Inside EPA – Climate Change Drives New California Plans To Rescue Insurance System

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By Staff at Inside EPA

California leaders are citing the crushing impacts of climate change to help justify a sweeping plan to overhaul and improve the state’s crumbling property insurance market, with Gov. Gavin Newsom (D) issuing an executive order and the state’s insurance commissioner laying out a multi-pronged strategy aimed at long-term market stability.

“This is yet another example of how climate change is directly threatening our communities and livelihoods. It is critical that California’s insurance market works to protect homes and businesses in every corner of our state,” Newsom said in a Sept. 21 press release announcing the effort and his executive order. “A balanced approach that will help maintain fair prices and protections for Californians is essential.”

California Insurance Commissioner Ricardo Lara in a separate Sept. 21 release announced his strategy. “We are at a major crossroads on insurance after multiple years of wildfires and storms intensified by the threat of climate change. I am taking immediate action to implement lasting changes that will make Californians safer through a stronger, sustainable insurance market. The current system is not working for all Californians, and we must change course. I will continue to partner with all those who want to work toward real solutions.”

The long-awaited actions — including Lara’s “Sustainable Insurance Strategy” — come after some major insurance companies announced they are halting the issuance of new property coverage in California or limiting policy renewals.

Many of the policy changes outlined in Newsom’s and Lara’s plans aim to address several major problems with the state’s current system identified by experts, including during a May 10 Senate Insurance Committee hearing. These problems include legal restrictions on rate increases, outdated regulatory policies and dwindling competition.

Lara’s sustainability strategy lists updated rate review timelines as a way to improve market certainty for rate approvals; improved rate filing procedures as increasing stability while maintaining intervenor transparency; new regulations on catastrophe modeling as allowing for long-term sustainability of coverage and rates; the exploration of a California-only reinsurance regulation as protecting consumers from paying the costs of other global catastrophes; and increased transparency for intervenors as making “prior filings of intervenors publicly available to encourage broader participation.”

Lara is calling his plan the “largest insurance reform since state voters’ passage of Proposition 103 nearly 35 years ago.” Passed by voters in 1988, Prop. 103 requires that rate increases are approved by the state insurance commissioner.

Prop. 103 was championed by consumer activist Ralph Nader and led by Harvey Rosenfield, a self-described consumer advocate who works with groups such as Consumer Watchdog. Rosenfield testified at the May 10 committee hearing, providing background on the ballot measure.

But critics have charged that California’s rate review process cannot handle monumental shifts in risk caused by catastrophic wildfires the state has suffered in recent years, including that it does not allow insurance companies to factor in the soaring cost of reinsurance coverage they must obtain, or to use catastrophe models when calculating proposed rate increases. This dynamic has contributed greatly to companies exiting the California market in recent years, critics say, leaving consumers with fewer options and higher costs for property coverage.

Insurance Commissioner Actions

Lara will take “executive action” to transition homeowners and businesses from the state’s FAIR Plan, which offers government-backed fire insurance policies, “back into the normal insurance market with commitments from insurance companies to cover all parts of California by writing no less than 85 [percent] of their statewide market share in high wildfire risk communities.”

The insurance department will also expedite the “introduction of new rules for the review of climate catastrophe models that recognize the benefits of wildfire safety and mitigation actions at the state, local, and parcel levels.”

Lara also plans to enact the “Safer from Wildfire Regulation,” which will build on a mandate for insurance companies to “recognize and reward wildfire safety and mitigation efforts made by homeowners and businesses,” the release continues. His new rule will require insurance companies to “submit new rates that recognize the benefit of safety measures such as upgraded roofs and windows, defensible space, and memberships in community-wide programs” to reduce risk.

Meanwhile, Newsom’s executive order requests that Lara “take swift regulatory action to strengthen and stabilize California’s marketplace,” the governor’s press release says.

Action should include expanding “coverage choices for consumers, particularly in underserved areas of the state”; improving the “efficiency, speed, and transparency of the rate approval process”; maintaining the solvency of the state’s FAIR Plan; and accelerating implementation of potential new regulations.

Sen. Bill Dodd (D-Napa), who during the May hearing was critical of some of the current insurance department regulations and policies, including those necessitated by Prop. 103, praised the new effort by Newsom and Lara.

“I want to thank the governor and insurance commissioner for stepping up to address California’s insurance crisis,” he said in a Sept. 21 press release. “Because clearly, the status quo is not working. It is critically important that we adopt policies and efficiencies that are going to ensure the availability of insurance. Given that the Legislature is not in session right now, utilizing the commissioner’s regulatory authority makes good sense.” — Curt Barry ([email protected])

Consumer Watchdog
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