California Legislators Whiff on 'Spiraling Crisis' in Home Insurance Market

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Published 10 months ago on

September 25, 2023

Before the California Legislature adjourned this month, it managed to fulfill most of wishes of majority Democrats’ favorite interest groups, most notably labor unions.

Dan Walters

CalMatters

Opinion

However, legislators left town without doing anything concrete about something that threatens the psychic and economic wellbeing of millions of homeowners and those who aspire to ownership: the rapidly shrinking availability of residential fire insurance.

One by one, insurers have been reducing or eliminating their exposure in California, having paid out billions of dollars to cover losses from years of major wildfires and, they say, facing a fire threat that is likely to increase with climate change.

With Gov. Gavin Newsom and Insurance Commissioner Ricardo Lara involved in the background, there were weeks of private negotiations among legislators, insurance lobbyists and other stakeholders on how to bolster the state’s insurance market.

However, the negotiations ended a week before the Legislature adjourned without agreement, signaled when state Sen. Bill Dodd, a Democrat whose Napa-centered district is one of the state’s most fire-prone regions, sent a text message: “Deal is dead. Very frustrating.”

The discussions revolved about changing the way insurers calculate risk, from basing it on past experience to including potential future risk. Such a change would probably increase premiums and legislators wanted ironclad assurances that the companies would continue writing policies in fire-prone areas if the change was made.

As the session ended, there were public assurances that the issue would not be forgotten.

“We hear loud and clear from our residents that access to insurance is a problem,” Assembly Speaker Robert Rivas said in a statement.

The Legislature’s departure punted the issue, at least for a few months, to Lara and Newsom, who said, “We can do a lot of things. And I’m very mindful. We can do all of that.”

However, Newsom didn’t list any specifics. Last Thursday, he issued an executive order urging Lara to “take action to stabilize and improve California’s property insurance marketplace.”

Almost immediately, Lara issued new rate-setting regulations, which he had described earlier as “a package of regulatory solutions that will streamline the department’s rate review process, opening it equitably to public input – not just the entrenched interests that have benefited materially from the status quo.”

California Insurance Market in ‘Spiraling Crisis’

Newsom, Lara and the regulations drew praise from the American Property Casualty Insurance Association, which said, “Everyone understands that California’s insurance market is in a spiraling crisis that requires immediate policy solutions to protect consumer access to the coverage they need.”

Given industry support, it’s likely that the new regulations will allow it to include, at least to some extent, estimates of future risk from wildfires in their rates which would probably lead to premium increases.

Newsom stopped short of declaring an emergency in Thursday’s executive order, which would have given Lara the authority to issue new rate-setting rules without going through the usual procedural hoops.

Earlier in the day, Consumer Watchdog, the organization that sponsored a 1988 overhaul of insurance regulation, Proposition 103, and has been a critic of Lara from virtually his first day on the job, issued a warning to Newsom and Lara about proceeding on an emergency basis.

Later, the organization said, Lara’s move “would allow insurance companies to use secret algorithms to set rates for homeowners’ coverage for wildfire and to add reinsurance costs to premiums will lead to higher insurance premiums.”

So there it is, a complex mélange of economic, political and societal factors and a huge tradeoff between the availability of coverage, which is mandatory for anyone having a mortgage, and the costs.

About the Author

Dan Walters has been a journalist for nearly 60 years, spending all but a few of those years working for California newspapers. He began his professional career in 1960, at age 16, at the Humboldt Times. CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more columns by Dan Walters, go to calmatters.org/commentary.

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