California’s insurance strategy ‘long on hope, short on details’

Brokers and agents air concerns and questions over plans to stabilize the market

California’s insurance strategy ‘long on hope, short on details’


By Gia Snape

Agents and brokers have hailed California’s sustainable insurance strategy as a positive step towards stabilizing the state’s insurance market but note its lack of clarity and details. Some have also said reforms need to come faster than the target date of implementation in December 2024.

Last week, California Governor Gavin Newsom signed an executive order to initiate a package of reforms outlined by the state’s Insurance Commissioner Ricardo Lara, declaring an emergency over the ongoing homeowners’ insurance crisis.

The Independent Insurance Agents & Brokers of California (IIABCal) has applauded Commissioner Lara’s recognition of serious, and worsening, property insurance availability problem in California, and vowed to work with the Department of Insurance (DOI) to carry out new regulations.

But Steve Young, senior vice president and general counsel of IIABCal, said that, without more details, it was impossible to know whether the announced measures will lead to a competitive admitted market for property risks.

“The Commissioner’s announcement, coupled with the governor’s emergency declaration, was long on hope and short on specifics,” Young said.

“But the fact that Governor has issued an emergency declaration is very helpful, in terms of focusing more attention on the severity of this availability crisis, and in opening the door for the Commissioner to promulgate emergency regulations more quickly than he otherwise would be able to.”

Insurance market overhaul

The sustainable insurance strategy, touted as the largest insurance reform in the state in decades, aims to create more capacity in the California market. It follows a spate of carrier exits and mitigating actions that have drastically reduced Californians’ ability to access homeowners’ insurance.

Several major players, including State Farm, Farmers, USAA, Allstate, among others, have limited business in California or pulled out of the state entirely.

One of the key actions is requiring insurers to write a minimum of 85% of their California market share in high wildfire risk areas.

In return, the state has given insurers the green light to use catastrophe models reflecting future higher risks and to include the cost of reinsurance in their pricing.

Concerns over Proposition 103, minimum carrier threshold

Jamie Reed, chairman of the board at C3 Risk & Insurance Service, a San Diego-based brokerage, said that while the strategy addresses the challenges brought by catastrophes such as storms and wildfires, it doesn’t address other factors such as inflation.

“I am not disputing the fact that adverse weather events are one factor driving the need for insurers to seek rate increases; it is a real issue. However, it is only one factor,” said Reed.

“Even if adverse weather events were the single factor contributing to the need for insurers to seek rate increase, that does not mean the DOI can solve an international macro problem like global warming through continued over governance of the California insurance industry.”

Reed noted that he is keen to see how the DOI would improve the efficiency, speed, and transparency of its rate approval process, another action outlined in the executive order.

But he also said the strategy failed to address another issue: the strain on carriers created by Proposition 103, a 35-year-old insurance rule that aimed to curb unjustified rate increases and other abuses.

The regulatory framework has helped protect consumers, but critics have argued it doesn’t allow insurers to account for tremendous losses brought by extreme weather events in recent years.

“It is outdated, and hyperinflation has exacerbated the issue,” Reed told Insurance Business.

For the IIABCal, one of the biggest red flags in California’s strategy is the 85% minimum market share carriers would be ordered to write in distressed areas.

“We certainly support those binding commitments to write more business in areas where the risk of wildfire exposure is greatest, because agents and brokers need markets,” said Young.

“Where we have a concern, though, is with a threshold that the commissioner has announced. Eighty-five per cent (85%) is going to be an extraordinarily high threshold, and one that many companies simply can’t meet.”

‘Broad strokes’ need more clarity, legal expert says

Mark Robinson, co-founder of law firm Michelman & Robinson and leader of its regulatory practice group, also raised concern over a lack of details in the California insurance strategy.

“The devil is in the details,” he said. “These are more broad strokes and concepts, so what are the new regulations going to look like?”

Specifically, Robinson asked how the state would qualify which communities are “high wildfire risk.”

“How is that going to be defined? Is it by county, such as Los Angeles County or Marin County, or is it going to be very specific to historical fire areas?” he said. “I think that’s one factor that insurance companies are going to be interested in knowing.

“What will be of interest is how it’s going to be regulated and what the requirements are so that it’s fair to consumers and allows for a reasonable, fair rate of return to carriers.”

Robinson, an insurance industry specialist who primarily represents retail brokers and agents, said there was a definite sense of urgency in the market for more capacity in property and personal auto.

Could carriers start returning to California?

Like IIABCal’s Young, Robinson expressed hope that the state government would expedite reforms before the December 2024 deadline.

Young said he hoped that some carriers would increase their availability or return to the California market once they see the reforms being rolled out.

“There is not going to be immediate relief from this,” Young continued. “It’s not like when the legislature returns in January, that suddenly there’s going to be great market availability.

“But the commissioner’s willingness to make these changes, we hope may encourage some insurers to lift or modify the decisions that they’ve been making for the last year and a half to restrict writing in California.”

California insurance premiums to climb further

Travis Hodges, managing director of VIU by HUB, a digital personal lines platform operated by HUB International, said the DOI’s move is a “positive sign” that state officials and regulators are coming together with the insurance industry to improve the market.

But he noted that as the reforms take hold, insurance premiums must increase to support the financial viability of insurance carriers.

“Leaving homeowners with limited options and pooling all the risk on a small number of companies can only lead to more disastrous results,” Hodges said.

“As states across the country increasingly find themselves facing similar scenarios, it is more important than ever for consumers to work with an insurance broker who will be at the forefront of any changes to carrier availability and have access to support when customers need it most.”

What are your thoughts on the California sustainable insurance strategy? Tell us in the comments.

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