Could grants to low- and middle-income residents help? That’s an idea California Insurance Commissioner Ricardo Lara wants to bring to the Legislature next year, he said in conversation today with CalMatters’ economy reporter Levi Sumagaysay.

Lara discussed his multi-pronged approach to the insurance crisis — with companies decreasing coverage, raising premiums for residential and commercial customers, or leaving the state altogether. Part of the plan includes speeding up the state’s reviews of insurance companies’ proposed rate hikes — which are supposed to take 60 days, but often take as long as 18 months, by which time rates might not reflect the risk anymore. 

“This was completely ignorant on my part as a new insurance commissioner. I’m like, ‘Okay, we’re reviewing these rates. We’re done, right?’ They’re like, ‘Oh no, there is a whole backlog,’” he said during the hour-long CalMatters event in Sacramento, adding that companies often submit another rate review immediately after one is done because of the long wait times. 

Another significant change Lara is pushing to make insurance more available: For California to come out of the “dark ages” to join other states in allowing insurance companies to do “catastrophe modeling.” That would allow them to take projected losses into account – not just historical information — using data such as frequency, severity, damage and loss from wildfires and other natural disasters. Insurers can start using the modeling to set rates next year.

While companies are allowed to keep the modeling private, Lara promised there will be safeguards in place to ensure data and transparency. 

“We’re doing this from scratch,” he said. 

Lara also wants to tackle problems with the FAIR Plan — a “last resort” insurance plan required by state law that offers minimum coverage for wildfires. His plan is to raise the amount of coverage. Run by a pool of insurers, the FAIR Plan has grown to 400,000 policies. 

While he worries about “Armageddon” scale disasters, Lara said the recent flurry of wildfires in Southern California don’t undermine his proposals, noting that he issued emergency declarations to protect 750,000 policyholders from losing coverage. 

“I’m so confident in my plan,” he said. “I know it’s going to work.” 

But consumer groups and Lara’s predecessors as insurance commissioner have expressed concerns that his plan favors insurers.

What’s not in Lara’s proposals? Requiring insurers to address climate change in the regulations. 

“My immediate goal is to stabilize this market now, to get insurers to come back, to grow, and then we’re going to be having conversations on separate issues, separate requirements that we can look at,” he said. 

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Insurance industry representative Rex Frazier argues that state leaders have the right idea: Burdensome regulations are making a difficult situation worse. But consumer advocate Jamie Court contends that the state needs to take a harder line by requiring coverage of homeowners who meet fire protection standards.

As the leader of an association of homeowners’ insurers, I frequently hear from anxious Californians who are losing their coverage and wondering whether the situation will get better. My answer is that I am not one of those who believes California is facing an uninsurable future. The problems we face are difficult but solvable.

The insurance challenges the state is facing today have roots in the past. While the giant wildfires of 2017 and 2018 had a huge impact, requiring insurers to pay claims equivalent to more than 20 years of profits, the state’s insurance problems predate the fires. California’s failure to update the old rules governing insurance rates have long prevented insurers from preparing for a hotter, drier future.

California’s laws are a national outlier. The rules for projecting wildfire losses, a crucial aspect of calculating insurance rates, are a case in point. California is the only state in the country that requires property insurers to project future wildfire losses based on average wildfire losses over the last 20 years, regardless of where they plan to do business. Every other state allows insurers to base their rates on where they intend to sell insurance, taking into account the degree of fire risk to the properties they plan to insure.

California is also a national outlier on rate approval in that it’s a “prior approval” state. That means an insurer must receive approval from the California Department of Insurance before it may increase or decrease rates.

While California law promises a 60-day approval period, it often takes six months or more to get permission to change rates. At times of high inflation, slow approvals require insurers to leave the highest-risk areas or face financial ruin.

A less visible but nevertheless critical issue is the financial well-being of the FAIR Plan, a pool of insurers providing last-resort coverage. The FAIR plan is growing well beyond its ability to pay claims for large fires. And if it runs out of money, it will charge insurers, as members of the pool, a fee in addition to claims from their own customers for the same fire. If that fee gets large enough, it could devastate insurers. We must address this.

Fortunately, Insurance Commissioner Ricardo Lara has recognized the need to fix these problems. His Sustainable Insurance Strategy would update California’s rate regulations and approval process while requiring insurers to make commitments to cover high-risk areas. The proposal is far from perfect, but we look forward to working with all the interested parties to increase insurance availability and restore the health of the market.

While state regulations and processes can be changed, we remain vulnerable to forces that are beyond our control. Inflation makes repairing and rebuilding homes much more expensive, driving up rates. Longer dry seasons increase the chances of devastating fires, having the same effect in the short term. We need a system that acknowledges these realities.

But raising rates is not a long-term solution. Reducing them over time will require consensus on how to handle combustible fuels near valuable property.

That will take a lot of time and effort. California homeowners’ insurers are ready to do our part to secure an insurable future for the state.

Rex Frazier is the president of the Personal Insurance Federation of California.

Home insurance companies have put Californians in a bind by refusing to sell new policies or renew many customers, leaving them with few coverage options. That has driven more homeowners into the high-cost, low-benefit FAIR Plan, a pool of insurers required to provide last-resort coverage.

Gov. Gavin Newsom recently announced legislation to allow insurance companies to hike rates more quickly in an effort to woo them back to the state. While that will certainly leave Californians paying higher rates, it’s not likely to get more people covered.

Insurance companies are refusing to write new policies despite substantial recent rate hikes — an average of 20% for State Farm and 37% for Farmers, for example. What has them spooked is greater exposure through the FAIR Plan, which increasingly covers expensive homes in wildfire-prone areas. Insurers are on the hook for FAIR Plan claims, and their exposure increases with market participation, so they limit their participation.

Only freeing people from the FAIR Plan will solve this. The most practical way to do that is to require insurers to cover people who harden their homes against fire. We have mandatory health and auto insurance, so why shouldn’t we have it for homes that meet standards?

Hardening is expensive enough that most homeowners are unlikely to do it without guaranteed coverage. Mandating insurance is therefore the best way to mitigate wildfire risks.

Mitigation efforts are already working, with major claim events dwindling in recent years. Moreover, insurers recovered billions from the utilities responsible for major fire losses in 2017 and 2018.

The current crisis was precipitated not so much by wildfires as by investment losses and rising construction costs. Insurers responded by tightening underwriting and raising rates.

Insurance companies got their hikes, but they refuse to write new business here until they get more. Unfortunately, Newsom and Insurance Commissioner Ricardo Lara are ready to give them what they want.

Last week, Lara proposed regulations attempting to address the crisis. Echoing a legislative proposal that failed last year, they would allow companies to raise rates based on black-box climate models. Florida tried a similar approach, and its rates are now about double California’s. Florida’s insurer of last resort covers 20% of its homeowners, roughly five times the share in California.

The proposed regulations purport to require insurers to increase sales to homeowners in “distressed areas” by 5%. However, they would not require them to charge prices consumers can afford. The requirement to cover these areas could also be waived if an insurer shows it’s “taking reasonable steps to fulfill its insurer commitment.” And the plan gives companies two years to comply but lets them start charging all policyholders higher rates immediately.

Newsom cheered the proposal, essentially arguing that California’s insurance rates are too damn low. He didn’t mention that California insurers’ profits have generally outpaced the national average over the last 20 years.

Newsom’s latest legislative proposal would limit public participation in rate-setting by cutting out so-called intervenors such as Consumer Watchdog, which can challenge unnecessary increases and has saved consumers more than $6 billion over 22 years.

Throwing more money at insurers won’t end the crisis; requiring them to cover responsible homeowners will.

Jamie Court is the president of the nonprofit Consumer Watchdog.

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