Los Angeles, CA — Consumer Watchdog today warned that the new draft reinsurance regulation proposed by Insurance Commissioner Ricardo Lara would allow insurance companies to drive up home insurance rates by 40% to 50% without offering a substantive expansion in wildfire coverage. There is no opportunity for public comment, as it was issued on an emergency basis.
The Department offered no cost analysis of the plan for its impact on consumers and there is no real commitment to increase wildfire coverage for consumers. In exchange for the rate hikes, the plan, like Lara’s climate modeling regulation, allows companies to increase coverage in wildfire distressed areas by only 5% after two years, rather than the 85% saturation the Commissioner had promised.
“This plan could drive the price of home insurance up by 40%” said Jamie Court, president of Consumer Watchdog. “Tellingly the commissioner did not do a cost impact analysis of his plan on consumers. That’s because this plan is of the insurance industry, by the insurance industry, and for the industry. The Commissioner has left no opportunity for public comment on the regulation before it is final by issuing it on an emergency basis. It’s the worst type of power grab.”
The plan was drafted under contract by an industry consultant for Milliman, according to a contract obtained under the Public Records Act. In addition, it allows companies to raise rates based on the volatile catastrophe bond market – a plan presented by the Department in August.
The Commissioner has moved forward on this regulation without providing consumers clarity on what the proposal will mean for prices. The Department of Insurance has done no analysis estimating the proposal’s home insurance rate impact.
Examples from other states make clear that consumers should expect massive double-digit rate increases were this regulation to take effect.
Actuary and consumer advocate Robert J Hunter provided testimony to the legislature the last time a similar proposal was floated as legislation that allowing insurers to charge consumers for reinsurance would increase premiums by 40% overnight, and cause periodic reinsurance-driven spikes in premiums of 50% or more. He also noted Florida’s experience, where the cost of reinsurance accounted for 40-50% of premiums in 2004 and 2005, according to a report from Florida insurance regulators. Hunter is the former Federal Insurance Administrator under Presidents Ford and Carter, a former Texas Insurance Commissioner and the former Director of Insurance at the Consumer Federation of America,
According to documents filed by the insurance industry in a current North Carolina homeowners rate filing, adding the net cost of reinsurance increases the rate by 46%.
And a June 2024 study that used mortgage data to compare insurance premiums across states found an average 33% increase in premiums due to the pass-through of reinsurance costs in states with the most disaster risk.
And that is an average number, so the burden on homeowners in fire areas already seeing 50 or 100 or 200% increases will be even higher.
Lara said he wanted to allow companies to be able to raise rates based on their reinsurance costs, but the plan allows the companies wide latitude to peg the increase to the volatile catastrophe bond market. In August, the Department presented a plan to tie the provision for reinsurance to the catastrophe bond market.
“How can an insurance rate be regulated when it is tied to a volatile unregulated catastrophe bond market that can be manipulated?” asked Court.
The plan, drafted under contract by an industry consultant from Milliman, allows companies to increase their premiums based on a “net cost of reinsurance” calculation, which could be based on a catastrophe bond price analysis, as proposed in the Department’s original presentation. Catastrophe bonds are securities, and like any securities prices are impacted not only by the perceived value of the security sold but also by the market and investor sentiment – in this case the investor’s gamble that the insurer will not experience a covered extreme weather event and the investor will reap market-beating returns.
The market for catastrophe bonds is not California specific, it is international, and covers every kind of peril, from hurricanes to fires to tsunamis. That means the regulation is not limiting what California homeowners will be charged to “California-only reinsurance costs,” as the Commissioner has promised.
The proposal was drafted by an industry consultant for Milliman, Nancy Watkins, who has served as expert witness for the industry in cases asking for higher rates and in an ongoing case justifying USAA’s discriminatory pricing, according to the contract obtained from the Department of Insurance. It is based on one paper written twenty years ago by another Milliman consultant and has not been tried in other states.
Bloomberg reports that investors in the cat bond market made a 20% return in 2023, and an average 15% return so far this year, in part because the terms of many cat bonds were so favorable to investors they did not pay out despite significant catastrophic events. Jamaica’s cat bond, for example, was not triggered after Hurricane Beryl’s destruction.
There is a good reason the Department of Insurance has never allowed home insurance companies to pass through reinsurance spending to consumers: reinsurance is unregulated through the prior-approval process. As former Insurance Commissioner Dave Jones said: “Often, insurers purchase their reinsurance coverage from non-admitted carriers and from their own affiliates for what may or may not be market pricing. To allow insurers to load unregulated reinsurance costs into the consumer’s premium rate potentially undermines the entire prior-approval process and would increase costs for all insurance consumers.”
