State takes final step to fix California’s troubled home insurance market
The state released another regulation Monday aimed at easing California’s home insurance crisis that will allow insurers to charge homeowners higher premiums to protect themselves from catastrophic wildfire claims.
The rule is the last in a package of home insurance reforms spearheaded by Insurance Commissioner Ricardo Lara, and it will allow insurers to pass on to consumers the costs of reinsurance.
Insurers acquire reinsurance typically from other larger insurers in order to limit their payouts during huge wildfires and other catastrophic events.
This will be the first time in California that insurers can include the cost of reinsurance in their premiums, though it is a common practice in other states.
Insurers have been pulling back from the state’s home insurance market, citing wildfire losses, and the regulation is intended to make the market more attractive for home insurers.
“Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change,” Lara said in a statement. “This is a historic moment for California.”
Renters insurance is getting harder to come by and more expensive in California as insurers pull back from the state’s troubled homeowners market, which has been hard hit by wildfires.
The department said it will limit the costs to consumers by tying the reinsurance charges to an industry standard that can’t be exceeded.
In order to take advantage of the new rule, the department said that insurers will have to increase their writing of comprehensive home policies in wildfire-distressed neighborhoods by 5% every two years until their policies are equivalent to 85% of their statewide market share. That would mean that an insurer that has a 10% share of California’s home insurance market would have to write 8.5% of the policies in such neighborhoods.
The department released preliminary maps this year of the areas. Southern California neighborhoods include ZIP Codes in Malibu, Beverly Hills and other communities in mountainous areas. Homeowners in those areas have been increasingly flocking to the FAIR Plan, the state’s insurer of last resort, which does not offer comprehensive policies.
The 85% formula is similar to another key element of Lara’s reforms, which will allow insurers to use so-called “catastrophe models” in setting premium rates. The models are computer programs that attempt to predict the likelihood and costs of disasters, such as wildfires, using complex variables rather than just past losses. The industry maintains they are essential because climate change has made wildfires more common and costly.
The regulation was praised by the American Property Casualty Insurance Assn., a trade group for home, auto and business insurers, which called the step “one of several critically needed reforms to stabilize California’s insurance market.”
Consumer Watchdog, a Los Angeles group that has claimed Lara is too close to the industry, blasted the regulation, alleging that it will lead to 40% or higher increases in rates given experiences in other states and that it includes loopholes that don’t guarantee insurers will write more policies in wildfire neighborhoods .
“Tellingly the commissioner did not do a cost impact analysis of his plan on consumers. That’s because this plan is of the insurance industry, by the insurance industry, and for the industry,” Jamie Court, president of the group, said in a statement.
Lara’s spokesperson, Michael Soller, called the criticisms “hogwash,” saying the department’s goal is to “create stability and increase availability — and better risk management by insurance companies is key to those goals.”
State Farm is seeking a 30% rate hike, claiming its California unit is in financial trouble. Consumer Watchdog alleges the home insurer is hiding earnings.
Southern California this year experienced several large wildfires, including the 4,000-acre Franklin fire that destroyed 20 structures in Malibu and the nearly 20,000-acre Mountain fire that demolished 243 structures in Ventura County.
However, neither came close to the losses of a series of fires in 2017 and 2018, including the blaze that burned down much of the Sierra Nevada foothill community of Paradise. That fire scorched 153,000 acres, destroyed 18,800 structures and killed 85 people. Insurer losses topped $12 billion, including two fires in Southern California, according to the department.
Multiple insurers have stopped writing new home policies, and the state’s largest home insurer, State Farm General, said this year it would not renew policies for 72,000 California property owners. However, there recently was some good news when Farmers Insurance, citing Lara’s reforms, said it will boost the number of homeowners policies it writes and resume writing new policies for condominiums, renters and landlords.
The regulation released Monday still must undergo review by the Office of Administrative Law before it can become law.
