Thomas D. Elias: Insurance blackmail wins again

It would have taken a rare combination of courage and toughness to solve California's three-month property insurance crisis fairly.

Neither quality was displayed by either Gov. Gavin Newsom or Insurance Commissioner Ricardo Lara, and so blackmailing insurance companies won big against ordinary Californians for the second time in 27 years.

How craven were these two officials? First, on a cool day in late September, Newsom issued a uniquely unspecific executive order essentially telling Lara to do something, almost anything, about the crisis spawned by the insurance industry, whose biggest companies had stopped writing new property policies anywhere in California for the preceding three months, claiming huge wildfire losses.

Lara's response was to capitulate to the companies, including State Farm, Allstate, USAA, Farmers and more. Exactly one week after the Legislature refused to give them carte blanche in setting new rates, Lara effectively did just that.

Several leading insurers now have rate increase applications pending before Lara's department for price hikes averaging about 34 percent starting sometime next year. Under a deal Lara struck mere hours after Newsom's flailing order, they will almost certainly get the bulk of those increases. In return, all they must do is issue or restore homeowner policies in wildfire prone areas, charging pretty much whatever they want in the process.

Property owners elsewhere might also see their rates increase to help subsidize the companies and thus keep them in the California market. For the first time, the industry will now use projections of future fire losses to justify rate increases, rather than only past performance, and never mind if their profit-motivated predictions never come to pass.

All this, the companies say, because they've had big losses in California since wildfires became larger and more common starting in 2017.

But how much have they really lost? Over the last two decades, these companies made far higher profits in California than nationally, even more if you include the $12.1 billion that utility companies were forced to pay them to refund insurance payouts after fires caused by the electricity providers.

Between 1997 and 2021, insurance companies enjoyed an 8.8 percent return on spending in California, compared with 6.2 percent nationally, according to figures reported by the Consumer Watchdog advocacy group and not disputed by the industry. Add in the big money from the utilities, and profits here were even higher.

Consumer Watchdog founder Harvey Rosenfield, author of the 1988 Proposition 103, which made the insurance commissioner elective and mandates setting rates based on past expenses, says his outfit – which often intervenes in insurance rate cases – will not meekly accept Lara's capitulation to the insurance companies.

"Insurance companies used their economic power to create shortages (and) pressure elected officials to change the (Proposition 103) rules that have kept insurance in California stable, affordable and available for decades," Rosenfield said. "Consumer Watchdog will not allow Lara to derail the rights of consumers." Translation: "We'll see you in court, Mr. Lara."

The fair way to end the insurance boycott would have been to tell the companies if they're not going to sell all kinds of insurance here, they can't sell any. Firms that boycott should lose their licenses to sell any new insurance here for several years, including extremely profitable coverage like life insurance.

But Lara took well over $100,000 in campaign dollars from the industry he regulates, despite earlier promises not to accept any insurance company donations. When the donations were revealed, Lara was forced to return most of the money.

Still, the industry's apparent influence over him was clear in the deal he made. Lara acted much like 1990s-era Commissioner Chuck Quackenbush, who also accepted insurance company donations and then gave in to the industry's previous boycott of California over a requirement that anyone selling homeowner coverage also had to sell earthquake insurance.

Quackenbush orchestrated a deal eliminating that rule and forming the California Earthquake Authority to replace policies long carried by the industry. In both that case and this fall's, California was blackmailed and elected commissioners who had taken insurance company dollars capitulated.

That's not how government is supposed to work, but it is reality when leaders lack the courage and toughness to fight off obvious extortion.