Will Commissioner Lara’s plan ease California’s insurance crisis?

Top property insurers pulling out of California

A week after negotiations to save California’s floundering home insurance market broke down in the Legislature, the state’s top insurance regulator unveiled his own rescue plan, which essentially amounts to a trade for the state’s major insurers.

Major insurers will be required to cover a certain percentage of homeowners in the state’s most wildfire-prone areas under proposed regulations announced Thursday by Insurance Commissioner Ricardo Lara. In exchange, the Department of Insurance will permit businesses to charge higher rates to cover the rising costs of doing business in a fire-ravaged state.

RELATED: California Governor and Insurance Commissioner Announce Major Home Insurance Reform

Lara referred to the proposed regulations as “the largest insurance reform” since 1988, when California voters approved a proposition requiring insurance companies to seek prior approval before raising premiums.

The plan is intended to reverse a slow-motion exodus of private home insurers from the state. In the last year and a half, seven of California’s top 12 property insurers have either imposed new restrictions on where they do business or stopped selling new policies entirely.

State Farm, the largest player of all, announced a freeze on new policies in May, causing a new round of panic among homeowners scrambling to find affordable insurance policies and lawmakers eager to address the crisis.

For years, insurance companies have complained that current rates and the regulatory process do not allow them to recoup the costs of doing business in the state’s most vulnerable areas. “It’s the department calling the bluff of insurers,” said Rex Frazier, president of the Personal Insurance Federation of California, a trade group, by relaxing some of those restrictions while requiring the companies to expand their coverage.

In general, insurers are willing to make that trade-off, he added, though it will ultimately depend on how the specific regulations are crafted in the coming months.

Amy Bach, executive director of the consumer organization United Policyholders, agreed.

He “did not sell out to the industry here, in my opinion, he struck a deal,” she stated. “Whether it’s going to manifest positively overall…the proof will be in the premiums.”

But Consumer Watchdog, an advocacy group that Lara referred to as “bombastic” and “materially benefiting” from the current regulatory system during his presentation, came to a difficult conclusion.

“He’s basically capitulated to the industry,” said Jamie Court, president of the group. “There’s not really much coming back for the consumer in here.”

Continuing where legislators left off

Despite mounting public outrage and calls for action from top lawmakers, addressing the problem in the Legislature proved too difficult this year.

In the final weeks of the legislative session, which ended a week ago, lawmakers scrambled to meet the demands of insurers, who sought higher premiums to cover more of their costs and a more flexible rate-setting process, and consumer groups, who opposed calls to increase homeowners’ financial burdens. Following the failure of negotiations, Gov. Gavin Newsom hinted that his administration and Lara’s Department of Insurance might be willing to act on their own.

Sen. Bill Dodd, a Democrat from Napa who was involved in the failed negotiations, applauded Lara’s announcement in a statement. “Given that the Legislature is not in session right now, utilizing the commissioner’s regulatory authority makes good sense,” he stated. “I know there is work that still needs to be done and I’ll be supporting these efforts any way I can.”

Insurance companies have identified three major reasons why doing business in California is becoming increasingly risky: Rising wildfire risk, rising construction costs, and the global cost of reinsurance — insurance policies purchased by insurance companies.

While costs have risen, the amount that companies are permitted to charge homeowners in California is tightly capped and closely regulated, making home insurance policies relatively inexpensive by national standards. Major insurers must obtain approval from the Department of Insurance before raising rates.

Currently, insurance companies are not permitted to include the cost of reinsurance in such applications. They are also barred from using forward-looking models to forecast future costs, which insurers say they desperately need as a warming climate and residential development encroaching on fire-prone areas result in longer and more catastrophic fire seasons than in the past.

Lara proposed providing companies with both of those tools, though it appears that companies will only be allowed to itemize the cost of reinsurance as it relates to California. It is unknown how this calculation will be performed.

Allowing companies to use predictive models, according to Bach of United Policyholders, isn’t inherently a bad idea — “Are these models nefarious tools of Satan? “No,” she said, adding that she hopes there will be more transparency about which models are used and how they work.

Companies will be required to cover homeowners in wildfire-prone areas of the state at 85% of their statewide coverage in exchange for these new tools. For example, if a company provides 10% of homeowner policies in California, they are required to provide 8.5% of the coverage in areas deemed “at-risk.”

According to the Court and Consumer Watchdog, 85% is 15% too little. “It’s a really sh—y deal,” he admitted.

Then, there’s FAIR plan

California homeowners who are currently unable to obtain insurance on the private market can now turn to the FAIR Plan, a last resort provider of fire insurance funded by a levy on regulated insurers. The number of homeowners covered by the FAIR Plan more than doubled between 2018 and 2022, reaching roughly 3% of all homeowners.

However, the FAIR Plan policies are costly and limited. If the FAIR Plan runs out of funds, it is required by law to replenish its reserves by levying a surcharge on major insurers. The prospect of the FAIR Plan running out of funds and slapping the insurance industry with a bill has also encouraged insurers to reduce their coverage.

Consumer Watchdog regularly challenges insurance companies’ applications for higher premiums to the state, as allowed by the 1988 ballot measure. Lara also stated today that he wants to make it easier for the public to see who intervenes and how much they are compensated for their efforts.

“One entity is involved in nearly 75% of all interventions for rate approvals, materially benefiting from a process that is meant for a broader public participation,” he stated, referring to the nonprofit.

Lara additionally stated that “throwing bombs is easy and putting out bombastic statements from entrenched interest groups doesn’t benefit anyone.”

Court stated that his organization will continue to fight as the department drafts the specific regulations. “We’ll be battling over this stuff for many months to come,” he stated.