State insurance market is compromised [The Orange County Register]

What led to the alarming decision by State Farm and Allstate to stop selling new property insurance policies in California, and who’s to blame?

It turns out that regulations from the California Department of Insurance, adopted last October, played a part in the decision of these two insurance giants to stop selling homeowners policies in the largest United States property insurance market.

While politicians like to point to global climate change as the cause of California’s problems, it’s often the case that the unintended consequences of ill-considered policies are the real culprit. In this case, the California Department of Insurance released a statement that read in part, “We have been here before after major wildfires. What’s different now is our actions in California with the first-ever insurance discount program for wildfire safety.”

Sometimes when you’re the “first ever,” you find out why no one else has done it.

In October, the California Department of Insurance announced new rules mandating discounts for consumers who take specific actions to mitigate the risk of wildfire damage. The department called it the “Safer From Wildfires” framework. Insurance Commissioner Ricardo Lara said it was necessary because insurance costs had been skyrocketing in wildfire-prone areas, and less than half of insurers in California were offering discounts to property owners who did such things as installing ember-resistant vents, fire-resistant roofs and upgraded windows that are less likely to break in a fire.

In a statement released by his office, Lara said then, “Protecting Californians from deadly wildfires means everyone doing their part, including insurance companies by rewarding consumers for being safer from wildfires.”

The new rules from the Department of Insurance gave insurance companies 180 days to implement the new safety standards and create a process to determine a property’s “wildfire risk score,” which property owners would have the right to appeal.

That was mid-October. The 180 days are now up, and two major insurance companies have said “no thank you” to selling new property insurance policies in California.

The new regulations had the support of the California Professional Firefighters, the Coalition for Clean Air and the California Association of Realtors. The executive director of a nonprofit organization called United Policyholders called the regulations “a critical and fair step” and L.A. County Supervisor Kathryn Barger said the new rules would promote “community-driven preparedness.” But none of those people are actuaries, the financial risk experts who do the math to be sure premiums bring in enough money to pay claims.

Allstate and State Farm did not cite the mandatory discounts as a reason for their decision to stop selling new property insurance policies in California. State Farm blamed “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.” A statement from Allstate said, “The cost to insure new home customers in California is far higher than the price they would pay for policies.”

Harvey Rosenfield, founder of the nonprofit group Consumer Watchdog and author of Prop. 103 in 1988 to regulate insurance companies, accused the companies of boycotting California to achieve “uncontrolled rate increases.”

But California’s high property insurance costs stem from many different state policies, both environmental and liability-related, that have greatly increased the financial risk caused by wildfires.

Those problems were not fixed by adopting “first-ever” regulations that address high costs by mandating lower prices.

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