Sacramento, CA — Insurance companies are seeking a multi-billion dollar bailout of the insurance industry for its exposure to wildfire losses, pushing for a last-minute deal at the end of the legislative session.
The proposed legislation would relieve insurance companies of responsibility for covering fire claims under the California FAIR Plan, which insurers control, and put it on the backs of all property insurance policyholders as an added surcharge on insurance bills.
It would also allow the companies, in violation of insurance reform Proposition 103, to charge homeowners and renters excessive and unjustified rates, including the unregulated costs of reinsurance, and use black box algorithms to set insurance premiums – pushing homeowners’ rates even higher.
Nothing in the proposal requires insurance companies to insure new homes as a condition of a bailout.
Politico reports the industry is in negotiation with legislators, the insurance commissioner and the governor’s office over the plan.
The push to pass a bailout during the final three weeks of session to avoid the scrutiny and vetting of a public debate is especially outrageous, said Consumer Watchdog, because proposals that would protect consumers have not been considered. For example, two bills that would have required insurance companies to sell policies to all homeowners who harden their homes against wildfires were denied hearings by the legislature’s insurance committees (AB 2367 Gonzalez in 2020 and SB 672 McGuire in 2023).
“This would constitute the biggest insurance industry bailout in modern history, rushed through without the public deliberation that placing a burden of this magnitude on policyholders demands. The legislature and governor should reject this eleventh-hour plan. Insurance companies are trying to exploit a crisis to get deregulation they have sought for 35 years and a bailout of their current responsibilities to California homeowners,” said Harvey Rosenfield, author of Proposition 103 and founder of Consumer Watchdog.
Proposed FAIR Plan Bailout Will Exacerbate Problems in the Private Marketplace
Insurers are threatening lawmakers with more pullouts from the home insurance market if they do not get their way, but a bailout would make things worse, not better, said Consumer Watchdog. The industry proposal would create adverse selection in the FAIR Plan, California’s “insurer of last resort.” If the insurance companies can choose to shift the burden for the riskiest homes to all policyholders, eliminating all insurer responsibility for those policies, it will incentivize them to abandon more Californians to the FAIR Plan’s less generous benefits.
More rational proposals would limit the insurance companies’ exposure under the FAIR Plan without putting the burden on policyholders. They include a commission to determine appropriate land use policy to address new construction in the highest risk wildfire zones, an increase in the size of policy limits for hardened projects, and a guarantee that all policyholders who harden their homes can buy insurance. These policies should be debated in the normal legislative process.
Industry Bailout Plan Based on Disastrous Florida Law
This deregulation/bailout scheme mimics Florida’s – where rate regulation is weak, insurance companies are allowed to use black box models, pass through the cost of reinsurance, and slap surcharges on all policyholders if the state’s FAIR Plan equivalent, Citizens Property Insurance, experiences shortfalls.
Homeowner premiums are 2 – 3 times higher in Florida and Citizens insures 17% of the market, compared to 3% for the FAIR Plan in California. Insurance companies have abandoned the Florida market even after the state, under Governor Ron DeSantis, bent over backwards to give in to the insurance industry’s demands.
Thanks to Proposition 103’s protections, the average premium for an “all-risk” (HO-3) home insurance policy in California is 43% less than the average premium in Florida.
|Average Premium for All Homes, HO-3||Average Premium for $500,000+ Homes, HO-3|
Source: National Association of Insurance Commissioners, “Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance Report: Data for 2020.”
Florida’s disastrous marketplace forces far more policyholders out of the private market and allows insurance companies to force policyholders to pay surcharges, as the industry’s Sacramento deal proposes.
|California home insurance||Florida home insurance|
|Regular Market||FAIR Plan||Regular Market||Citizens|
|If FAIR Plan cannot pay claims:Insurance companies pay assessment proportional to private market share||If Citizens cannot pay claims:Citizens policyholders pay assessment, then private market policyholders pay|
“Giving the insurance companies everything they wanted did not keep them in Florida, and we won’t make insurers keep their promises to Californians by following in Ron DeSantis’ footsteps,” said Carmen Balber, executive director of Consumer Watchdog.
Consumers Should Not be Forced to Bail Out Home Insurance Companies that are More Profitable in California than Across the Nation
Under Proposition 103, insurance companies have prospered even as the law has kept homeowners rates low. The insurance industry says the 2017-18 fires wiped out two decades of profits in California. In fact, over the last 20 years, home insurers earned an average 8.8% return on net worth in California, compared to 6.2% nationally. The companies collected $70.1 billion more in premiums than they reported in claims between 1991 and 2022 (not including $12.1 billion in payments utility companies made to cover wildfire losses they caused). The industry’s average annual profit on homeowners insurance transactions in California between 1997 and 2021 was four times the national average when adjusted for those utility payments.
Contrary to the industry’s assertions, insurance companies are also getting the rate increases they need in California. The Insurance Commissioner has approved, on average, 94% of the premium increases that home insurance companies applied for between 2021 and March 2023; the average requested increase was 10.88% and the average increase approved by the Commissioner was 10.23%.
The industry’s bailout proposal will require the insurance commissioner to charge consumers for unregulated reinsurance costs (illegal today under current regulations). It also requires the commissioner to speed up rate hikes without adequate justification and the full public scrutiny required by Prop 103 that has saved Californians hundreds of billions of dollars since it passed. These changes will dramatically raise home, condo and renters’ insurance rates and illegally interfere with the powers the voters gave the Insurance Commissioner. Under the California Constitution, the Legislature is barred from amending Proposition 103 unless the amendment furthers Prop. 103’s purposes.
“There are many legitimate ways to address the impact of wildfire and other extreme weather events on consumers, the business community and the insurance industry while complying with Proposition 103’s transparency and accountability requirements and without bailing out the industry. It is essential that elected officials take the time to consider the panoply of solutions before they act. California history – electricity deregulation – shows that hasty and poorly vetted proposals backed by self-interested industries end up as costly debacles for California consumers and taxpayers,” said Rosenfield.