Fix the California Insurance Crisis!
The California insurance market is facing a coverage crisis, with millions of Californians losing access to the insurance coverage they need to protect their homes and businesses. Addressing California’s insurance crisis is critical to meeting the needs of the state’s residents.
Sign the petition to urge the Insurance Commissioner to resolve the California insurance crisis by implementing the Sustainable insurance Strategy.
Fix the California Insurance Crisis!
The California insurance market is facing a coverage crisis, with millions of Californians losing access to the insurance coverage they need to protect their homes and businesses. Addressing California’s insurance crisis is critical to meeting the needs of the state’s residents.
Sign the petition to urge the Insurance Commissioner to resolve the California insurance crisis by implementing the Sustainable insurance Strategy.
PETITION TO THE CALIFORNIA INSURANCE COMMISSIONER:
The Sustainable Insurance Strategy is historic, the most significant modernization of the California insurance market since Proposition 103 passed in 1988.
Efforts by the California Department of Insurance to improve rate transparency and participant accountability are appreciated, but fallout from widespread non-renewals is causing more distress than the risk of higher insurance rates.
The reforms outlined in the Sustainable Insurance Strategy will bring insurers back to the market if correctly designed and implemented. And will better align California with how insurance is regulated across the United States.
Many consumers who are unable to access admitted market insurance coverage are being forced to parcel out insurance through the FAIR Plan, driving up costs, and reducing coverage. In turn harming local economies, and the ability to buy and sell real property. The insurance crisis has harmed the affordability of home ownership and has negatively impacted the financial livelihood of real estate agents, residential lenders, commercial lenders, developers and contractors.
Please enact all aspects of the Sustainable Insurance Strategy as quickly as possible.
California Insurance is at a Point of Crisis
California Insurance is at a Point of Crisis
Table of Contents
What is causing the California Insurance Crisis?
California faces rapidly growing catastrophe exposure.
The number of acres burned in California has grown steadily in recent years. Climate change is making wildfire worse, five of the ten most destructive wildfires in California have occurred in the past five years1. At the same time, more people are moving into fire-prone areas with at least 1.2 million California homeowners at risk of extreme wildfire2. More people, homes, and businesses mean more costly damage when an extreme weather event like wildfire occurs.
Historic Increases in Construction Costs
Claims cost are being compounded by inflation and supply chain disruptions. All of this has increased the cost of labor and materials, which translates to higher home repair and rebuilding costs. Insurers have been paying these increased costs for years and must begin charging appropriate premiums to continue covering them in a sustainable manner. California homeowners insurance companies lost eight cents on every dollar of premium between 2013 and 20223. This is not sustainable.
Decades-Old Insurance Regulations
Challenges posed by outdated regulations, including lengthy rate approvals and the inability to price risk. Proposition 103 has hindered California’s insurance market from nimbly adjusting rates to match evolving risks of insuring property in the state.
What is Proposition 103?
All things concerning insurance in California are impacted by Proposition 103, which was passed by California voters in 1988. This voter approved initiative required insurance companies to roll back prices by 20% and mandated that all future rate increases and decreases be approved by the California Department of insurance (CDI). Through this ballot initiative, the Insurance Commissioner became a statewide elected official. Prior to this, the Commissioner was a gubernatorial appointee. Proposition 103 also required prior approvals of property and casualty rates, including homeowner insurance. CDI enforces the insurance laws of California and has authority over how insurers and licensees conduct business in California.
After Proposition 103, insurance rate increases and decreases were approved by the elected Insurance Commissioner. This has created rate disparities between California and the rest of the United States. Average California premiums have not kept up with the rate of inflation and rates have been kept artificially low compared to other states. These statistics are especially startling when compared to other states experiencing high levels of natural disasters, like Colorado and Louisiana. As seen in the chart below, between 2010 and 2020, California’s average insurance premiums increased by 28.3%. The average across the U.S. was a 34% increase. Colorado, a state with similar historic losses in wildfires saw its insurance premiums increase by 73.5%4. Despite several years of historic wildfire related losses, California’s average homeowners’ premiums remain below the national average and far below other states with significant climate-related impacts.
What is the Sustainable Insurance Strategy?
The California Insurance Commissioner proposed regulatory reform in September 2023, the Sustainable Insurance Strategy, which could be the most significant insurance reform seen since Prop 103 in 1988. Each element of this strategy plays a vital role in reviving a robust insurance market and enhancing statewide insurance availability.
Restructuring the FAIR Plan to ensure solvency
California’s FAIR Plan is in danger of insolvency. Currently, should the state’s plan fail to meet financial obligations, admitted market insurers will have to fund it based on their market share in California and would unlikely be able to recover. Reforms are needed to allow for emergency assessments of policyholders and the ability to issue bonds to help cover claims in the event of a major catastrophe or if the FAIR Plan becomes insolvent.
Streamlined rate approval process
More timely insurance rate reviews and approvals are needed to effectively respond to market trends. Currently, rate filings can take longer than six months to review and sometimes up to a year or more when an intervenor is involved. By the time new insurance rates are approved and implemented, the rates are already inadequate. It is important to note that California is the only state that allows intervenors (outside groups) to participate in the rate review process. Intervenor expenses are paid by insurance companies, but the true costs are paid by California consumers.
Accounting for the cost of reinsurance in rates
Insurance companies buy reinsurance to ensure they can cover the costs of claims and those reinsurance rates are rising as well. The net cost of reinsurance should be factored into rates as a legitimate business expense, as is already done in every state but California. This will help increase access to coverage.
Use of predictive catastrophe risk modeling
Insurers need to project claims more accurately to determine rates that better reflect expected claims costs. Currently, California does not allow the use of forward-looking and scientifically based catastrophe risk modeling, which can predict the likelihood of wildfire risk. Instead, rates are determined by 20 years of historical losses resulting in rates that do not accurately reflect the current risk. Catastrophic risk modeling is already used in every state but California.
What is the California FAIR Plan?
The California Fair Access to Insurance Requirements (FAIR) Plan was established to meet the needs of California homeowners unable to find insurance in the traditional marketplace. The FAIR Plan is not a state agency, nor is it a public entity. There is no public or taxpayer funding. The California FAIR Plan guarantees all property owners access to fire insurance.
All admitted homeowners insurance companies must be members of the FAIR Plan as a condition of doing business in California. The FAIR Plan operates without any state financial support. If the FAIR Plan is short of funds, admitted market insurers will be required to fund the FAIR plan based on each insurance company’s market share in California. The FAIR Plan does not cover water damage, liability, or theft. These coverages can be found in policies known as Difference in Conditions, or DIC, and can be added by homeowners as a wraparound policy.
The FAIR plan has historically insured approximately 123,000 policies in California. However, the number of homeowners in the FAIR Plan is rising in high fire risk areas, reaching 350,000 policies, a 22% increase in 20235. The FAIR Plan receives nearly 1,000 applications a day.
This growth signals a problem in the regular admitted market. For residents unable to find an admitted market policy, most likely those in the wildland urban interface (WUI), they will pay much higher premiums if forced to obtain coverage through the FAIR Plan.
Allowing the FAIR Plan, “the expensive market of last resort”, to grow too large can threaten the sustainability of the California admitted insurance market. If a major catastrophic event strikes California and the FAIR Plan’s surplus and reinsurance are insufficient to pay their claims, the admitted insurance market will be required to financially rescue the FAIR Plan based on each insurance company’s market share in California.
Insurers are growing increasingly concerned about exposure to an unlimited assessment to fund the FAIR Plan’s losses that could be in the billions of dollars.
TAKE ACTION TO FIX THE CRISIS!
