When disaster hits, insurance companies are supposed to have your back… but their number one priority is almost always their own financial well-being.
We’ve seen that play out over the last few years as Californians have grappled with unprecedented wildfires – the direct result of the catastrophic heating of the planet’s climate. Californians have lost their homes and suffered an estimated $27.7 billion in property damage– a significant amount of which wasn’t even covered. The more reputable insurance companies will honor their promise to pay their customers’ claims promptly and in full – if for no other reason than the law requires it. Others, not so much.
But the industry and its lobbyists always view a disaster as an excuse to increase rates and premiums, and their profits, at the expense of consumers and the state’s economy. That’s why, after the insurance industry destabilized California’s economy in the 1970s and 1980s, California voters passed Proposition 103 to give the elected Insurance Commissioner extensive authority to prevent such abuses. And why the insurance companies went to Sacramento, in the midst of the Floyd murder protests and the pandemic last summer, to try to repeal Proposition 103’s protections.
Consumer Watchdog joined with Commissioner Ricardo Lara, other public interest groups, and the leadership of the California Senate to block the industry’s cynical attack, which would have allowed insurers to raise rates 40-60%! And last Fall, the Commissioner began an investigation into the insurance companies that have cancelled, or refused to renew, tens of thousands of Californians – leaving them without coverage and for those whose banks require home insurance, with the threat of losing their homes. Consumer Watchdog testified on the industry’s actions in a Zoom hearing last Fall.
Consumer Watchdog recently wrote the Commissioner with suggestions as to further actions the Commissioner should take to address the economic crisis created by the insurance industry:
1. Insurance companies should be required to give discounts to homeowners who take actions to protect their homes against wildfire.
Studies show that people whoundertake safety measures to protect their homes against wildfire, such as modernizing roofing and building materials, installing sprinklers, and clearing brush, can lower the threat posed by wildfire and lesson the damage if one hits their property.
There are “loss mitigation” discounts for safe driving, workers’ compensation, and coverage for theft of property. Similar discounts would incentivize homeowners to make their homes and property safer. But right now, only a few insurance companies give such discounts.
2. Investigate and punish the insurance companies that arbitrarily refuse to sell or renew insurance coverage to certain people.
Insurance companies are selectively and arbitrarily non-renewing homeowner policies in so-called “risky” neighborhoods —while continuing to insure their favored customers (those who, for example, buy auto, life, or other insurance). Using the power of citizens to review the insurance companies’ books, Consumer Watchdog discovered that one company would not sell home insurance to “properties located in a neighborhood not showing pride of ownership.” Proposition 103 bars such discriminatory practices, and companies that are found to be arbitrarily boycotting neighborhoods should be prosecuted.
3. Monitor and address claims handling abuses by insurance companies.
Unfortunately, what happens after a wildfire or other natural disaster—when policyholders file an insurance claim—can be as traumatic as the event itself. Many policyholders who experienced losses in recent wildfires have yet to receive all the coverage they paid for.
Insurance companies should be required to disclose detailed information about their handling of wildfire claims on a monthly basis. Additionally, Consumer Watchdog urged the agency to investigate the software that almost every insurance company now uses to review a policyholder’s claim. That software, written and applied at the direction of an insurance company, frequently lowballs Californians’ claims, denying people the coverage they paid for.
4. Bar the Use of Secret “Catastrophe Models” to Predict Losses.
Insurance companies are in the business of predicting the future. No industry on the planet was better positioned to anticipate the impact of climate change. But, like most other industries, the insurance companies chose to focus on short term profits and ignore the long-term threat.
Now the insurance companies complain that existing, proven methods of predicting risk – known as actuarial science – are no good. The industry wants to use software algorithms, marketed by Wall Street firms, to set insurance rates and premiums. Conveniently, the Wall Street firms claim their software is “secret” and cannot be subject to public scrutiny. That’s a violation of California law, which requires the disclosure of anything that is used to set rates and premiums.
Permitting insurance companies to use these models is a conflict of interest since the insurance company has a financial incentive to inflate projected losses. Like claims handling software that is easily programmed to underestimate property values and lowball claims payments, the objectivity and legitimacy of rate prediction models requires independent verification. Consumer Watchdog has uncovered that multiple models used by insurance companies in several recent rate applications arrived at greatly conflicting predictions of losses.
Insurance companies want to use models in order to escape public scrutiny and accountability. Consumer Watchdog believes there is no proof that models are needed; but if the Commissioner uncovers such proof, any model or other technology that is used to set insurance rates, premiums or eligibility must be fully transparent and disclosed to the public under the prior approval process established by Proposition 103.
5. Force Insurance Companies to Address Climate Change.
Since insurance companies have failed their responsibility to act as sentinels for safety, they should be required to do so by law. Insurance companies should disclose the fossil-fuel related companies they invest in and underwrite. And they should be required to include all direct and indirect public health and safety costs of risks involving fossil fuels when pricing insurance coverage. Just as America’s smoking habit led to massive health care costs for American taxpayers, industries that manufacture or rely on fossil fuels must be forced to buy insurance coverage that insures the public against the devastating long-term effects.