The Time for Action on Insurance Crisis is Now

Californians need bold and immediate action from the Governor Gavin Newsom and Insurance Commissioner Ricardo Lara to help attract insurers back to the state, create a robust market, and give consumers more options for fire insurance coverage.

Proposition 103, passed by voters in 1988, governs our state’s property and casualty insurance industry. Under Prop. 103, the Insurance Commissioner must approve rate increase requests from insurers before they are implemented.

Rate increase applications are languishing in the Department of Insurance (DOI) for up to two years. Instead of losing money while waiting for rate increases, insurers are pulling out of the state with astonishing speed. It’s likely that everyone reading this knows someone who has been non-renewed by an insurer and unable to find the needed fire insurance required by lenders.

The DOI should immediately approve all currently filed rate filings from insurance companies. Rates will increase, for certain. But, right now, the choice is not between higher-priced and lower-priced policies, but between California FAIR Plan’s highest-priced policies or no policies at all. These approvals should extend to requests that include forward-risk modeling and reinsurance costs, which is standard in the other 49 states.

Commissioner Lara has committed to the risk modeling and reinsurance components but is expected to issue regulations to that effect this December. That is progress but the crisis demands faster action, and it is within his power to act right now and help increase supply.

The lack of traditional policy options has pushed many people to the California FAIR Plan, an insurer of last resort that is morphing into the fastest-growing policy writer in the state. This is a disaster waiting to happen and is part of a vicious cycle driving insurers from the California market.

The FAIR Plan is writing the highest-risk policies in California, but it is woefully underfunded, with only a few billion in assets and several hundred billion in liabilities. A single catastrophic loss event in an area dense with FAIR Plan policies would bankrupt the entity quickly. The insurance industry is the backstop for the FAIR Plan, meaning they would be liable for paying out excess FAIR Plan claims in proportion to the amount of business they write in our state, even though they are not receiving any premium for those policies and would also pay out for losses on their own policies.

This lose-lose scenario is another reason why insurers are shrinking their California footprint, to avoid FAIR Plan financial liability.

The state must provide a mechanism for the FAIR Plan to remain solvent without uncapped industry exposure. Creating a reinsurance program specifically for the FAIR Plan could be a solution. Attracting more insurers back to our state would also help shift the FAIR Plan back to its original purpose as a market of last resort.

Governor Newson has committed to enacting some reforms intended to help speed up the approval process in a coming budget trailer bill, which would take effect immediately. The bill will put a tighter, 120-day cap on the rate review process and, unless the public contests the desired rate, insurers would have the ability to immediately implement. This is a step in the right direction.

From the consumer side, it’s critical that responsible homeowners, who are making their properties fire safe, should get a discount for these measures from insurers to reduce the cost of their policies. I’ve heard too many stories of homeowners taking comprehensive measures to lessen fire risk but still not getting insurance. As the negotiations continue, it’s important that these measures are recognized by insurers.

California is and has been a lower-cost state for insurance but that did not accurately reflect the risk insurers faced, as the devastating wildfires of 2017 and 2020 proved. Those fires wiped out decades of insurer California profits and shed critical light on what rate adequacy really looks like. The low prices were an artifact of Prop. 103, which is acting as a price control, which always leads to shortages. It is proving a barrier to its stated goal of ensuring insurance is available to all Californians.

The Insurance Commissioner still has an important role to play, rooting out fraud and protecting the financial health of insurers, but must commit to much faster rate reviews.

Nobody is served by cheap policies they can’t get. Prices match actual risk or there will not be policies at all. The new cost environment will be painful to businesses and families initially but should stabilize when the insurance market opens back up and eventually becomes competitive again.

Insurance lubricates the entire economy. The current system is broken because government regulators have been too slow to react to the changing insurance market conditions. The time for action is now.