Cost, availability of insurance the latest threat to California pocketbooks

Insurance is another in the list of cost-of-living outrages.

Auto insurance policies are getting harder to find and more expensive in California —a trend that, like homeowners' insurance, blamed by insurers on the state's regulations.

While the regulations in the past have saved many millions of dollars for consumers, insurers wanting to raise rates during inflationary times have also had to live within the confines of Proposition 103, the voter-approved state law that requires hearings for any insurance rate increases that go above 7% if even one state resident challenges the request.

Prop. 103, while it protects consumers and increases transparency, also has discouraged insurers from raising rates above the 7% threshold that triggers an extensive, costly review process. Insurers, who are in the risk business, thus often keep the increases below 7%.

While surveys show Prop. 103 has kept increases in auto insurance rates in California lower than in many other states, some insurers say Prop. 103 makes California, with its 27 million licensed drivers, an untenable market, so they pull back on writing policies in the state, or, for new drivers or first-time requestors, quote high rates.

Still, with such a huge market, there remain more than 130 companies that offer auto insurance in the state.

The same cannot be said, however, for fire insurance. Citing increased wildfire risks, some of the biggest home insurers have pulled out of California. Amid soaring premiums, seven of the state's top 12 insurers have paused or restricted new business since 2022.

One cause is the state's Fair Access to Insurance Requirements Plan, a state-established high-cost, bare-bones plan that offers coverage to people who can't find it anywhere else.

The FAIR Plan was intended to be a temporary safety net but has become the fastest-growing insurer in California, with policies more than doubling since 2018. The problem is that although the FAIR Plan accounts for only about 3% of California's insurance market, it insures a disproportionate number of properties in high-wildfire-threat areas, where the risk of a disaster could affect a number of policyholders at the same time.

With this increased risk comes increased liability, and the FAIR Plan's exposure reached $290 billion this fall.

And while the number of subscribers to the plan is growing exponentially, private insurers remain responsible for claims the FAIR Plan can't afford to pay. The upshot is that to reduce their own risk or cover these potential losses, many private insurers then either limit their coverage or just drop it.

Reducing FAIR Plan liability is essential to stabilizing California's insurance market, which will take legislative action.

Another reason insurers have left is that California is the only state that doesn't allow them to use catastrophe models that predict future losses in setting home insurance rates. And it doesn't let them pass through the cost of reinsurance, which is insurance bought by insurers to limit their risks amid climate-related losses.

State Insurance Commissioner Ricardo Lara has unveiled a new plan that would allow insurers to set prices according to predicted future catastrophes, but will likely take years to translate fully into rate changes. Under political fire, Lara also wants to require insurers to offer discounts to homeowners who harden their homes against fires.

Another possible solution is to severely limit development in fire- and flood-prone areas, though state legislators earlier this year tabled a bill to would require local governments to enact regulations that would ensure this. (In the CZU fire zone, where more than 900 homes were lost in the 2020 wildfires, 158 building permits have been issued to date, with 232 said to be in process.)

Nobody wants to pay more for insurance. But insurance is already expensive and doing nothing will make it even costlier.

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