Home insurance reform urgently needed in California, watchdog says

Jeff Collins, The Orange County RegisterOrange County Register

California’s home insurance market needs urgent reforms to halt the exodus of insurers from California and to stem skyrocketing costs for coverage, a state watchdog said.

For example, the state should allow insurance companies to use computer models and incorporate their own “re-insurance” costs in calculating rate hikes, the Little Hoover Commission said in a report released Thursday, Nov. 21.

But the state should also require insurance companies to base rates on investments homeowners and communities make to reduce their fire risk.

“Too many people are being told their existing insurance won’t be renewed, forcing them to find more expensive alternatives, often for inferior coverage, or even to forgo insurance altogether,” commission Chair Pedro Nava said in a statement. “This crisis has been brewing for many years and deserved timely attention.”

See also: Anguished homeowners struggle to keep their insurance

Although many of the Little Hoover recommendations are already being implemented by California Insurance Commissioner Ricardo Lara, the report criticized him for failing to respond to repeated requests that he testify before the commission.

“That the current insurance commissioner did not participate is inexplicable and irresponsible,” Nava said in a letter to state leaders.

“One wonders,” Nava added, “why action wasn’t taken sooner.”

Starting in 2022, at least seven of the state’s top 12 insurance companies paused new policies or pulled out of the state entirely.

Many homeowners are being forced to use little known, out-of-state insurance companies or enroll in the high-cost program of last resort, the state-created FAIR Plan, which doesn’t include liability and other types of coverage.

The FAIR Plan’s share of residential policies doubled to 3.1% in 2022, from 1.6% in 2018, state Department of Insurance figures show.

See also: California homeowners could continue losing insurance as wildfire threat looms

Since 2017, California has experienced 13 of the 20 most destructive wildfires in its history, resulting in the destruction of more than 3.8 million acres and 40,000 structures, the report said. Combined losses totaled $20 billion,

During the decade ending in 2022, insurers in California averaged a 2.6% loss, compared with a 6.7% average profit margin in the nation as a whole, according to the report.

“For insurers, (the 2017 and 2018) fire seasons reset expectations regarding the damage wildfires could pose,” the report said.

The commission launched a study of California’s home insurance market early this year, crafting 11 recommendations and numerous reforms.

Recommendations include:

—Allowing insurance companies to base future rate hikes on forward-looking “catastrophe models.”

California is the only state that bans such models, requiring insurers to base future rate hikes on historical losses, the report said. That precludes them from taking into account housing growth in high-risk areas, increased dry vegetation during droughts or other climate change impacts.

—Creating an open, shared data clearinghouse of property risk information for each parcel of land in the state, since insurance companies keep their own risk data private.

—Establishing the state’s own public catastrophe model to help evaluate rate hikes based insurers’ private “black box” models.

(In September, Lara announced a partnership with Cal Poly Humboldt to explore the creation of such a model for predicting wildfire risks.)

—Allowing insurance companies to take into account rising costs from investors who provide “re-insurance,” or insurance for insurance companies.

—Modernizing the Department of Insurance website “to make data and information more user-friendly and accessible,” while ensuring that market indicators are up-to-date and searchable.

—Helping homeowners protect aging homes against fire hazards.

Since the median age of California homes is 48 years, high costs could deter many homeowners from updating them to current fire safety standards, the commission said. But such investments also could lower premiums and reduce claims payouts after a disaster.

The state could partner with insurers to offer incentives such as tax breaks, grants or insurance discounts to offset the costs of those upgrades, the commission said.

See also: State Farm halts new property insurance policies in California

Representatives of the state Department of Insurance and Consumer Watchdog both praised many of the Little Hoover recommendations.

“It’s a strength of the report that its recommendations echo and endorse Commissioner Lara’s Sustainable Insurance Strategy,” said department spokesperson Michael Soller.

For example, Lara’s plan endorses catastrophe modeling and allowances for re-insurance costs. It would also require insurers to recognize homeowner fire-prevention investments and calls for modernizing the department website.Related Articles

Lara said he hopes to have new regulations adopted by Dec. 31.

Consumer Watchdog, which sponsored a statewide proposal for greater insurance oversight, has criticized Lara’s proposals for speeding up the rate-hike review process. The group also complained that Lara’s reforms fail to guarantee that insurance companies will continue offering insurance to properties in areas with high wildfire risks.

However, the group issued a statement Thursday endorsing many of the commission’s recommendations, including “greater public oversight of the secret algorithms insurance companies use to decide who pays more for home insurance,” the group said.

“The Little Hoover Commission gives key recommendations that will make insurers’ actions more transparent,” Consumer Watchdog Executive Director Carmen Balber said in a statement.

The recommendations would also “give Californians credit for the billions that have been invested in protecting our communities from wildfire,” Balber added.