The next insurance commissioner will oversee the largest insurance market in the country, with authority over property, auto, health, life, pet, ride-hailing and workers’ compensation insurance. But in recent years, the office has been defined largely by one urgent issue: the growing difficulty of securing affordable home and fire insurance as wildfire risk intensifies.

For many residents in fire-prone parts of Southern California and the Inland Empire, the question is not abstract. Homeowners have faced nonrenewals, limited options and steep premium increases, while others have been pushed toward the FAIR Plan, California’s insurer of last resort for fire coverage.

The next commissioner will inherit a difficult balancing act: keeping insurers in the California market while protecting consumers from unaffordable rates. Several insurance companies that previously stopped writing new policies or renewing existing ones have begun using new state regulations that allow different tools in setting rates. Those changes are expected to contribute to higher premiums as the Department of Insurance continues reviewing and approving rate increases.

The office also will have to address the fallout from last year’s Los Angeles County fires, where delays and denials in insurance claims have slowed recovery and rebuilding for many property owners. State Farm, California’s largest individual insurer, and the FAIR Plan are both facing lawsuits from homeowners and legal action by the Department of Insurance over their handling of claims connected to those fires.

The leading Democratic candidates include state Sen. Ben Allen, who is leaving the Legislature because of term limits; Jane Kim, chair of the California Working Families Party and a former member of the San Francisco Board of Supervisors; Patrick Wolff, a financial analyst who has not held public office; and Steven Bradford, a former state senator and assemblymember.

On the Republican side, the leading candidates are Stacy Korsgaden, a longtime insurance agent, and Merritt Farren, an attorney who lost his home in last year’s Palisades fire. Neither has held statewide public office.

The candidates have generally identified similar problems in California’s insurance system, but their proposed solutions differ. Kim has called for creating a state authority for wildfires and floods funded by a portion of policyholders’ premiums. Farren has proposed a state reinsurance authority funded through a fee charged by insurers to policyholders, an idea that both Kim and Allen have also shown interest in. Bradford has said he would examine a public-private partnership aimed at keeping insurance companies active in California.

Consumer advocates and former insurance commissioners have described the job as a demanding role that requires weighing the needs of homeowners, landlords, renters and businesses while also ensuring insurers believe they can charge rates that reflect the state’s wildfire risk.

U.S. Rep. John Garamendi, a Democrat whose district includes much of Contra Costa and Solano counties, served as California’s first insurance commissioner and later returned to the office for a second stint. He has described the position as complex and difficult work requiring close attention to detail.

Original source: CalMatters

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The “crisis” in California’s insurance market was caused by “a laser focus only on affordability,” said Nancy Watkins, a principal at Milliman, an actuarial firm, at a legislative hearing on Wednesday.  The companies are operating with “very crude tools” at the expense of availability and reliability, she said.

She said the current regulatory system is too rigid. “It’s like you’ve got your steering wheel locked straight ahead, you’ve got your speed set on cruise control, and now you find yourself on the Pacific Coast Highway,” she said. “What insurance company would agree to that?”

Home insurance premiums in California are a little cheaper than the national average — and much lower than premiums in other disaster-prone states like Florida and Louisiana. That’s without accounting for the fact that California has some of the most expensive housing in the country. 

California still has about 115 companies offering home insurance, said Michael Soller, a deputy commissioner for the state’s insurance department. As for whether more companies are likely to follow State Farm and Allstate, “we don’t think that will happen,” he said

Consumer and insurance industry groups and other experts have ideas for what they’d like to see California do in the wake of the news — few of which they agree upon. Here’s the debate over four of those ideas. 

Require State Farm to keep issuing new policies

There’s disagreement whether this idea, backed by the group Consumer Watchdog, is legal.

The idea hinges on how insurance prices are regulated in California. Under current laws, insurance companies can’t just charge whatever they want: They have to submit their proposed rates to the insurance department, which they back up by explaining their projected costs, losses, revenue and more. State regulators can approve a company’s proposed rates, or deny them, if they think, for example, the rates are unjustifiably high, or so low that they could put the company’s finances at risk.

Harvey Rosenfield, founder of Consumer Watchdog, said if a company suddenly says that it’s not going to take the same number of customers that it had projected when it got the department’s approval, then it has changed the assumptions on which the approval was based. 

“They granted themselves a de facto rate increase by reducing the risk” in a state where that’s illegal, said Rosenfield. The department could issue a notice to State Farm, he said, and tell the company it needs to keep selling new home insurance policies until it submits new rates and those rates are approved. 

The insurance department disputes that it has the power to do this. “Their claims are not supported by law,” said Soller, the deputy commissioner. “There’s a reason why it hasn’t been done by any insurance commissioner before.”

Let insurance companies use forward-looking catastrophe models

The kinds of data and statistical models insurance companies can use to set prices may sound like a nighttime sleep aid, but it’s a matter of lively discussion in insurance circles. 

When a company tries to justify rate changes, it is required to rely on past losses to project future losses. It can’t use factors like the locations of new homes it is covering — whether they’re in downtown San Francisco or rural wine country — or the increased risk of wildfires due to climate change.

“We do it in a very old-fashioned way, and it needs to be updated,” said Rex Frazier, president of the Personal Insurance Federation of California, an insurance industry group that counts State Farm as a member. He supports the use of forward-looking models, which are generally provided by other private companies. California already permits insurers to use models for earthquake insurance. 

If a company is trying to figure out how much it should charge for earthquake coverage, it would look at proximity to fault lines, Frazier said, but for wildfire insurance, California doesn’t do that. 

“For wildfire it just says ‘Well, looking backward, what have you paid over the last 20 years for wildfire clients?’” he said. 

Consumer groups generally oppose letting insurance companies use models, fearing that companies will use them to justify extreme price hikes, and that complex math will make scrutiny a challenge.

“They’re just very sophisticated crystal balls,” said Amy Bach, executive director for United Policyholders, a consumer group. Modeling companies generally see their models as intellectual property, which can pose a challenge for transparency. “Our fear is that they overstate risk,” said Bach. 

About a week and a half after State Farm’s announcement, the insurance department said it would host a public workshop on use of models in insurance pricing, ahead of considering regulations. The workshop will take place on July 13. 

On Wednesday, the Assembly’s insurance committee held a hearing on models. When asked by a legislator whether the department was moving toward incorporating catastrophe models, a department representative confirmed that it was. 

“Historic losses do not fully account for growing wildfire risks, or risk mitigation measures taken by communities,” said Michael Peterson, a deputy commissioner at the insurance department, during the hearing.

Address the increasing cost of insurance — for insurance companies

Insurance companies are just like us: They buy insurance! When insurance companies buy it, it’s called “reinsurance.” 

The cost of reinsurance has risen dramatically, and State Farm cited “a challenging reinsurance market” as one of the reasons it decided to stop selling new home insurance policies in California. 

When insurance companies explain their costs to the insurance department as part of the process for justifying their prices, they aren’t allowed to include the cost of reinsurance. The department hasn’t historically permitted it, Soller said, because it doesn’t regulate reinsurance. 

“What are insurers supposed to do when, on the one hand, the Department of Insurance is telling them ‘maintain your solvency’ and then, on the other hand, when their costs go up, you can’t charge for it,” said Frazier.

Insurance industry groups say it would help if they could incorporate the cost of reinsurance into their prices. But consumer groups say that the move would cause premiums to spike. 

“Californians would see immediate massive rate hikes — both as soon as that went into effect and ongoing,” said Carmen Balber executive director of Consumer Watchdog. A reinsurance provider regulated by California would address problems she sees with the reinsurance market, Balber said, but that doesn’t exist currently.

Reduce the risk of disasters

The underlying problem is that disasters happen in California — at an increasing rate thanks to climate change — and that homes are at risk. They’re in the middle of the woods, or surrounded by flammable grasslands, or on the edge of bluffs that are expected to erode. Making homes less likely to burn, flood or collapse would be good for homeowners and would also make California feel less risky to insurers.

There’s no shortage of ideas for how to reduce risk, and there’s been action on this front in recent years. The insurance department, for example, has required insurance companies to consider whether homeowners take certain steps to protect their homes — like installing fire-resistant vents and clearing out vegetation under decks — in their prices.

California has set aside $2.7 billion for wildfire resilience over the past three years, according to the insurance department. When the department convened a group of environmental advocates, researchers, and public policy and insurance experts to make recommendations on how to reduce the risks of climate change, they came up with a long list. Among the recommendations: 

• Create statewide hazard maps so that future risks are more clear to the public 
• Increase funding to retrofit homes 
• And apply fire-resistant building codes in areas with moderate to higher fire risk.

Cutting greenhouse gas emissions would ultimately be the best way to reduce the risk, said Alice Hill, chair of the group convened by the department and a senior fellow for energy and the environment at the Council on Foreign Relations. But the world will get warmer even if we reduce emissions, she said, so focusing on where and how homes are built remains important.

“That could mean not building in areas that are just becoming too risky,” Hill said.

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Insurance giant State Farm is no longer accepting new applications for business or personal property coverage in California. “We take seriously our responsibility to manage risk,” the company said in a statement posted to its website Friday. “State Farm General Insurance Company made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure and a challenging reinsurance market.”

Automobile insurance is not affected by the change, which took effect Saturday. The company was the state’s largest provider of property and casualty insurance as of 2021, the most recent year for which data are available from the California Department of Insurance. “While insurance companies prioritize their short-term financial goals, the long-term goal of the Department of Insurance is protecting consumers,” said Michael Soller, deputy insurance commissioner and spokesman. “The factors driving State Farm’s decision are beyond our control, including climate change, reinsurance costs affecting the entire insurance industry and global inflation.”

Last year, California became the first state to require insurance premium discounts for owners who implement wildfire protection safeguards at homes or businesses. The change was a response to soaring insurance costs for people in areas prone to wildfire. “Protecting Californians from deadly wildfires means everyone doing their part, including insurance companies, by rewarding consumers for being safer,” Insurance Commissioner Ricardo Lara said at the time.

While State Farm pledged to “work constructively” with California policymakers and regulators, the change is necessary to “improve the company’s financial strength,” the statement said. State Farm last year posted a net loss of $6.7 billion, driven largely by losses in the auto division. The company’s homeowner division recorded $849 million in underwriting gains.

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