California’s home insurance challenges are a complex web of risk management, construction costs, pricing algorithms, climate forecasts and regulatory minutia.

Recently, State Farm and Allstate — two major home insurers in California – chose to stop writing new property policies, citing rising costs. Their moves raise fears of a potential statewide insurance shortage.

This begs the question: What are fair premiums and how will they offer homeowners decent protection while providing insurers a fair profit?

Now, insurance pricing logic makes the average human’s head hurt. It requires calculating the risks of everything from major catastrophes to modest calamities at just one home. The variables run from climate to construction to crime.

Add that up and then make a big bet: How much money for how much protection?

Let my trusty spreadsheet try to explain this odd dynamic, using some awfully basic math to highlight the tussle between a property owner and an insurer.

Proper premiums

We all know that many things tied to housing in California are expensive.

So, it might surprise you to know that California’s home insurance rates look relatively affordable when compared with premiums across the U.S.

California had the 37th-highest annual premiums at an average $1,434 a year to cover $360,000 in damages, according to my look at policy price rankings from Nerdwallet, Insurance.com, and Bankrate.

The national median was $1,963. And the highest premiums were found in Middle America where wind and hail pound homes – Oklahoma at $4,766, then Nebraska at $3,985, Kansas at $3,774, Texas at $3,389 and Arkansas at $3,172.

One argument the insurance industry makes to explain their wariness about protecting more California homes is that they don’t feel they’re being adequately compensated for their risks. Remember, insurance premiums are regulated by the state’s Department of Insurance.

Costly construction

Building housing in California isn’t cheap – and that’s a hefty slice of insurance cost.

For starters, the California construction workers who’d fix your home are pricey.

They earn the nation’s fifth-highest annualized average pay of $89,300, according to federal job stats. These jobs pay better only in Massachusetts ($101,200), New Jersey ($90,500), Illinois ($90,100), and New York ($89,700). Nationwide, construction wages run $80,300.

Those paychecks are one reason why California ranked No. 3 among the states with an average construction expense of $188 per square foot, according to my combination of building expense benchmarks from Today’s Homeowner and Forbes. The national median was $149 and only two states were costlier: Hawaii at $206 and Alaska at $189.

On the other hand, the typical home in California is far smaller than the typical American residence. That might offer some savings on a significant repair bill.

The median California house is 1,860 square feet, 37th among the states vs. the 2,014 U.S. norm, says the American Home Size Index. The biggest houses are in Utah at 2,800 square feet and the smallest are in Hawaii at 1,164.

Combine cost and size and you get a rudimentary replacement value for a quasi-typical California home: $349,000. That’s eighth-highest in the nation and far above the nation’s $304,000. The highest was in Utah at $427,000. The low was in Iowa at $213,000.

Now before you scoff at those guestimates, much of a California home’s huge price tag comes from the lofty value of the land it sits on. You still have a lot even if, say, a wildfire burns the home to the ground.

Another wrinkle is the age of housing. Old homes typically required the cost of being brought up to modern construction codes when repaired.

California ranked 16th for the age of housing stock at 45 years vs. 35 nationally, according to the Census Bureau. The oldest housing is in New York at 63. The youngest is in Nevada at 25.

What are the odds?

The owner and the insurer both want the premium to properly reflect the likelihood a housing hazard will damage the property.

And it’s a good bet that the largest perils can be tied to Mother Nature.

California had the fifth-most dangerous conditions, according to my composite of climate-risk scorecards from CoreLogic, WorldPopulationReview, WalletHub, and MoneyGeek. No. 1 was Texas, then Louisiana, Mississippi and Oklahoma. The lowest risk, by the way, was found in Rhode Island, Delaware and Connecticut.

However, this is a broad brush for scoring home insurance’s risks.

Remember two large hazards — flooding and earthquakes — are not protected by a typical California home insurance policy. Plus, home policies also cover losses such as plumbing leaks theft and various legal liabilities.

Bottom line

This math barely scratches the surface of the pricing debate.

Plus, no two owners or insurers will see the California risks the same way. And state insurance regulators have their own views, too.

Look, there are far more questions than answers surrounding California’s home insurance headaches. But there’s an over-arching issue that California will have to figure out: What’s more important, coverage or cost?

Should the regulation err on the side of availability of insurance in a state where owners have to protect considerable real estate values?

Or is the price of protection paramount in a state where housing expenses aggressively stretch many family budgets?

Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at [email protected]

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