Insurance Commissioner Ricardo Lara and Governor Gavin Newsom announced major insurance changes late on Thursday designed to improve insurance choices and keep plans affordable amidst numerous insurance companies recently saying that they would either take no new home insurance policies or drastically reduce the number of new policies issued within the state.
Since May, 5 insurance companies operating in California have either stopped accepting all new homeowner insurance applications or put severe limits on how many new applications can be accepted in a year. State Farm became the first company in May to no longer accept new applications for any kind of insurance other than personal vehicle insurance. In June, Allstate made a similar announcement, saying that they had already not accepting new applications all year. Farmers was the next to announce in July, reducing the overall number of new monthly policies that they would accept.
In August, AmGuard and Falls Lake announced that they would be ending homeowners policies, with Farmers laying off 2,400 workers because of the decline. This is all on top of several insurance companies, such as AIG, leaving the California homeowners insurance market in the past few years. The reasons behind the decisions have been, in large part, because of significant increases in construction and reconstruction costs, inflation, and an increased risk of danger because of more wildfires and other natural disasters associated with climate change.
For months, Gavin Newsom, the Legislature, and Insurance Commissioner Ricardo Lara have largely been aloof while the homeowners insurance crisis worsened, with much of the burden being put on the state because of many opting to use the state FAIR Plan, which is intended as the coverage of last resort. However, the growing numbers of companies pulling out of California, along with increased pressure from Senate Republicans and other groups, led to Newsom and Lara to finally put together a plan. On Thursday, they both announced what the state would be doing under the new plan.
The new plan
According to a statement from the Department of Insurance, the following measures will be introduced:
- Executive action by Commissioner Lara to transition homeowners and businesses from the FAIR Plan back into the normal insurance market with commitments from insurance companies to cover all parts of California by writing no less than 85% of their statewide market share in high wildfire risk communities. For example, if a company writes 20 out of 100 homes statewide, it must write 17 out of 100 homes in a distressed area.
- Giving FAIR Plan policyholders who comply with the new Safer from Wildfires regulation first priority for transition to the normal market, thus enhancing the state’s overall wildfire safety efforts.
- Expediting the Department’s introduction of new rules for the review of climate catastrophe models that recognize the benefits of wildfire safety and mitigation actions at the state, local, and parcel levels.
- Directing the FAIR Plan to further expand commercial coverage to $20 million per building to close insurance gaps for homeowners associations and condominium developments to help meet the state’s housing goals and to provide required coverage to other large businesses in the state.
- Holding public meetings exploring incorporating California-only reinsurance costs into rate filings.
- Improving rate filing procedures and timelines by enforcing the requirement for insurance companies to submit a complete rate filing, hiring additional Department staff to review rate applications and inform regulatory changes, and enacting intervenor reform to increase transparency and public participation in the process.
- Increasing data reporting by the FAIR Plan to the Department, Legislature, and Governor to monitor progress toward reducing its policyholders.
- Ordering changes to the FAIR Plan to prevent it from going bankrupt in the case of an extraordinary catastrophic event, including building its reserves and financial safeguards.
The plan was backed up by an executive order issued by Governor Newsom on Thursday. Specifically, Newsom ordered Lara to consider the following goals in crafting a regulatory response:
a. Expand coverage choices for consumers, particularly in underserved areas of the State.
b. Improve the efficiency, speed, and transparency of the Department’s rate approval process.
c. Tailor the rate approval process to account for all factors necessary to promote a robust, competitive insurance marketplace, including through potential revisions to the way catastrophe risks and insurer costs are accounted for.
d. Maintain the long-term availability of homeowners and commercial property insurance coverage.
e. Maintain the solvency of the FAIR Plan to protect its policyholders and promote long-term resiliency in the face of climate change, including by identifying mechanisms to reduce its share of the overall market in underserved areas and move its customers into the admitted insurance market.
Changes to the insurance market in California
In addition, Newsom said in a statement that “This is yet another example of how climate change is directly threatening our communities and livelihoods. It is critical that California’s insurance market works to protect homes and businesses in every corner of our state. A balanced approach that will help maintain fair prices and protections for Californians is essential.”
In his own statement, Commissioner Lara added , “We are at a major crossroads on insurance after multiple years of wildfires and storms intensified by the threat of climate change. I am taking immediate action to implement lasting changes that will make Californians safer through a stronger, sustainable insurance market. The current system is not working for all Californians, and we must change course. I will continue to partner with all those who want to work toward real solutions.”
Reaction to the moves made by Newsom and Lara were largely mixed on Thursday and Friday. Many pointed out that the first new major regulations in 35 years updated the industry in the state to what they currently go through and now allow them to use forward-looking catastrophe models to mark rates, rather than the old method of using older data.
“California’s 35-year-old regulatory system is outdated, cumbersome and fails to reflect the increasing catastrophic losses consumers and businesses are facing from inflation, climate change, extreme weather and more residents living in wildfire prone areas,” said American Property Casualty Insurance Association (APCIA) vice president for state government relations Denni Ritter. “The actions announced today by the Commissioner are the first steps of many needed to address the deterioration of the insurance market.”
However, despite the action by Lara and Newsom on Thursday, other insurance experts said on Friday that the plan itself had many gaps and that there was doubt that everything in the plan could be implemented by December 2024.
“It’s good that the insurance industry likes this and that it will take less people off the state plan,” said Trevor Connery, a lobbyist who has worked for insurance companies in the past. “But right now California is trying to avoid the high costs and high number of people who don’t have insurance that have plagued disaster-prone states like Florida. Floridians pay more than four times on average on insurance premiums, and because of how many wildfires popping up in California, many companies want that to be more even. This plan addresses some of that, but not all.
“Like the FAIR plan needs to be less attractive. It’s good as an emergency option, but after all the steps insurers in the state are taking, Fair is becoming more and more of an option. California needs to stop that. And implementation is another thing too. Some of the things they want to do will take time, and it is being based on the hop that California doesn’t see a catastrophic wildfire or earthquake or other major event in the next few years. If one does happen, FAIR may not fair well, and it could be the last straw for insurers. They have fled Louisiana and Florida, and one more big event in California could cause the same mass exodus. What happened in the past several months is nothing compared to that scenario.
“Good first steps today, but they should have made these decisions some time ago and really need to expand upon them. The insurance industry is in by and large. Californians want more options. It’s just the state that, despite everything today, is still behind on.”
Lara has said that he wants all parts of the plan in place by December of next year.