also provides coverage for the business and its key personnel.
| Common Uses of Life Insurance in California | |
| INDIVIDUAL LIFE INSURANCE
Covers a single person |
DEATH BENEFIT: This is the money policy beneficiaries receive after the death of the insured. A death benefit can be used to:
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LIVING BENEFITS: It allows the insured to access money from the death benefit while still alive. Living benefits can be used to:
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| COMMERCIAL LIFE INSURANCE
Covers company's employees and management |
GROUP life insurance: It is a term life policy offered by employers or large-scale entities, like associations and organizations, to its employees or members. Group life insurance can be used to:
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KEY PERSONNEL life insurance: Covers individuals that are critical to the organization like the business owner or top executives. Key personnel life insurance is used for:
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| BUY-SELL AGREEMENT COVERAGE: A business buys life insurance policies on the lives of the business partners. Buy-sell agreement coverage can be used to fund the buy-out of a deceased business partner's share of the business. | |
DISASTER INSURANCE in CA
Natural disasters like volcanoes, wildfires, drought, floods, landslides, earthquakes, and storms are common in California. These disasters can lead to loss of lives and properties, injuries, damages, and transportation disruption. Hence, Californians should get disaster insurance to protect against damages caused by the prevalent disasters in their areas.
| Most Common Natural Disasters in California | ||
| Natural Disaster | Related Stats | Disaster Damages |
| Flood | Nearly 200,000 people in California reside in coastal areas like Coronado, Santa Barbara, and San Clemente, putting homes and over 870 miles of roads at risk. The result of flooding greatly impacts the economy.
Most standard residential and commercial property insurance policies exclude flood damages. Hence, individuals would have to purchase separate flood insurance policies to cover flood losses. The National Flood Insurance Program (NFIP) provides additional protection from damage caused by flooding. |
The most common damages from flooding are:
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| Volcanoes | Volcano damage is covered by standard property insurance. There are about 20 volcanoes located in California that can erupt without notice. | The most common damages caused by volcanoes are loss of lives, damages to pipelines, and contamination of open tanks or reservoirs. |
| Wildfires | Standard property insurance policies cover fire damage. In 2021, about 9,260 wildfires consumed over 2.2 million acres of land in California. | The most common damages from wildfires are:
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| Earthquakes | Most property insurance policies do not cover losses resulting from earthquakes. The California Earthquake Authority (CEA) is the state's major seller of California earthquake home insurance policies. There are several active faults in California, with about 200 of them potentially hazardous due to their slip rates. Unfortunately, it is projected that over 70% of Californians currently reside within 30 miles of areas where high ground shaking could occur in the next 50 years. | The most common damages from earthquakes are:
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OTHER TYPES OF INSURANCE IN CA
California’s insurance market offers various other types of coverage to suit people’s specific needs aside from the main broad categories of insurance. Below are a few examples:
| Insurance Type | Related Fact | Definition |
| Pet Insurance | As of 2021, approximately 3.9 million pets were insured in the United States with the largest share of these pets residing in California. | Pet insurance covers veterinary bills when your pet gets injured or ill. It also covers pet loss through theft and any damages caused by your pet to others or their properties. |
| Travel Insurance | California is home to 27 primary commercial airports with millions of passengers yearly. | Travel insurance protects against financial losses associated with traveling, like delayed flights, luggage losses, and trip cancellations. |
| Motorcycle Insurance | Over 853,000 motorcycles registered in California need insurance. | Motorcycle insurance protects against financial losses associated with motorcycle accidents, damage, and theft. |
| Boat Insurance | There are over 4 million recreational boaters in California in need of boat insurance. | Boat insurance covers physical damages to your boats and injuries or damages you cause to others while boating. |
| Aircraft Insurance | With over 60 aircraft owned by CAL FIRE alone, the aircraft, the pilot, and the passengers need aircraft insurance coverage. | Aircraft insurance covers repairs or replacement of damaged aircrafts. It also covers third-party liability claims and loss of cargo. |
| DeFi & Crypto Insurance | There are over 900 blockchain companies in California that reveal a great need for DeFi & Crypto insurance. | DeFi & crypto insurance protects against financial losses associated with blockchain-related activity. |
| Umbrella Liability Insurance | Everyone in California should purchase umbrella liability insurance for extra coverage. | Umbrella liability insurance is a comprehensive policy that provides additional coverage when the limit of standard policies like homeowners, auto, or watercraft insurance have reached their coverage limits. |
| Identity Theft Insurance | In 2021, over 390,000 Californians filed identity theft reports to the Federal Trade Commission (FTC). | Identity theft insurance covers financial losses associated with identity theft like legal fees and fraudulent charges on credit cards. |
How Does California Insurance Work?
The operations of over 1,400 insurance companies in California are regulated by the State Department of Insurance. Generally, insureds must pay premiums regardless of the type of insurance policies they purchase to keep their policy active. These premiums are what insurers use to settle claims when they experience damages, losses, or health challenges. Failure to pay insurance premiums may result in policy lapse. In addition, all insurance policies (except life and liability insurance) require the insured to pay deductibles. A deductible is an amount an insured must pay out of pocket before insurance kicks in.
What is an Insurance Claim?
An insurance claim is an official request for payment made by an insured to an insurance company when damage or loss covered by the policy occurs. About 5.79% of homes in the United States had homeowners insurance claims between 2016 and 2022 with a claim severity of nearly $14,000. In 2020, Californians who experienced damages to their homes due to lightning made over 3,380 homeowners insurance claims which was worth over $522 million.
You must contact your insurance company to file a claim immediately after a loss, damage, diagnosis, or sickness requiring medical expenses. Your insurance company will provide you with an online claim link or send you a claim form. Afterward, in the case of a home, auto, or commercial insurance policy, the insurance company will send an adjuster to investigate and evaluate the damage or loss. After the inspection, you will be given a damage estimate, and if you agree with it, your claims will be processed immediately. For life insurance, after your demise, your policy beneficiaries will be required to file a claim. They must submit a claim form, a copy of the policy document, a death certificate, and other supporting documents to process the claim and payout.
Upon filing a claim in California, the insurance company has 15 days to acknowledge the claim and then up to 40 days to investigate it. Once the claim is accepted, the insurer has 30 days to send the payment.
There are a lot of complexities around filing insurance claims, and getting a California-licensed insurance agent is the best option. Your insurance agent will ensure you get the best compensation for the damage or loss.
What is the Cost of Insurance in California?
The cost of insurance is the amount an insured California resident pays either monthly, quarterly, semi-annually, or yearly to keep the insurance policy active. The cost of insurance in California varies by insurer. Insurance companies use several factors to calculate the cost of insurance premiums. However, comparing insurance quotes from several insurance companies is essential when shopping around for a policy. This helps you get an affordable policy that is within your budget.
| Factors that affect insurance premiums in California | |
| Life Insurance in California | Age, gender, policy type, smoking habits, health status, lifestyle and occupation |
| Health Insurance in California | Age, occupation, pre-existing condition, tobacco use, and family medical history |
| Home Insurance in California | Location, home’s age and condition, replacement cost, marital status, and proximity to hydrants |
| Auto Insurance in California | Driving history, age, location, car make/model, gender, and annual mileage |
| Commercial Insurance in California | Number of employees, location, annual income, and type of business |
Individuals can use the interactive tool on the California Department of Insurance (CDI) website to compare premiums between insurance companies in the state. Below are the average costs of insurance policies in California:
| The average monthly cost of insurance in California | |
| Individual Insurance Policies | Health Insurance:
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| Auto Insurance: Costs between $665 and $1,420 per year for minimum coverage (liability coverage only). This could cost more or less due to certain factors like car type, driving history, annual mileage, and coverage type. If the coverage is increased, the average cost of full coverage car insurance in California is between $1,325 and $3,758 per year. | |
Life Insurance: The cost depends on the age at which the policy is obtained and the individual’s health at the time of purchase.
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Residential Property Insurance:
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| Commercial Insurance Policies | Commercial Property:
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Commercial Health:
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| Commercial liability:
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Speak to a California-licensed insurance agent who can help you compare quotes from several insurance companies in the state to get you a cost-effective policy. They can also provide sufficient information on how to save on your insurance policy.
How Can Insurance Companies in California Afford To Pay Out Claims?
California insurance companies can afford to pay out claims by ensuring the cost of an insurance policy is higher than the risks associated with the coverage. Below are some ways insurers can afford to pay out claims:
- Investment income: Insurance companies generally make money on premiums, but they make more from investing the premiums in the money market and other low-risk investment opportunities. Hence, they can afford to pay out claims from the money they make from premium investments. For instance, insurance companies in the U.S. made about $200.8 billion from premium investments in 2021.
- Lapsed policies and expiring term policies: When a policy lapses, the insurer is not obligated to pay out claims. Similarly, when a term life policy expires and the insured outlives the policy tenure, the insurer will retain all collected premiums without paying out any benefits. Insurance companies can take out the money retained from the lapsed and expired term life policies to pay out claims.
- Policy cancellations: Insureds with permanent life insurance policies can decide to close their accounts after making a lot of money via their cash value accounts. The insurance company will pay the cash value amount with accrued interest and keep all the premiums that have been paid. The insurer can use the money gained from the premiums to pay out the claims of other insureds.
What Happens If an Insurance Company in California Goes Bankrupt?
Although the state’s Department of Insurance highly regulates the insurance industry in California, insurance companies can go bankrupt. For instance, insurance companies may underprice their products and have huge insurance claims that can affect them financially. Before an insurance company goes bankrupt, the Conservation and Liquidation Office of the California Department of Insurance will take the company through the process of rehabilitation (called conservation) to make the company regain its financial footing. At this point, the Insurance Commissioner takes over the insurance company's operations to conserve its assets. During conservation, the Commissioner will investigate the insurance company’s records to determine its eligibility for rehabilitation, so that insurance operations can continue without the management of the Commissioner.
If the conservation fails, the insurance company will be declared insolvent or bankrupt, and the superior court will order the company's liquidation. The business operations of the insurance company will be terminated by canceling all insurance policies and not issuing any new or renewal policies. During this period, the company’s assets will be sold to generate funds to pay out claims.
When an insurance company is declared insolvent, the Commissioner will publish a notice to every party interested in the company's assets, like the creditors, shareholders, and policyholders. The notice will inform those who have a claim against the insurance company to file claims before the final claims filing date. Notably, policyholders will be informed that their insurance policies will be canceled with the insurance company within 30 days from the date of the liquidation order. Hence, they would have to file their claims before that time.
Every licensed insurance company in California belongs to the state guarantee association. Hence, the California Guarantee Association will swing into action at the point of a company's insolvency. They will continue to provide coverage as long as premiums are paid when an insurance company goes bankrupt. The major Guarantee Associations in California that administer covered claims are:
- The California Insurance Guarantee Association (CIGA)
- The California Life and Health Insurance Guarantee Association (CLHIGA)
CIGA was created in 1969 and comprise all insurance companies licensed in specific lines of insurance in California. Its major goal is to take over the insurance obligations of insurance companies when they become insolvent. For instance, CIGA paid approximately $234 million in claims from insolvent insurance companies in 2011. In contrast, CLHIGA was created in 1991, comprising all California-licensed life and health insurance companies. CLHIGA protects policyholders when a life or health insurance company becomes insolvent. They help to pay out claims or keep the coverage in force.
What Are The Insurance Company Ratings in California?
Insurance company ratings refer to the view of independent agencies regarding an insurance company’s financial strength, solvency, and ability to pay out claims. Independent rating agencies use different rating scales to make their judgments about insurance companies. Hence they tend to have different opinions even about the same insurance company. There are four major insurance company rating agencies in California, namely:
- Fitch
- Moody's
- A.M. Best
- Standard & Poor's
- Kroll Bond Rating Agency
Note that insurance company ratings are opinions and not facts. However, it is advisable to always check an insurance company's ratings from multiple rating agencies in California before purchasing an insurance policy from them. This will help you know how an insurance company is doing financially. In addition, most insurance company rating agencies offer financial strength ratings (IFS ratings) online that individuals can access for free. Contact the California Department of Insurance at [(800) 927-4357](tel: +8009274357) for further information about insurance company ratings. Alternatively, you can speak to a California-licensed insurance agent to help you find out about an insurance company’s solvency.
How Do California Insurance Companies Make Money?
California insurance companies make money by designing business models that allow them to assume and diversify risks. Most insurers generate revenue through premiums, investment, cash value cancellation, and coverage lapses.
Insurance companies use the service of actuaries to help determine premiums. These actuaries use several factors, health status, age, annual income, gender, and credit history, to determine an individual's risk level. The risk level is then used to determine premiums so that the insurance company can gain from the policy despite the potential risks. If an insurance company discovers that the risk is too high, they can either choose to increase the premiums or not offer the policy. However, they will be willing to provide coverage when the risk is low. This underwriting process ensures that the insurance company makes additional income by reducing the chances of paying out on the policies they sell.
California insurers also make money through premium investments. They invest the premiums paid by insureds in the financial markets to increase their income. Since insurance companies collect premiums upfront and do not have to pay off claims on insurance policies immediately, they allow the money to work for them through investment. In the event the investment crashes, insurers can hike premium costs and share the losses to the insureds.
Another way insurers make money is through cash value cancellations. For example, some insureds with permanent life insurance policies with cash value accounts can decide to cancel their policies, having earned sufficient cash in their cash value account. This allows the insurance company to pay the insured all the money in the cash value account, including interest earned on the investment. However, the insurer keeps all the premiums paid during the policy.
Coverage lapses are another way insurers make money in California. Refusal to pay premiums as and when due and during the grace period may cause a policy to lapse. Insurance companies do not pay out when the policy lapses. As a result, all previously paid by the insured belongs to the insurance company.
Speak with a California-licensed insurance agent for more information on how insurance companies in the state make money. They will also provide answers to all your insurance questions since they are knowledgeable in insurance operations.
