Will insurance blackmail win out again | Thomas Elias

Historically, the only effective deterrent to blackmailers is to get tough on them, fighting back and not giving in to their demands.

Historically, also, California has a history of doing the opposite when it comes to insurance, letting companies that have lost money during natural disasters blackmail the state to escape risks that traditionally come with selling insurance.

It appears about to happen again now, in a development that looks similar in many ways to the last successful insurance company blackmail, which took place in the 1990s.

Prior to the big urban-area earthquakes that struck California in 1989 and 1994, insurance companies selling property insurance here also had to offer earthquake insurance policies.

But no more. Those big temblors caused so much damage and so much insurance company loss that the companies declared they would stop selling homeowner and other property policies here unless they could escape from writing quake policies. They did just that.

The insurance commissioner at the time, Republican Chuck Quackenbush, had been elected largely with insurance company donations. He quickly caved to the insurance company blackmail and led the Legislature to create the California Earthquake Authority, which now sells policies through actual insurance companies, which are not themselves on the hook for earthquake damages.

Now the same companies, State Farm, Allstate and Farmers, plus AmGuard and Falls Lake Insurance, are using a similar blackmail tactic by again stopping property policy sales in the state, this time demanding a surcharge on all California property insurance to help pay for their losses from wildfires, floods and other disasters at least partially caused by climate change.

They also want to base future rates on climate change projections of more severe fires and storms, rather than getting reimbursed by rate increases after those events occur, if they ever do. Farmers took matters a step further, announcing 2,400 layoffs.

"This is pure blackmail," says consumer advocate Harvey Rosenfield, author of the 1988 Proposition 103, which has regulated insurance rates since then. "They're saying, 'Give us more money or we'll pull out and even cancel existing policies.'"

Here's the likely state response, as predicted by Rosenfield and the Consumer Watchdog advocacy group he founded: A last-minute legislative bailout.

But here's the proper response: Current Insurance Commissioner Ricardo Lara and Gov. Gavin Newsom need to tell companies which won't sell property insurance here they also won't be selling car insurance in the world's largest automotive market and also won't be allowed to sell life insurance, their most lucrative current product.

So far, there is no sign of that kind of toughness from either Lara or Newsom.

Reality is that the insurance companies want to keep making big profits even in periods when they have to pay up on their policies. That is the big reason Farmers recently also pulled out of the Florida property insurance market, where it has taken losses from frequent and severe hurricanes.

But risk is at the root of the insurance business. Proposition 103, which has saved consumers more than $13 billion over the last 35 years, allows insurance companies to raise rates when justified by the payouts they've made. The companies want more. They want license to raise rates to an almost unlimited extent and they want to charge low-risk customers who live outside wildfire areas for the risks they assume by insuring other people.

So, in addition to telling the big companies that if they won't sell one kind of insurance, they can't sell others, California needs to require that companies price their policies higher in high-risk areas than other places.

Folks who choose to live in the safest areas should not have to subsidize others who want to enjoy the beauty and adventure of forest living. Homeowners in wildfire areas know the risks before they move there.

But the legislators who might this fall give in to the insurance company demands know they are politically safe, whatever they do, so long as they run under the Democratic Party label.

Which means insurance company blackmail will likely succeed again this time, just as it did in the 1990s.