Secret Black Box Climate Models are Prohibited by Proposition 103

Los Angeles, CA – At a Department of Insurance hearing today, the non-profit organization Consumer Watchdog will propose that California build a public model to predict the risk of wildfires and prevent insurance price-gouging and bias. Insurance companies are barred from using private black-box computer models to set rates under the Proposition 103 consumer protection law because they prevent public scrutiny and cannot be verified, said the group. 

The insurance industry is currently using the threat of home insurance cancellations to seek state endorsement of black box models to deregulate insurance prices, all in the guise of addressing climate change, says the organization’s testimony. 

“Insurance companies want to use secret computer models so they can raise rates,” said Carmen Balber, Consumer Watchdog’s Executive Director. “What California needs is a public model, open to public scrutiny as required by the voters, and subject to public control, to guide the state towards reducing the risks of wildfire caused by climate change.”  

Consumer Watchdog will make its proposal at a remote hearing convened by Insurance Commissioner Ricardo Lara in the midst of growing economic pressure by insurance companies that is destabilizing the marketplace. Over the last eight weeks, State Farm, Allstate and Farmers have asked Commissioner Lara for over $1 billion in new premium increases for homeowners, while also announcing they are refusing to sell new home insurance policies because they need higher insurance rates. 

Last Friday, the insurance industry dropped all pretense that the pullouts are about climate change, said Consumer Watchdog. The industry’s national lobbying organization issued a press release announcing their demand: deregulation. At the top of their list is the subject of today’s workshop: permission to use secret models. Read the insurance industry’s demands here.

Read the Commissioner’s hearing notice.

Read Consumer Watchdog’s testimony.

“The Insurance Commissioner and lawmakers should not buy what the insurance industry is selling: deregulation wrapped in the cloak of addressing climate change,” said Balber.

“Black Box” Models Are Inconsistent, Unreliable, Prone to Bias and Conflicts of Interest, Inefficient, Defeat Accountability, and Don’t Address the Most Important Issue: Prevention of Death and Destruction from Climate Change

Consumer Watchdog assessed private computer models and concluded that they are severely flawed:

• Inconsistent and Unreliable – based on Consumer Watchdog’s experience reviewing the output of private earthquake and wildfire models proposed by insurance companies, models are imprecise and often wildly inconsistent when projecting future insurance losses. This would lead to arbitrary and unfair rates and premiums for Californians.

• Prone to Bias – models are based on data and assumptions that often reflect racial, gender and income-based bias, discriminatory criteria that have long plagued consumers in Black and brown communities, and are barred by Proposition 103.

• Conflicts of Interest – insurance companies rely on private “rating agencies” to evaluate their financial condition. Many of these rating agencies are affiliated with modelling firms, leading to the kinds of pernicious conflicts of interest that caused the 2008 financial crash, and that contributed to California’s electricity deregulation debacle, which cost Californians tens of billions of dollars.

• Inefficient and Defeat Accountability – allowing every insurance company to use its own private model, potentially further customized by each company, will be extremely expensive, an expense insurance companies will want to pass thru to consumers. Even assuming private modelers agreed to comply with Proposition 103’s disclosure and transparency requirements, regulatory review and scrutiny of a potentially unlimited number of separate models will place an extreme burden on the California Department of Insurance.

• Focus on Rates, but Not Resilience – insurance companies want to use models to increase rates – a short term, profit-driven goal that explains why insurance companies have failed for decades to focus on lowering and preventing the risks caused by climate change. Indeed, when it came to regulations requiring insurance companies to give discounts to homeowners who take steps to protect their property against the risks of wildfire, the insurance companies opposed the requirement and claimed that they “didn’t have enough information” to offer discounts. 

An Open, Public Catastrophe Model Will Focus on Loss Prevention and Best Protect California Consumers Against Insurance Company Profiteering

“A public interest framework for the use of catastrophe models in insurance rating in California would insure the most people at the lowest price while incentivizing homeowners to reduce climate risk. The insurance industry has long pursued the opposite strategy, seeking to weed out homeowners who are more likely to make claims, and the secrecy of the private modeling industry serves as a tool to that end,” says Consumer Watchdog’s testimony. “California has the opportunity to create a public model that serves all Californians. A public model would prioritize equity, reliability, affordability, transparency, accountability, and risk reduction.”

“The Golden State is home to an unparalleled wealth of independent academic, scientific and engineering expertise – greater than any other state in the nation. The Commissioner should recruit these resources to assist the state in the creation of a public model that could also serve as a template for the efforts of other states,” said Balber.