California's Insurance Crisis: How to Adjust Your Pro Forma

Insurance premiums for California investment properties have doubled and in many cases tripled over the last two years. The FAIR Plan has expanded coverage but at much higher prices. If your pro forma still uses insurance numbers from 2023, your underwriting is broken.

How Bad It Is

Historical average annual premiums on FAIR Plan policies for a typical single-family rental used to run $1,000-$1,200. Investors are now reporting premiums of $2,500-$3,500 or higher. Some commercial properties have gone from $5,000 to $15,000 annually. That's a 100-200% increase.

How This Crushes Your Numbers

Most investors run pro formas with insurance at 0.1-0.2% of property value, or a flat $1,000-$1,500 per unit. Those numbers are wrong.

Take a 4-unit building worth $1 million. Old insurance estimate: $1,600 annually. New FAIR Plan premium: $4,500 annually. Difference: $2,900 per year.

Old NOI: $27,200. New NOI: $24,300. That $2,900 drop pushes your DSCR from 1.36 to 1.22. That may knock you below lender requirements, leading to higher interest rates or loan denial.

What to Do

Update your pro forma insurance costs based on current FAIR Plan premiums or actual market quotes. Run scenarios with premiums 50% higher than current quotes to account for future increases. Adjust your expense ratios, cash flows, and DSCR calculations accordingly. Talk with your lender early about how they handle insurance premiums in underwriting.

Focus on properties with lower wildfire risk. Urban and coastal properties generally face lower premiums than foothill and wildland-edge locations. Build insurance hikes into rent increase projections, but be realistic about AB 1482 rent cap limits (currently max 6.3% annual increase).

The FAIR Plan expansion is not temporary. This is a permanent recalibration. If you don't stress-test insurance costs in your underwriting, you're guessing.