California’s regulatory restrictions are a key factor driving the limited availability of property insurance in high-risk areas, according to a new report from the Insurance Information Institute (Triple-I)
The report, Trends and Insights: California’s Risk Crisis, examines the effects of Proposition 103, a measure that’s been on California’s books for more than three decades.
“In a dynamically evolving risk environment that includes earthquakes, drought, wildfire, landslides, and, in recent years, flooding due to ‘atmospheric rivers’, Proposition 103 and its regulatory implementation have prevented insurers from using the most current data and advanced modeling technologies,” Triple-I said in a news release. “Instead, they have required insurers to price coverage based on historical data alone.”
“Much has changed in the world since 1988 when Proposition 103 came into effect, and it’s well over time to evolve California’s regulatory system,” said Sean Kevelighan, CEO of Triple-I. “While the recently proposed changes by the California Department of Insurance are a move in the right direction, it is becoming increasingly critical to quickly bring market stability into one of the largest state economies. Insurance is a key driver to economic stability and growth, but it needs to function in ways that allow insurance to be accurately priced. Insurance prices are the effect rather than the cause of risk.”
Triple-I’s report said that Proposition 103 had also thrown up hurdles to premium rate changes by allowing consumer advocacy groups to intervene in the rate approval process.
“This makes it hard to respond quickly to changing market conditions, resulting in approval delays and rates that don’t accurately reflect current (let alone future) risk,” Triple-I said. “It also drives up legal and administrative costs.”
All of this has led to a rash of carrier exits from the state in recent years, while other carriers have limited or reduced their business in California.
In September, California Insurance Commissioner Ricardo Lara announced the Sustainable Insurance Strategy, which attempts to maintain the availability of homeowners’ insurance coverage in wildfire-prone areas of the state in exchange for allowing insurers to use risk models that prioritize wildfire safety and include reinsurance costs in premium pricing.
The strategy has hardly garnered universal acclaim from the industry, with a representative from the Insurance Agents and Brokers of California calling the proposal “long on hope and short on specifics.”
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