Policymakers Fail to Strike Deal to Remedy California Insurance Crisis

Record wildfire losses have contributed to California's growing insurance crisis.

By Rene Swan

On Monday, a last-minute bid that sought to deliver solutions for California’s insurance crisis was officially declared dead as lawmakers and insurers proved unable to come to terms.

A small group of policymakers and other stakeholders – including carrier representatives and members of the California building industry, as well as the state’s farm bureau – for weeks had conferred privately to develop an agreement that would have been submitted prior to Monday’s 2023 deadline for new legislation.

“We came so close to getting a bill through the legislature that would have opened the door to a possible solution to this crisis,” said Steve Young, senior vice president and general counsel for the Independent Insurance Agents & Brokers of California (IIABCal).

“We held out a Hail Mary hope that over the weekend, people would come to their senses. But that was not to be,” he added.

The group’s goals included allowing insurance carriers to charge what they consider fair rates for wildfire-exposed areas, which has become a point of contention for insurers. Since March, several major insurers have announced they have paused writing business in several key lines of both personal and commercial business.

That has left consumers with fewer viable options for homeowners and personal auto coverage – and the rates for the limited cover available to them have doubled or even tripled in some cases.

One provision discussed would have given insurance companies credit for their reinsurance costs in their pricing; right now, California is the only state in the U.S. that does not recognize insurers’ reinsurance costs in the DOI’s calculations when approving rate increases. (Insurers’ property reinsurance rates, meanwhile, have risen by more than 60% in the last six years.) Another provision would have authorized carriers to utilize catastrophe (CAT) modeling in their rate-request filings with the DOI.

Yet another goal of the proposed legislation was to shore up the state’s insurer of last resort, the California Fair Access to Insurance Requirements Plan, or “FAIR Plan,” which provides basic fire insurance coverage for properties in high-risk areas at a high premium when traditional insurance companies will not. This would have been accomplished in part by permitting insurers to recoup, through policyholder surcharges, a portion of assessments the FAIR Plan might have to issue in the event of catastrophic losses.

The deal discussed also would have permitted insurers to get credit for their reinsurance costs and employ cat models in rating, thereby potentially increasing rates to more adequate levels – but only if insurers agreed to significantly increase the number of properties they wrote in wildfire-exposed regions of the Golden State.

Insurers have complained that the approvals process for obtaining rate increases in California has been painstakingly slow and, in many cases, unsuccessful. Due to an initiative passed in 1988 that was intended to protect consumers, when carriers apply to the state’s DOI to raise rates by 7% or more in personal lines or 15% or more in commercial lines, they can face an “intervenor” in a public hearing (which are sometimes delayed for up to two years) to decide whether the rates are warranted.

Facing this burden of proof, carriers often seek to avoid those hearings and ask for increases just below the thresholds that trigger a public hearing. Over time, however, those small increases have been insufficient for insurers to continue writing business in California – and that has led to an exodus among its leading carriers by market share.

Among them: Nationwide, which in March announced it would pause writing all new small commercial business in the state; State Farm, which in May said it would stop accepting applications for all business and personal lines of property & casualty insurance; Allstate, which has paused new homeowners, condo, and commercial insurance policies; Farmers, which is scaling back new homeowners insurance policies in California; Berkshire Hathaway Guard, which in August announced it is exiting California for all personal lines effective mid-November; AEGIS, which is no longer writing homeowners, renters, or dwelling fire policies in California; and Kemper, which announced in August it will no longer write preferred personal home or auto business countrywide (timing of the move was not made clear).

Additionally, Liberty Mutual in July announced it will no longer offer businessowners policies in California starting Oct. 1, and in August, Chubb scaled back its businessowners classes of business in California from 1,300 to 250. Inflation, increased loss costs, and many other factors – including insurers’ inability to get rate filings approved – have prompted these decisions. USAA recently announced that it, too, is tightening its standards on issuing wildfire policies.

IIABCal’s Young believes that while these talks proved unsuccessful in getting new legislation submitted, they have helped to “elevate the temperature” around California’s growing insurance crisis and foster a sense of urgency for California Insurance Commissioner Ricardo Lara to work toward viable solutions.

“The rhetoric around the commissioner’s office is changing,” said Young, who added the state’s department of insurance has the authority to enact emergency regulations, but even those procedures take time. “The thing that’s so disappointing is that the legislation would have expedited the whole process.”

As for what happens next, “We go back to the drawing board,” said Young. “The legislature comes back in January, and in the interim we’ll continue to develop a strategy to let our state’s leaders know how serious this crisis is.”

Meanwhile, independent insurance agency owners, increasingly concerned about the availability of insurance for their clients – and the possibility that decreased competition will lead to a more severe crisis – are writing letters and making phone calls to their legislators in hopes of bringing greater attention to the need to act.

Rene Swan is Renaissance’s Regional Executive Vice President, West.

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