By Eli Fischer, LAW360
California regulators’ provisional approval of State Farm’s premium increase request following the Los Angeles fires is another step forward in an insurance reform process that insurance pros view as a negotiation that has been protracted to the detriment of consumers.
Last week, Insurance Commissioner Ricardo Lara gave initial approval for State Farm’s California subsidiary, State Farm General Insurance Co., to charge an extra 21.8% rate increase for homeowners policies, responding to solvency concerns, including from members of his own department. But that increase is contingent on State Farm General justifying the proposal at an April hearing in Oakland, California, that will be presided over by an administrative law judge.
Meanwhile, Lara has also asked State Farm Mutual Automobile Insurance Co. — the Illinois-based mother ship to State Farm General — to send $500 million to the subsidiary to help shore up its finances and ability to pay claims. Experts see Lara’s move as paradigmatic of a negotiation in which he needs to balance consumer protection against the need for a competitive insurance market.
“I want to see State Farm make commitments to California, and I’d like to see State Farm get a fair and reasonable rate increase as a result,” Dan Veroff, a San Francisco-based policyholder attorney with Merlin Law Group, said in an interview with Law360. “It’s really been a back-and-forth sort of negotiation in my view.”
While commending Lara for bringing consumer advocates into the process, Veroff also expressed empathy for homeowners who might have benefited from an earlier deal. State Farm declined to renew coverage for many victims of the fires that ripped through the Pacific Palisades, and it’s possible they could have had better coverage, he said.
In addition to the $500 million that Lara requested be sent to State Farm General, the commissioner also asked that State Farm General suspend nonrenewals for all Californians through the end of the year, according to a transcript of a meeting March 11.
The question of whether State Farm has justified its rate proposal has taken on more import following the release of a draft report in Florida showing carriers in the state were reporting millions in losses while affiliated companies earned billions, experts said.
“The public is really appropriately skeptical — and I am as a consumer advocate — have these been arm’s-length transactions between the parent and the sub?” said Amy Bach, executive director of the San Francisco-based United Policyholders.
Carrier attorneys and industry officials view Lara’s “Sustainable Insurance Strategy,” an overhaul of California’s system of insurance regulation, as a bid to entice carriers like State Farm General back to selling homeowners policies. That includes permission to use catastrophe models to price policies, provided carriers boost coverage offerings.
A new process has been set up to try to aid the fast approval of model-based rates.
“Focus should be given to streamlining the rate review and approval process,” said Spencer Y. Kook, an L.A. insurer attorney with Hinshaw & Culbertson LLP. “Enabling carriers to get to market more quickly with actuarially sound rates will help to alleviate insurance availability issues, which in turn should assist with affordability issues.”
He said that if State Farm’s rate request is ultimately denied — though it appears supported — it would send the wrong signal to the industry about the commissioner’s ability or willingness to act quickly and reasonably. That would further disincentivize carriers from continuing to stay and grow in California’s market at a critical time, Kook said.
To help speed up the rate approval process, Kook said, California regulators should consider more rigorously applying statutory “deemer” provisions that expressly allow for the approval of rate changes below a certain threshold after a statutory notice period.
“This approach would help carriers get to market with appropriate rates more quickly and alleviate the burden upon the department so that it may prioritize more significant rate change requests, while preserving its ability to later revisit the use of an approved rate if circumstances warrant it,” Kook told Law360 in written comments.
The upcoming April 8 hearing between State Farm, regulators and Consumer Watchdog will be a more official proceeding than several meetings conducted so far between the parties. Lara ordered that the administrative law judge provide him a proposed decision within 10 days following the hearing, at which point Lara could issue an interim rate order.
Consumer Watchdog, an advocacy group that’s challenging State Farm’s rate requests, will also participate in the meeting.
“We don’t believe an interim rate is legally permitted when they haven’t shown that their current rates are plainly invalid,” said Pam Pressley, a senior staff attorney with Consumer Watchdog.
“The only way that the commissioner can usually have authority to grant an interim rate — short of prior approval of a full rate — would be if they could show that their current rates are either inadequate under the ratemaking formula, or confiscatory, or there’s some risk of going insolvent,” Pressley told Law360.
Insurance groups have routinely assailed Consumer Watchdog as an impediment to progress, given that it’s the group foremost responsible for challenging rate increases in California. Its founder, Harvey Rosenfield, authored Proposition 103, a 1988 law that permits rate challenges and gives the commissioner power to approve rate changes.
The law has saved billions for consumers, but critics say it spawned a system of regulation that is too slow-moving and ultimately inadequate to address cost concerns over climate change-fueled disasters, inflation and other economic disruptions.
Efforts to square Prop 103 with a new system, however, have taken a long time, all while consumers suffer from high costs and low coverage availability.
“I think the state and the Department of Insurance allowed this issue to fester for too long, and in the process lost leverage for real negotiations,” said Lilit Asadourian, a Los Angeles-based policyholder attorney with Barnes & Thornburg LLP.
Asadourian also said state lawmakers have a role to play in limiting a “regulatory choke hold” on measures that would help reduce the risk of fires. In February, Lara backed a slew of bills to address the state’s insurance crisis, including several that would help fund home hardening activities and research into safety inspections.
“There has to be a way to protect ourselves by doing smart things that can reduce the impact of these kinds of fires,” Asadourian told Law360 in an interview.
At a hearing Wednesday, as Lara was questioned by lawmakers in the state Assembly, the commissioner acknowledged that new regulations have been slow to arrive, but also stressed a need to get them right to avoid a loss in court. Lara missed an earlier oversight hearing last week on the state’s crisis to attend a reinsurance conference in Bermuda.
“The Camp Fire was in 2018, the year before that we had the Sonoma North Bay fires,” James Gallagher, the Assembly’s Republican minority leader, said Wednesday. “So my frustration is with the lack of urgent action and only now are we finally getting these regulations.”
“Could I have moved quicker? Absolutely,” Lara told Gallagher.
State Farm General is also seeking several other rate increases — last year it asked California regulators to approve hikes of 30% for nontenant homeowners insurance, 41.8% for renters and condominium owners and 38% for rental dwelling insurance.
In a March 14 statement following Lara’s provisional approval of its 21.8% interim increase, State Farm Mutual said it’s time for certainty in California’s market.
“The provisional nature of today’s decision does not improve that certainty but it’s a step in the right direction,” the statement said. “We are moving forward with implementing this provisionally approved rate and will continue to work with the California Department of Insurance for a sustainable future for the California insurance market.”
In March last year, the insurer credit rating agency A.M. Best downgraded the subsidiary’s rating. And in February, S&P Global Ratings put State Farm General on a credit watch with negative implications, citing weak underwriting performance.
Regulators within the California Department of Insurance also share concerns over State Farm General’s condition. On Feb. 7, an official with the CDI‘s Rate Enforcement Bureau wrote to Lara, describing the carrier’s situation as “urgent” and recommending that he move expeditiously to approve State Farm General’s interim rate request.
That rate increase could be subject to refunds pending further hearings, said the official, assistant chief counsel Nikki McKennedy. Weeks later, in a meeting with State Farm, Lara and Consumer Watchdog, McKennedy said she believed the insurer had not yet given the CDI satisfactory justifications for its request for an emergency rate increase.
“But what we have determined is that they made a preliminary showing that they can get the interim rates subject to refunds with interest, if necessary,” she said.
Then, in another informal follow-up meeting March 11, Lara said that he had reviewed financial statements released by State Farm and its California subsidiary, and concluded there was concern regarding the subsidiary’s funds for claim-paying.
Insurers have paid out $12.1 billion in claims related to the L.A.-area fires as of March 5, according to the latest data from state officials. Over 37,000 claims have been filed, and over 27,000 have been partially paid out, per the data, which includes the FAIR Plan.
The data doesn’t include payments for property rebuilding or debris removal, just immediate payments issued under laws requiring advance payments to speed recovery.