It has been five years since the tragic Camp Fire in Paradise, Butte County, claimed 85 lives, destroyed 11,000 residences, and displaced two-thirds of the population.Thank you for reading this post, don't forget to subscribe!
Though this year’s fire season in California was relatively calm due to an exceptionally wet winter, the long-term consequences of wildfires, such as soaring inflation and a heightened risk of more fires due to climate change and inadequate forest management, have contributed to a different form of calamity: the escalating expense and diminishing availability of home insurance.
Seven of the state’s top 12 insurers have either terminated or limited new business until 2022, and consumer choices are diminishing by the day. A recent example is Farmers Direct Property & Casualty Insurance Company’s decision to terminate coverage in California and move most policyholders to its parent company, Farmers—which already has limited coverage in the state. Last month, four small insurers declared that they would cease renewing California policies by 2024.
It is widely agreed that the “California’s current insurance marketplace is in chaos,” as expressed in a letter to state Insurance Commissioner Ricardo Lara by 32 Democratic members of the state’s congressional delegation.
However, rather than offering practical solutions, the congressional delegation seems more focused on scoring political points and insinuating that Lara’s plan to stabilize the insurance market favors “unruly corporate interests” and may result in harm to consumers due to “excessive” costs.
This repetitive line of criticism fails to make progress towards ensuring Californians receive the necessary and affordable coverage, while also obscuring the actual causes of the state’s insurance crisis.
California’s insurance marketplace is grappling with a looming crisis because of its Fair Access to Insurance Plan, a state-established high-cost, basic plan that offers coverage to individuals who cannot obtain it elsewhere.
Originally intended as a temporary safety net, the FAIR scheme has rapidly transformed into the fastest-growing insurer in California, receiving an average of 1,000 new applications every week. As of October, it covered over 340,000 properties, twice the number covered in 2018.
“Expanding FAIR Plans is not just a problem for people on the FAIR Plan, but for all of us,” conveyed Deputy Insurance Commissioner Michael Soller to the Editorial Board.
Why this is a concern:
Even though the FAIR plan only accounts for 3% of California’s insurance market, up from 1.6% in 2018, it insures a disproportionate number of properties in high-wildfire risk areas, leading to an escalating disaster risk. This was expressed through a fact sheet shared with state lawmakers.
Increased risk brings greater liability. As of October, the FAIR plan was exposed to $290 billion, nearly six times higher than the $50 billion exposure in 2018, according to a spokesperson.
The FAIR plan’s growth is a consequence of Californians not being able to obtain insurance elsewhere. However, private insurers are accountable for any claims that the FAIR scheme cannot cover – requiring them to reduce their risk in order to cover all potential losses.
In other words, they will need to restrict their coverage or discontinue it altogether to evade bankruptcy.
Reducing FAIR plan liability is crucial for stabilizing California’s insurance marketplace. However, the congressional delegation was silent on this in its letter, potentially due to their reluctance to acknowledge that doing so would lead to consumers paying higher rates.
California is among the states in the country with a high cost of living but relatively low insurance rates. This is partly due to Proposition 103, which established a thorough regulatory process, including the requirement for the Insurance Commissioner to review and approve any rate adjustments, among other things.
The intentions of Proposition 103 were commendable, aiming to enhance consumer protection and transparency. However, in practice, this has dissuaded insurers from increasing rates beyond the 7% threshold that triggers a more extensive and often expensive review process. In 2022, the California Department of Insurance took, on average, 349 days to approve rate filings, according to S&P Global Market Intelligence analysis.
This has impeded California’s insurance market from flexibly adjusting rates to align with the actual conditions.
“Prop. 103 have created an insurance market that struggles to operate efficiently even in the best of times and remains vulnerable to periods of intense stress, according to the findings of a white paper released Monday by the International Center for Law and Economics. It’s almost impossible to keep up.
The stabilization strategy initiated by Lara in September would exclusively remove restrictions in California that hinder insurers from utilizing forward-looking climate catastrophe models to help determine rates and enable them to bear some of their reinsurance costs. This would maintain robust consumer protection.
Conversely, insurers would be mandated to issue policies in “distressed areas” equivalent to 85% of their share of the California market.
The plan, which will require several years to fully execute, seeks to address the immediate issue of unrestricted FAIR plan expansion. The major debate concerning a temporary solution is how California should mitigate the risks in the long term.
The state is investing billions in combating climate change. Recently, Lara introduced regulations mandating insurers to provide discounts to homeowners willing to insure their properties against fire.
However, the restriction of new development in fire-prone areas has sparked controversy. Earlier this year, state legislators introduced a bill requiring local governments to prioritize constructing residences in urban areas over less-developed regions at risk of fire and flooding.
The discussion about development is one in which the insurance industry should play a significant role. Legislators need to acknowledge that while the industry may often be a convenient political battleground, it also constitutes an integral component of any enduring, sustainable solution.
As mentioned by the congressional delegation, it’s one thing to be cautious of “uncontrolled corporate interests.” Another matter is denying the fact that a business needs income to remain viable. Over the past 10 years, the direct profit of insurance companies from insurance transactions in California was -6.1%, compared to 4.2% nationwide.
No one desires to overpay for insurance. However, maintaining the current situation incurs substantial costs.
Reach out to the Chronicle Editorial Board with a letter to the editor at sfchronicle.com/submit-your-opinion.