Summer began on Thursday, but early wildfires have already scorched the outskirts of the city. la And this Gulf regionMany California homeowners find themselves more vulnerable than ever as major insurance companies abandon areas at risk from fires caused by climate change. Governor Gavin Newsom and state Insurance Commissioner Ricardo Lara have responded with efforts to ease regulations and expand coverage.
Insurance industry representative Rex Frazier argues that state leaders have the right idea: burdensome regulations are making a difficult situation even worse. But consumer advocate Jamie Court argues that the state needs to take a tougher stance by requiring insurance coverage for homeowners that meet fire safety standards.
California’s sclerotic insurance bureaucracy isn’t helping anyone
by Rex Frazier
As the leader of an association of homeowners insurers, I often hear from worried Californians who are losing their insurance and wondering if the situation will get better. My answer is that I am not one of those who believe California faces a future that cannot be insured. The problems we face are difficult but solvable.
The insurance challenges the state faces today have their roots in the past. While the massive wildfires of 2017 and 2018 had an outsized impact, causing insurance companies to pay out claims equivalent to more than 20 years of profits, the state’s insurance problems predate the fires. California’s failure to update outdated rules governing insurance rates has long prevented insurers from preparing for a hotter, drier future.
California laws differ nationally. One example is the rules for estimating wildfire losses, which is a key aspect of calculating insurance rates. California is the only state in the country that requires property insurers to estimate future wildfire losses based on average wildfire losses over the past 20 years, regardless of where they plan to do business. Every other state allows insurers to set their rates based on where they want to sell insurance, taking into account the degree of fire risk for the properties they plan to insure.
California also stands out nationally in terms of rate approval because it is a “prior approval” state. This means an insurer must get approval from the California Department of Insurance before raising or lowering rates.
While California law promises a 60-day approval period, obtaining approval for rate changes often takes six months or longer. In times of high inflation, slow approval causes insurance companies to abandon the riskiest areas or face financial ruin.
A less visible but still important issue is the financial well-being of the FAIR Plan, a group of insurance companies that provide last resort coverage. The FAIR Plan is growing far beyond its ability to pay claims for large fires. And if it runs out of money, it will charge the insurance companies that are members of the pool a fee in addition to the claims they pay their customers for the same fires. If this fee grows large enough, it could devastate the insurance companies. We must pay attention to this.
Fortunately, Insurance Commissioner Ricardo Lara has recognized the need to fix these problems. durable insurance strategy The proposal would update California’s rate regulation and approval process, while requiring insurers to make a commitment to cover high-risk areas. The proposal is far from perfect, but we look forward to working with all interested parties to increase insurance availability and restore the health of the market.
While state rules and procedures can be changed, we remain vulnerable to forces beyond our control. Inflation makes repairing and rebuilding homes more expensive, which drives up rates. Prolonged dry weather increases the chances of devastating fires, which have the same effect in the short term. We need a system that acknowledges these realities.
But raising rates is not a long-term solution. Lowering them over time will require consensus on how to handle combustible fuels near valuable property.
This will take a lot of time and effort. California homeowners insurers are ready to do their part to secure an insurable future for the state.
Rex Frazier is president of the California Personal Insurance Federation.
Newsom needs to focus on homeowners, not insurance companies
by Jamie Court
Home insurance companies have hit Californians hard by refusing to sell new policies or renew them to many customers, leaving them with few options for coverage. More homeowners attracted to high-cost, low-benefit FAIR planA group of insurance companies that are required to provide coverage as a last resort.
Governor Gavin Newsom recently announced the legislation Allowing insurance companies to sharply raise rates in an effort to lure money back to the state. While this would certainly result in Californians paying higher rates, it is unlikely to result in more people getting covered.
Insurance companies are refusing to write new policies despite recent huge rate hikes – on average 20% for State Farm And for farmers, for example, 37%. What has scared them is the higher risk through the FAIR plan, which covers expensive homes in areas prone to wildfires. Insurers are responsible for FAIR plan claims, and their risk increases with market participation, so they limit their participation.
Only freeing people from the FAIR plan can solve this problem. The most practical way to do that is to require insurance companies to cover people who protect their homes from fire. We have mandatory health and auto insurance, so why shouldn’t we have it for homes that meet the standards?
Hardening is so expensive that most homeowners are unlikely to do it without guaranteed coverage. So making insurance mandatory is the best way to reduce wildfire risk.
Mitigation efforts are already working, with the incidence of large claims declining in recent years. Moreover, insurance companies recovered billions from utilities responsible for large fire losses in 2017 and 2018.
The current crisis arose not from forest fires but from investment losses and rising construction costs. Insurance companies responded by tightening underwriting and raising rates.
The insurance companies got their pay raises, but are refusing to do new business here until they get more. Unfortunately, Newsom and Insurance Commissioner Ricardo Lara are willing to give them what they want.
Last week, Regulation proposed by LARA Attempts to resolve the crisis. Legislative proposals that failed Last year, they would allow companies to raise rates based on black-box climate models. Florida took a similar approach and now its rates are about double California’s. Florida’s last insurance company covers about 20% of its homeowners, about five times the share in California.
Proposed regulations aim to force insurance companies to increase sales to homeowners in “distressed areas” 5%However, they would not be required to charge consumers affordable prices. The requirement to cover these areas could also be waived if an insurer shows it is “taking reasonable steps to meet its insurance commitment.” And the plan gives companies two years to comply, but allows them to immediately begin charging all policyholders the higher rates.
Newsom praised the proposal, saying California’s insurance rates are too high. Very littleHe did not mention that California insurers’ profits are generally surpassed the national average In the last 20 years.
Newsom’s latest legislative proposal would limit public involvement in rate setting by eliminating so-called interveners such as Consumer Watch, which can challenge unnecessary increases and protect consumers. Over $6 billion in 22 years,
Throwing more money at insurance companies won’t end the crisis; forcing them to cover responsible homeowners will.
Jamie Court is president of the nonprofit Consumer Watchdog.
