By Jamie Court, LOS ANGELES TIMES OPED
Home insurance companies have put Californians in a bind by refusing to sell new policies or renew many customers, leaving them with few options. That drives more homeowners into the high-cost, low-benefit FAIR Plan, a pool of insurers providing last-resort coverage.
Gov. Gavin Newsom recently announced legislation to allow insurance companies to hike rates more quickly in an effort to woo them back to the state. While that will leave Californians paying higher rates, it’s not likely to get more people covered.
Insurance companies are refusing to write new policies despite substantial recent rate hikes — an average of 20% for State Farm and 37% for Farmers, for example. What has them spooked is greater exposure through the FAIR Plan, which increasingly covers expensive homes in wildfire-prone areas. Insurers are on the hook for FAIR Plan claims, and their exposure increases with market participation, so they limit participation.
Only freeing people from the FAIR Plan will solve this. The most practical way to do that is to require insurers to cover people who harden their homes against fire. We have mandatory health and auto insurance, so why shouldn’t we have it for homes that meet standards?
Hardening is expensive enough that most homeowners are unlikely to do it without guaranteed coverage. Mandating insurance is therefore the best way to mitigate fire risk.
Mitigation efforts are already working, with major claim events dwindling in recent years. Moreover, insurers recovered billions from the utilities responsible for major fire losses in 2017 and 2018.
The current crisis was precipitated not so much by wildfires as by investment losses and rising construction costs. Insurers responded by tightening underwriting and raising rates.
Insurance companies got their hikes, but they refuse to write new business here until they get more. Unfortunately, Newsom and Insurance Commissioner Ricardo Lara are ready to give them what they want.
Last week, Lara proposed regulations attempting to address the crisis. Echoing a legislative proposal that failed last year, they would allow companies to raise rates based on black-box climate models. Florida tried a similar approach, and its rates are now about double California’s. Florida’s insurer of last resort covers 20% of its homeowners, roughly five times the share in California.
The proposed regulations purport to require insurers to increase sales to homeowners in “distressed areas” by 5%. But they would not require them to charge affordable prices. The requirement to cover these areas could also be waived if an insurer shows it’s “taking reasonable steps to fulfill its insurer commitment.” And the plan gives companies two years to comply but lets them charge all policyholders more immediately.
Newsom cheered the proposal, essentially arguing that California’s insurance rates are too damn low. He didn’t mention that California insurer profits have generally outpaced the U.S. average for 20 years.
Newsom’s latest proposal would limit public participation in rate-setting by cutting out so-called intervenors such as Consumer Watchdog, which can challenge unnecessary increases and has saved consumers more than $6 billion over 22 years.
Throwing money at insurers won’t end the crisis; requiring them to cover responsible homeowners will.
Jamie Court is the president of the nonprofit Consumer Watchdog.
This oped appeared as a point/counter-point under the topic “With fires burning again, is California becoming uninsurable?” You can read the counter-point by insurance representative Rex Frazier here.
