SACRAMENTO, Calif. — As insurance companies have paused or limited business in California in recent years, hundreds of thousands of homeowners have found themselves dropped from their policies and forced to turn to drastically more expensive options.
WHY?
In the last three years, seven of California’s 12 biggest homeowners insurance companies – and many of the smaller ones – have paused or limited business in the state. They cite the rising risk of wildfires, the high cost of rebuilding homes and state regulations hurting their business.
State law, passed by voters in 1988 in the form of Proposition 103, requires insurance companies to get prior approval from the state before raising rates. Insurers must provide data justifying their rate hike, which the Department of Insurance reviews over the course of several months. Prop 103 also made the position of California Insurance Commissioner an elected one.
Proponents praised Prop 103 as protection for consumers against unjustified rate hikes. Opponents – including the insurance industry, which sued to block Prop 103 – said it would stifle business in the state.
Today, insurance experts say companies are leaving California - in part - because the rate approval process takes too long — sometimes more than a year — with too much red tape. Subsequently, insurers’ rates can't keep pace with the rising cost of doing business.
The exodus has led to increasingly unaffordable and unavailable homeowners insurance policies in the regular market, forcing people onto the state-created, privately-run FAIR Plan. This high-cost, bare-bones ‘insurer of last resort’ has become hundreds of thousands of Californians’ only option.
“However Prop 103 was well-intentioned, the long-term effects have been traumatic and - in some cases - extremely detrimental to the consumers that it was designed to protect,” said insurance expert Karl Susman, of Susman Insurance Agency.
WHAT IS THE STATE DOING?
In Sept. 2023, Gov. Gavin Newsom issued an executive order, urging California Insurance Commissioner Ricardo Lara to act quickly to address the crisis. Hours later, Lara held a news conference, where he announced the largest set of reforms to California’s insurance marketplace since the passage of Prop 103: the Sustainable Insurance Strategy. He promises to have the various components of his plan in place by the end of 2024 and hopes to see the market respond positively by mid-2025.
The Sustainable Insurance Strategy gives insurance companies several things they’ve wanted for years.
Expedited rate reviews
The rate hike approval process, which can currently take more than a year, will be expedited. Lara said Prop 103 states the process should happen within 60 days and he’s going to return to that, with two 30-day extensions allowed, if needed. Insurance industry experts tell ABC10 this is the most important part of Lara’s Sustainable Insurance Strategy.
The 60-day clock won’t start until insurers submit a complete rate filing. Too often, Lara said, insurers submit only partially complete rate increase requests, resulting in back-and-forth between his department and the insurer, which causes further delays.
Forward-looking catastrophe modeling
Insurance companies will also be allowed to use forward-looking so-called ‘catastrophe modeling’ when justifying requested rate hikes. Currently, insurers can only use the last 20 years’ worth of historical climate data - risk - when asking to increase customers’ premiums.
Consumer advocates, including Consumer Watchdog, express concerns about catastrophe models amounting to ‘black box’ algorithms allowing companies to justify significant prices increases without transparency about the factors the model takes into account.
In response, Lara announced his department is partnering with Cal Poly Humboldt and other public universities to create a public catastrophe model, so the factors and algorithm will be transparent. The model, however, could take years to create. In the meantime, private companies will be able to submit their catastrophe model for approval by the CA Dept. of Insurance. Once approved, insurers will be able to use the model in their rate applications.
Insurers will only be able to use a catastrophe model if they commit to writing more policies in wildfire-prone areas, as defined by the state, or help depopulate the bloated FAIR Plan by agreeing to write policies for people currently in that system. Exactly how many high-risk policies they must write is unclear. Policy language currently under review says insurers must get to where 85% of their market share is in wildfire-distressed areas. Another provision, however, says an insurer may, instead, commit to increasing the number of policies it writes in wildfire-prone areas by 5%.
According to the proposed policy language, an insurer must submit attestations they’re moving toward their commitment goal. If after two years they fail to meet that goal, they will either be stripped of their ability to use catastrophe modeling in subsequent rate applications – or they can submit an alternative plan to the Insurance Commissioner, who will review it.
In short: there are several options resulting in an insurer gaining and maintaining access to the use of catastrophe modeling. Consumer Watchdog has expressed concerns Lara’s plan offers too much leniency for insurers and not enough guarantees consumers in wildfire-prone areas will be able to access insurance in the regular market once again.
CA FAIR Plan updates
Lara’s Sustainable Insurance Strategy also includes provisions modernizing the FAIR Plan.
For example, Lara announced in July the FAIR Plan will be expanding the amount of coverage it offers to large commercial policyholders from $20 million altogether to $100 million ($20 million per structure, up to five structures). Policyholders who could benefit include larger homeowners’ associations, condo associations, farms and other businesses.
Lara also announced a change safeguarding the FAIR Plan’s solvency in the event of a catastrophic wildfire, but could also result in policyholders throughout the state helping to foot the bill. Lara is allowing the FAIR Plan to request permission to assess insurers, in the event of a disaster requiring a large pay-out to policyholders. If approved, insurers can then ask to turn around and pass some of the cost along to policyholders, in the form of a one-time assessment, to help spread around the cost burden and keep the FAIR Plan solvent. The Dept. of Insurance would have to approve any such assessments.
WHAT'S IN IT FOR CONSUMERS?
Ultimately, Commissioner Lara says his Sustainable Insurance Strategy aims to create a regulatory environment coaxing insurance companies back to doing business fully in California. From there, Lara hopes the availability of policies will increase and the market will stabilize.
He has acknowledged costs may remain high at first, but a stable market means premium prices won’t skyrocket chaotically as some consumers are seeing now.
The Sustainable Insurance Strategy is set to be in effect by Jan. 1, 2025.
In a statement this month, Commissioner Lara said:
“Since launching this comprehensive strategy last year, we have made significant strides in addressing the insurance challenges facing Californians due to the accelerating impacts of wildfires, floods, and other climate-related disasters.
“This strategy is grounded in transparency and public engagement. We have solicited input from a broad range of Californians — including wildfire experts, residents across the state, consumer groups, and insurers — to craft regulations that address today’s challenges and create a foundation for long-term sustainability.
“I am proud of the progress we’ve made, and we are working diligently to meeting our deadline. As we approach the final phase of implementing these reforms by December 2024, I remain focused on delivering a modern insurance marketplace that protects homeowners and businesses while promoting resilience across California’s communities."
