Calif. insurers continue tactics to slow new policies, stem losses

California auto insurers are “slow walking” new policy applications and engaging in a host of tactics to discourage, delay, and deny customer access to insurance in a strategy to stem losses, according to the state’s top insurance regulator.

Just before the Christmas holiday, California Insurance Commissioner Ricardo Lara warned companies about the practices and threatened enforcement action if they don’t clean up their act.

“These alleged passive-aggressive tactics by insurance companies to slow down drivers’ access to coverage are unacceptable, dangerous, and will not be tolerated,” Lara said. “I am taking action…to ensure these insurance companies are acting according to the law and giving drivers the coverage they are paying for at the rate they qualify for. We will continue to monitor the situation and take any and all steps necessary to protect California consumers.”

Lara said he is reacting to multiple complaints about waiting periods, confusing questionnaires and surveys, and unreasonable application requirements unrelated to eligibility. In online forum platforms such as Reddit and Facebook, drivers have been complaining for nearly a year about higher premiums, delayed quotes, and questionable insurer practices.

Consumer complaints cited

“These consumer complaints revealed that some insurance companies may be taking actions that are not a part of the underwriting guidelines they have previously filed with the Department,” the commissioner said in a statement. “Before implementing new practices, like using questionnaires or different filing instructions, insurance companies must file those guidelines with the Department.”

The accusations and regulator response gave a new wrinkle to the state’s already churning property and casualty insurance crisis. Regulators are holding new rate hearings for fire insurance as some of the biggest insurers have abandoned the state amid spiraling losses and complaints of their own that the state is slow to approve adequate rate relief. Gov. Gavin Newsom issued an executive order in September directing the insurance commissioner to find a solution to the crisis.

Policies will likely get more expensive, Lara has already warned. In 2023, seven of the 12 largest insurers doing business in California, including State Farm and Allstate, said they could no longer afford to cover new homes in the state due to wildfire risks.

Further insurance increases expected

“Will Californians see increased insurance costs in the future? The only realistic answer is yes,” Lara said at an Assembly Insurance Committee hearing last month. “Increasing availability of insurance is how we protect affordability.”

Regulators approved 111 rate increases in 2023 and are reviewing more than 80 other requests from insurers.

Major auto insurers began 2023 by slashing advertising budgets, cutting expenses, and taking other actions to stem losses. GEICO reduced its advertising spending by 38% year-over-year in 2022, which was the highest drop among auto insurers. The company spent $1.28 billion on advertising 2022, about $800 million less than in 2021. Allstate’s advertising spend also fell below $1 billion in 2022, a near 27% decrease from the previous year.

Many factors impacting losses

But spiraling inflation, dramatically increased repair costs, and supply chain interruptions ganged up on the insurers to stifle most attempts to curb losses.

“There are a lot of trends that are driving the cost of automobile insurance nationwide and California is not immune to these trends,” said Jerry Becerra, president of Heffernan Barbary Insurance Services, in Oakland, Calif. “The difference is that in California we passed Proposition 103 in 1988. The proposition regulates how insurance companies can price their coverages.”

Insurers are not allowed to consider the cost of reinsurance and projected future trends, Becerra notes, a recurring complaint by insurers seeking more adequate rates.

“Reinsurance cost increases cannot be passed on directly to consumers,” he said. “And rates must be based on historical trends, not on projected future trends.”

And the trends in auto insurance have not been good, he notes. Repair costs have skyrocketed, with newer vehicles being more difficult and expensive to repair. Meanwhile, the legal system is awarding higher and higher verdicts for automobile liability claims, which must be absorbed by insurance premiums. Changes in driver habits have also contributed to the increased number of claims with people driving less, but driving faster, more distracted, and causing more accidents.

Nationally, automobile insurance is running at a more than 110% loss ratio, meaning that for every dollar collected, insurance companies are paying out more than $1.10 on average. As a result, rates in the first half of 2023 increased by 17% nationwide and continued to spiral throughout the year.

“Rate increases have been lower than the national average in California due to regulation and  carriers are feeling the squeeze,” Becerra said. “Their response is to write less coverage and to tighten underwriting guidelines. Less coverage is available to be written and consumers are being forced into the surplus lines market.”

It is a frustrating situation for brokers like himself, he said, because it sometimes is difficult to find an insurance company willing to quote coverage at all.

“All of this trickles down to consumers who are paying the higher premiums and forced to buy less coverage,” he said.

Becerra said he thinks regulators understand the problems but are hampered by the law from coming up with solutions.

“I believe that these problems can be overcome but there is no quick fix,” he said. “I am optimistic that the state is working to address these problems.  However, we may be many months away from the market turning around.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].