New insurance law will work, for the companies | Thomas Elias

The newspaper headline asked the proper question, but the story that followed missed the point. It read, "California's plan to stabilize its home insurance market is now law. Will it work?"

The headline writer clearly wondered whether this new law, promulgated by Insurance Commissioner Ricardo Lara and not by the usual set of state legislators, would work for homeowners, many of whom have seen their insurance policies cancelled over the threat of fires, both wild brush and forest fires and blazes within neighborhoods made up of decades-old wood homes.

The insurance industry's version of the answer was given pretty quickly. The companies believe it will work just fine for them. The new law contains elements they've sought for decades, but were consistently denied by California's 1988 Proposition 103, which specifically forbade basing rates on industry risk forecasting formulae, but rather only on past events in the many locales where California's homes have been built.

Under those rules, the more fires an area has experienced, the higher rates could go in that place and others nearby.

Lara intended his new rules to stabilize the state's property insurance market, affecting not only homes but also other types of structures, from barns to body shops.

From now on, the industry will be able to base rates on secret "black box" alogorithms drawing on a wide range of information, including weather patterns, topography and other data, rather than relying mostly on historical losses in particular areas.

In exchange, the companies committed to cover more homeowners in wildfire areas. But this commitment is not compulsory in the actual new rules. In short, the companies got the rule change they have wanted since the early 1990s, while making only paper promises in return.

The stated commitment from the insurance industry is that companies will cover 85 percent of homes in known wildfire areas. Seeming to demonstrate they mean to keep this commitment, Farmers Insurance quickly announced it plans to write 9,500 new property policies per month here for the foreseeable future, up from the 7,000 it accepted in 2023.

But this move is purely voluntary, unforced by any law or regulation and Farmers or any other companies making similar commitments can change their minds anytime.

So consumers lose the protection of knowing their rates are based on real events, while getting unenforceable promises in return. That's basically because Lara gave in to industry blackmail, as the companies virtually ceased writing new policies in California until they got rules they liked.

Instead, Lara could have stood up to them by saying something like, "You will sell property insurance in California, or you won't sell any other type of coverage, including auto or life." Under that scenario, the companies pretty soon would have had to choose between losing their largest American market or selling new property policies under the old rules.

It's almost Biblical, but California's insurance boss gave away new and much higher rates but didn't even get a mess of pottage like Esau did when trading his birthright for lentil soup (pottage).

Here's the new insurance reality, as outlined by analysts for the Consumer Watchdog customer-interest group: Insurance companies won't have to sell anything more than a bare bones policy similar to those consumers get today if they're on the state-run FAIR Plan. Rate increases are already starting, but insurance companies won't have to report on improvements they've made to the overall market for two years, at the beginning of 2027. And after those two years, any insurer may put off indefinitely its supposed commitment to sell more policies in high-risk areas, so long as it claims to be making a "reasonable effort."

At the same time, companies are allowed to violate Proposition 103's requirement for public disclosure of mathematical price-making formulae. Nor must wildfire models used in rate-making be proven reliable and unbiased.

It's essentially a license for the insurance industry to take more money from every property owner in California, and it now appears those insurance consumers will have no legal defense against it, even though the new regulations were never approved by the state's Office of Administrative Law, which usually reviews all rule changes.

Lara calls this a victory, but it's actually abject surrender.