Commissioner attempts to address Calif. insurance crisis ‘head on’

Recent efforts to overhaul California’s crisis-ridden insurance system have been blasted by consumer groups, tepidly embraced by trade organizations, and slapped by at least one insurer by asking for sky-high rate increases.

Burdened with the near impossible task of increasing access and affordability of insurance for consumers while providing adequate rates and reasons to stay in business in the state for companies, Insurance Commissioner Ricardo Lara has forged ambitious proposals to solve the crisis and calm the market.

In June, Lara released another in a series of his “Sustainable Insurance Strategy” for the state’s troubled homeowners insurance market, which has seen a number of insurers stop writing polices and even abandon the state altogether. In what he said was part of the most significant insurance reform in 30 years, Lara floated plans to allow companies to use forward-looking catastrophe models for ratemaking – something that has never been allowed – in return for the commitments from insurers to write of policies in probable wildfire distressed areas.

Fewer policies being written

Under a voter-approved measure passed in 1988, insurance companies are legally free to choose where they write policies. As a result, companies wrote fewer and fewer policies in areas of the state they deemed less risky. Homeowners and businesses in the risky areas have had to rely on the state’s expensive last-resort FAIR plan for coverage or risk going without.

“We are addressing this crisis of insurance availability head-on,” said Lara. “For the many Californians who live anywhere where wildfires are a threat, my strategy will increase their options while requiring insurance companies to take their wildfire safety actions seriously. This builds on my first-in-the-nation Safer from Wildfires regulation by requiring insurance companies take into account wildfire mitigation efforts at the individual property, community, and regional level.”

The American Property Casualty Insurance Association seemingly reacted positively to Lara’s proposals while not exactly embracing specifics.

Insurers 'committed serving Calif.'

“Insurers are committed to serving Californians,” said APCIA vice president for state government relations Mark Sektnan. “The only way to increase availability and consumer access to coverage is to restore the health of the market and remove the obstacles that led to this crisis in the first place. We remain committed to working with the department to address these concerns and implement the other desperately needed reforms to fix the insurance crisis.”
A statement from the California Farm Bureau was only slightly more positive.

“California Farm Bureau members applaud Commissioner Lara's continued commitment to restore competition to the insurance market by bringing insurers back to write residential and commercial policies in our state,” said bureau president Shannon Douglass. “Competition is the first step to guide the market to a place where pricing reflects ongoing wildfire mitigation efforts undertaken by Californians, including by our farmers and ranchers who work to remove fuels and safeguard properties”

But consumer groups blasted Lara’s plan with one saying home insurance in the state will remain unaffordable and unobtainable for many Californians under the new rules.

They noted the proposal would not require insurance companies to charge a price that consumers are able to afford, and the requirement could be waived if insurers cannot meet it. In return, according to Consumer Watchdog, insurance companies would be allowed double-digit price hikes by using “unverifiable secret algorithms” to set prices, driving insurance premiums even more out of reach for many Californians.

Policy rates potentially 'unaffordable'

“A promise to expand coverage with unaffordable policies isn’t going to get California home, condo and apartment owners insured again,” said Carmen Balber, executive director of Consumer Watchdog. “What happens when companies fail to meet their commitment because premiums are out of consumers’ reach? The commissioner will be allowed to waive the commitment.”

Balber said the way to guarantee more coverage is to require insurance companies to sell to every homeowner who “does the right thing” and takes action to protect their home from wildfire.

“The commissioner’s whole plan could turn California into Florida, where insurance companies got everything they want and people still can’t get coverage,” said Balber.

As if on cue or perhaps coincidentally, the state’s largest homeowners insurer in early July hit Lara with a request to raise its rates for some customers by more than 50%.

In a filing to the Department of Insurance, State Farm’s California subsidiary requested jacking up homeowners' insurance policies by 30%, condo policies by 36%, and renter's policies by a whopping 52%.

"State Farm General Insurance Company is working toward its long-term sustainability in California," the company said in a statement. "Rate changes are driven by increased costs and risk and are necessary for State Farm General to deliver on the promises the company makes every day to its customers."

The insurance giant said last year it would stop accepting new home insurance applications due to historic increases in construction costs and inflation. Then in March, the company said it would cut 72,000 home and apartment policies in the state because of inflation, regulatory costs and increasing risks from catastrophes.

Lara shot back at State Farm saying its rate filings raise serious questions about its financial condition.

"This has the potential to affect millions of California consumers and the integrity of our residential property insurance market,” he said. “"We will use all the department’s investigatory tools to get to the bottom of State Farm’s financial situation. We take this process seriously."

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