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California’s Insurance Crisis: Slow Steps Toward Reform Amid Systemic Challenges

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As Insurance Commissioner Ricardo Lara released more risk modeling details this week to induce insurers to write more home insurance in distressed areas, we remain optimistic that positive change is on the horizon.  To be clear, insurers indicate that California remains a very difficult state for insurers to operate profitably.  Many of these challenges transcend Ricardo Lara’s failures, and they will remain long after he leaves office.

Insurers describe the pervasive anti-insurer atmosphere as systemic, and generally speaking, insurers are investing their limited resources in states where their capital is more efficiently deployed.  This is not surprising to many of us who have watched California lawmakers and regulators over the years champion bad policy, weaponize and slow-walk the ratemaking process, and empower parasitic intervenors like Consumer Watchdog.  Rather than create sensible legislation and regulate fairly and efficiently, lawmakers and regulators have destabilized and nearly suffocated the California personal lines insurance marketplace, resulting in real consumer harm.

But finally, as insurers labor under “death by a thousand cuts” conditions in this state so hostile to business, Insurance Commissioner Ricardo Lara is very slowly attempting to resuscitate the marketplace he has helped place on life support.  At the end of the legislative session last year, ten months ago, the California Department of Insurance (CDI) should have acted with urgency and introduced emergency regulations to encourage insurers to re-enter the marketplace.  It should have moved swiftly to expedite and fast-track rate filings after creating boundless consumer harm with its failed moratorium.  Instead, bureaucrats at the CDI are just now figuring out the California FAIR Plan (CFP) is simply one cigarette-butt-out-the-window-in-Big-Bear away from a complete melt-down of the homeowners insurance marketplace.

The CFP is on about $400 billion of risk, and it is highly concentrated in areas like Big Bear.  A major wildfire will trigger an assessment of insurers based on market share, which could reduce insurers’ surplus and result in corresponding non-renewal of existing homeowners policies with less available capital.  The CDI is betting big that it can thread the needle by depopulating policies at the CFP back to rate-adequate insurers before Mother Nature unleashes a major fire.

As a point of information, the CDI may need to take note that for depopulation to function properly, rates at the CFP can’t be lower than rates offered by insurers, so there’s that pesky detail.  This leaves some of us scratching our heads as the CFP described it’s last rate filing and approval; they needed a 70% rate increase, they filed for 48%, and they received only 15%.  Oh, and it took them 25 months to get it and they are still not rate adequate.  The risk modeling details released by the CDI this week and the yet-to-be-released details regarding the ability of insurers to expense their reinsurance costs in rate filings are welcome news, but the CDI’s lack of urgency is a cause for concern as they play with fire.

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