One by one, insurers have been reducing or eliminating their exposure in California following disastrous wildfires
Before the California Legislature adjourned this month, it managed to grant the majority Democrats’ favorite interest groups, most notably labor unions, their wishes.
However, legislators left town without doing anything concrete to address a threat to the psychological and economic well-being of millions of homeowners and those aspiring to ownership: the rapidly diminishing availability of residential fire insurance.
Insurers have been reducing or eliminating their exposure in California one by one, despite having paid out billions of dollars to cover losses from years of major wildfires and, they claim, facing a fire threat that is likely to worsen with climate change.
There were weeks of private negotiations among legislators, insurance lobbyists, and other stakeholders on how to strengthen the state’s insurance market, with Gov. Gavin Newsom and Insurance Commissioner Ricardo Lara in the background.
The negotiations, however, came to an end a week before the Legislature adjourned without agreement, as state Sen. Bill Dodd, a Democrat whose Napa-centered district is one of the state’s most fire-prone regions, texted: “Deal is dead. “It’s very frustrating.”
The discussions centered on shifting insurers’ risk calculations away from past experience and toward potential future risk. Such a change would almost certainly raise premiums, and legislators demanded unequivocal assurances that the companies would continue to write policies in fire-prone areas if the change was implemented.
As the session came to a close, public assurances were given that the issue would not be forgotten.
“We hear from our residents loud and clear that access to insurance is a problem,” Assembly Speaker Robert Rivas said in a statement.
The Legislature’s departure pushed the issue back to Lara and Newsom, who said, “We can do a lot of things.” And I’m very conscientious. We can handle it all.”
However, Newsom did not provide any details. He issued an executive order last Thursday urging Lara to “take action to stabilize and improve California’s property insurance marketplace.”
Almost immediately, Lara issued new rate-setting regulations, which he had previously described as “a package of regulatory solutions that will streamline the department’s rate review process, opening it equitably to public input – not just the entrenched interests that have materially benefited from the status quo.”
The American Property Casualty Insurance Association praised Newsom, Lara, and the regulations, saying, “Everyone understands that California’s insurance market is in a spiraling crisis that requires immediate policy solutions to protect consumer access to the coverage they need.”
Given industry support, the new regulations are likely to allow it to include, at least to some extent, estimates of future risk from wildfires in their rates, resulting in premium increases.
In Thursday’s executive order, Newsom stopped short of declaring an emergency, which would have given Lara the authority to issue new rate-setting rules without going through the usual procedural hoops.
Consumer Watchdog, the organization that sponsored Proposition 103, a 1988 overhaul of insurance regulation, and has been a critic of Lara since almost his first day on the job, issued a warning to Newsom and Lara earlier in the day about proceeding on an emergency basis.
Afterwards, the organization stated that Lara’s action “would allow insurance companies to use secret algorithms to set rates for homeowners’ coverage for wildfire and to add reinsurance costs to premiums will lead to higher insurance premiums.”
So there you have it: a complex mix of economic, political, and societal factors, as well as a significant tradeoff between the availability of coverage, which is required for anyone with a mortgage, and the costs.