By Mark Anderson, SACRAMENTO BUSINESS JOURNAL
Heightened wildfire danger coupled with high rebuilding costs is making a growing list of insurers wary of the risk of writing new home insurance policies in California.
Several major insurers have stopped writing or limited new policies, saying they are losing money on home insurance policies in the fire-prone Golden State, and they want to reform regulation and use proprietary catastrophe modeling to set prices.
They also say that California’s method for seeking higher rates, which requires consumer participation and public disclosure, is too onerous.
“If you are losing money, you don’t make it up in volume,” said Mark Sektnan, vice president with the American Property Casualty Insurance Association.
But consumer groups counter that insurance companies are using a calculated strategy to blame climate change to get regulatory reform.
“The insurance industry is not reacting to climate change,” said Carmen Balber, executive director of Los Angeles-based Consumer Watchdog. “They are using it to get what they have sought for decades: To get out of oversight of the regulator and public disclosure.”
Public disclosure is a major factor for both sides. Insurance companies say it hamstrings them from using proprietary models to set appropriate rates, and it limits them from passing through higher costs, such as reinsurance.
Public disclosure on home insurance rate-increase requests is the law in California, and it protects consumers, Balber said.
Insurers want to use private and proprietary catastrophe modeling programs that they don’t want to disclose.
Balber said the notion of private catastrophe modeling as protected and hidden intellectual property is an attempt by the insurance industry to get out of the open disclosure rules for setting rates by having them hidden in a black box of protected property.
“Using private catastrophe modeling means that insurance companies don’t have to open their books to see how they are setting rates,” Balber said. She added that reinsurance is a global, unregulated industry, and its actions are not publicly reviewable, which means insurance companies cannot pass its costs on to customers in California.
Whatever the arguments, insurers are cutting back on California home policies. The Allstate Corp. and State Farm have announced they are halting writing new home insurance policies in California. Farmers Insurance, California’s second-largest insurer, announced July 8 that it is limiting the number of new policies it writes in the state.
Allstate (NYSE: ALL), the fourth-largest property insurer in California, stopped writing new policies in November last year. State Farm announced on May 26 that it would cease new home insurance in California effective May 27.
Bloomington, Illinois-based State Farm said the company “made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure and a challenging reinsurance market,” according to its website.
“California’s regulatory framework is 35 years old and is ill-equipped to handle the increasing challenges wrought by climate change and is resulting in the insurance market upheaval California faces today. It is time to modernize Proposition 103,” said David Sampson, CEO of the American Property Casualty Insurance Association.
Proposition 103, approved by California voters in 1988, requires insurers to get prior approval from the California Department of Insurance before changing rates. It also created the elected office of Insurance Commissioner, which had previously been an appointed position. And it mandates that all data used by insurance companies to seek rate increases be documented and disclosed publicly.
Under Proposition 103, rates are set based on a 20-year look back. That means the state requires insurers to use 20 years of historic risk modeling to price current risks.
The insurance industry wants to use more modern modeling, sometimes proprietary catastrophe modeling, to assess risk in a rapidly changing market, Sektnan said.
“The world is much different today than it was in 1988. There is a new normal,” Sektnan said, adding that rates for profitable operation of home insurance in California “have been inadequate for years.”
Wildfires in the past seven years aren’t acting like they used to historically in multiple ways, Sektnan said. Fires used to calm during the evenings, but some recent blazes have continued growing through day and night. Fires, especially wind-driven fires, burn into residential neighborhoods, as happened in Santa Rosa, Redding, Paradise and other cities. What used to be natural firebreaks, like highways and vineyards, are not stopping fires like they used to. And even coastal redwood forests are burning, which is also something new.
The industry would like to see catastrophe modeling allowed, it would like to see reinsurance costs able to be reflected in rates in California and it would like overall reforms in how rate increases are handled by the state, Sektnan said.
He said insurers are concerned about California risk because reinsurance costs have risen 30% to 40% in the past two years for California properties.
Adding to risk costs, labor and construction materials now cost 27% and 33% more, respectively, to rebuild.
Also, California can have “abnormally long rate reviews” for insurers seeking to raise home insurance policy premiums, said Parr Schoolman, chief risk officer with Allstate, which insures 350,000 homes in California.
He said during a public workshop on July 13 that Allstate is dedicated to California, but the company must be able to match new policies to risks.
Rate reviews are supposed to take 60 days in a public process, but the state can ask for a waiver to delay the review.
Allstate’s last rate review took 773 days, Schoolman said.
Consumer Watchdog’s Balber said that review took so long because Allstate changed its application several times.
“The problem is insurance companies seeking to insure only the most profitable customers,” she said.
States across the West are experiencing increased wildfire, but only California is losing insurance carriers willing to write policies, said Stephen Young, general counsel at Independent Insurance Agents and Brokers of California. “This is a crisis.”
The state needs to reform its regulation to allow companies to do business, Young said. “Change is needed to restore California to a healthy insurance market.”
While some big players are limiting new coverage, the state still has more than 100 companies writing new policies, said Michael Soller, spokesman for the California Department of Insurance.
It is always best to have many insurers, said Ryan Vigus, executive vice president of personal lines product management with CSAA Insurance Group.
When it is working well, insurance is a competitive market because companies compete for business.
But with ratemaking artificially suppressed, it is driving insurers out of the market, Vigus said.
Insurers in California are losing 20 cents on every dollar of premium in California, and the industry has lost $6 billion over six years, he said.
The private catastrophe modeling programs rely on public data from public sources, like charting wind, charting fire and other databases, to create their models. It would be possible to create a publicly open model using academic research. That would be transparent for the purposes of existing California law, Balber said.
The risk to insurance companies in California isn’t just the potential loss from their own customers, it’s also the potential exposure to the state’s insurer of last resort should someplace expensive like Truckee or Tahoe see catastrophic damage, Sektnan said.
The insurer of last resort, the California FAIR Plan, was set up in 1968, when brush fires and riots in California saw some areas become uninsurable. FAIR stands for Fair Access to Insurance Requirements, and it was meant to be an interim and limited program to support insurance needs when the private sector pulls back.
Now with more areas being deemed hard or impossible to insure, the FAIR Plan is becoming a large high-risk pool. That means it could suffer catastrophic loss if one of the areas where it has a concentration were to burn.
If the FAIR Plan fails, then all the other insurers in the state would have to pay the losses on a pro rata basis.
For insurers of homes in California, they not only have to be concerned about their own exposure in their underwriting, but they also have to consider that if they gain market share in California, they also get more exposure to statewide risk of the FAIR Plan running into a problem. The FAIR Plan has more than doubled in size over five years from 126,709 policies in 2018 to 272,846 in 2022.
The last time the FAIR Plan assessed the overall insurance market was in the mid-1990s following both the Malibu and Altadena wildfires and the Northridge earthquake, said spokesman Nathan Yañez. “The FAIR Plan is required by law to have actuarially sound rates which means that FAIR Plan rates must be sufficient to cover expenses and projected losses. The FAIR Plan currently has a pending rate filing with the California Department of Insurance to help ensure its rates are adequate.”
Balber says the industry is dressing up its battle against open disclosure accountability in home insurance rates in the cloak of climate change.
One thing all sides agree upon is that fire-proofing and defensive hardening against wildfire could help mitigate concerns and costs. But advocates on all sides note that many rural residents do not have the financial means to make expensive fire-proofing improvements to their property.