California’s latest
insurance package
will offer little relief
California’s property insurance market has hobbled along for years, as insurers have slowly – then quickly – exited the market after years of massive wildfire losses have threatened their reserves. State officials have mostly blamed climate change, arguing that increased temperatures are leading to more such fires. They’ve doubled down on their climate agenda.
But after the devastating Los Angeles wildfires, the California Department of Insurance, Gov. Gavin Newsom and the Legislature are finally realizing that they have to do something to halt the exodus of insurers, shore up the tottering state-created insurer of last resort (the FAIR Plan) and help property owners who increasingly are left without – or with too little – insurance.
The problems have been known for years, but typically in California it takes a full-blown crisis to get any serious action. Insurance Commissioner Ricardo Lara did in fact respond – however slowly – after the state’s largest property insurer, State Farm General Insurance Co., announced in May 2023 that it would not write new property insurance policies. A year later, it announced non-renewals for many condo and apartment policies. Other companies followed suit.
His package of reforms included most of what the industry wanted, so he deserves kudos for pushing it forward despite the heated opposition from consumer and trial-attorney groups that support the current system. It allowed insurers to use catastrophe modeling to set prices – important, given that if climate change is increasing risk then insurers need to factor that into their pricing. It also lets them include the rising costs of reinsurance (the insurance that insurance companies buy) and came up with a strategy to bolster the FAIR Plan.
But then the wildfires struck before they had a chance to improve matters, although the announcement by Farmers in December that it would write additional new policies suggests the insurance industry believed these reforms would help. After the disaster and the tens of billions of dollars in expected claims, all bets are off. So Lara has returned to form, announcing a one-year moratorium on non-renewals in Los Angeles County and rejecting a recent State Farm rate request. That’s to be expected, perhaps, given public upset.
Now Lara has sponsored a 10-bill package that’s designed to gin up the insurance industry. Unfortunately, most of these proposals tinker around the edges at best. Some of them are fine enough but don’t get to the heart of California’s insurance shortages. As Politico reports, some of the bills had already been proposed before the fires and some came afterwards.
Per the publication, they include a grant program to encourage fire-wise home upgrades, a ban on non-renewals in areas with an emergency declaration, a fee cap on claims adjusters, a measure requiring payments even if homeowners don’t provide a detailed inventory list of lost items, the creation of a new state commission to develop building standards, new notice requirements for businesses that advertise fire-recovery services, the establishment of a public catastrophe modeling system, a mandate for fire-hardening insurance discounts, a loan package for the FAIR Plan, and the creation of a tax-exempt savings account to help homeowners pay for fire hardening.
None of these measures – except, perhaps, for the loan program for the FAIR Plan to keep it out of insolvency – would do anything in the short term to keep insurers from fleeing. Incentivizing fire hardening is a noble effort, but the best way to do so is to allow insurers to more accurately set rates to reflect their risks. And why does the state need a public system for catastrophe modeling when insurers are perfectly capable of doing this themselves?
If lawmakers want to make the system better, they could speed up the rate-review process and limit the way “intervenors” – consumer groups who are paid to participate in the rate-hike proceedings – are reimbursed. Right now, this process delays the proceedings and these groups are incentivized to drag it out given the pay structure.
If we’re looking for Republicans to come up with something better, it’s best to keep waiting. Freshman Assembly member Carl DeMaio, R-San Diego, has offered the highest-profile proposal. Assembly Bill 567 would, per his statement, “cap rate increases at no more than 7% a year for the next four years – and would force state government to cover any insurance costs above the annual cap.” As the Southern California News Group opined, “Price controls have gotten us into this mess, so more of them will make it worse.”
Although climate change may in fact make the state more prone to wildfires, the Democratic leadership has ignored the real cause for the crisis. In 1988, voters approved Proposition 103 in response to rapidly rising rates that were sparked by something other than the weather: A 1979 state Supreme Court decision (Royal Globe) that, as a Rand study explained, “gave an accident victim the right to bring a claim for punitive damages against another person’s liability insurer if the victim felt that the insurer had engaged in unfair claims settlement practices.”
That led to rapidly increasing rates, a frustrated voting public and, after the initiative passed, a prior-approval system that handed an elected insurance commissioner the power to approve or even roll back insurance rates. It created a system of price controls that depressed the state’s insurance prices – and left insurers unable to price policies to reflect their actual risk. Prop. 103 created a long and convoluted rate-review process that distorted rates.
As insurers left, homeowners became increasingly dependent on the FAIR (Fair Access to Insurance Requirements) Plan. If lawmakers want to make the system better, they could speed up the rate-review process and limit the way “intervenors” – consumer groups who are paid to participate in the rate-hike proceedings – are reimbursed. Right now, this process delays the proceedings and these groups are incentivized to drag it out given the pay structure.
This is of great significance to Californians who are focused on urban policy. Although many of the highest-risk wildfire areas are in forested areas, the devastating Los Angeles wildfires remind us that many urban areas run up against chaparral and woodlands, where uncontrolled fires can consume large sections of densely populated metropolitan areas.
Insurance is a key element as Los Angeles residents begin the long rebuilding process. Unfortunately, the latest bill package suggests that California’s leadership is not yet ready to make the hard choices needed to shore up the private insurance market.
Steven Greenhut is director of the Pacific Research Institute’s Free Cities Center. Write to him at [email protected].
