Lara’s Deal with Insurance Industry Does Nothing for Consumers and Does Not Address Climate Change

Los Angeles, CA – Insurance Commissioner Lara’s behind-closed-doors deal will allow the insurance industry to raise home insurance premiums for the 8.7 million Californians who insure their homes. But it does not guarantee that people who need coverage will be able to get it, nor does it do anything to reduce the risk of homes burning in California, Consumer Watchdog said today.
 
Lara announced last Thursday that he would allow insurance companies to skirt protections against price-gouging under California law, and in exchange insurance companies would start selling property insurance policies to more customers in high-risk areas. Insurance companies have publicly embraced the deal, but none have committed publicly to meet ironclad new sales benchmarks, much less the general threshold specified by Commissioner Lara, and no written agreement has been released. Even if insurers do expand offers of coverage, the new increases in premiums will make coverage unaffordable for those people. 
 
While insurance companies have blamed climate change for their demand for higher insurance premiums, raising rates won’t do anything to address the fact that builders have carte blanche to continue building in high-risk wildfire areas.  Consumer Watchdog has recommended establishment of a state land use commission to address this, and that insurance companies be required to insure all homeowners who harden their homes. In addition, insurers should be required to stop their contributions to climate change through underwriting and investing in fossil fuel projects. 
 
Rules finalized last year require insurance companies to offer discounts to homeowners who protect their homes from fire. However, the discounts that insurers began proposing in April have yet to be approved for implementation by the Department of Insurance. 
 
“Commissioner Lara sold out Californians in exchange for a ‘promise,’ negotiated behind closed doors, that the insurance industry will start behaving itself once it gets the go-ahead to charge homeowners and renters hundreds or even thousands of dollars more every year,” said Harvey Rosenfield, the author of Proposition 103. 
 
“The insurance industry has shifted all of the costs of climate change onto homeowners, by non-renewing policies, increasing premiums, and delaying and denying claims. Now Commissioner Lara wants to give them private risk models to unjustifiably manipulate rates even higher. But nothing in his deal with the industry would make Californians’ homes less likely to burn. Insurers have to be held to task for contributing to climate change by insuring and investing in the fossil fuel industry,” said Carmen Balber, executive director of Consumer Watchdog.
 
Lara Targets Transparency, Accountability and Fairness Required by Voters
 
Invoking the threat of climate change, Lara presented his plan as a series of vague bullet points loaded with references to “sustainability,” “modernization,” “balance” and “transparency.” 

Here’s how to read between the lines of the announcement:
 
• Lara said he will “expedite” changes in existing rules to allow insurance companies to use algorithms and Artificial Intelligence models to determine how much homeowners and renters will pay. These tools are untested, inaccurate, often deeply biased, and are marketed by Wall Street firms. Proposition 103 requires all such rate setting methods to be open to public scrutiny as part of the public rate setting process. But the insurance industry and Wall Street firms insist they will not make their models public. This secrecy is guaranteed to lead to higher premiums. Consumer Watchdog and other consumer organizations support the creation of a public model that will comply with Prop. 103’s transparency requirements.  
 
• In another concession to one of the insurance industry’s key demands, Lara said he will “explore” allowing insurance companies to force their policyholders to pay for reinsurance coverage bought on the global marketplace, which is unregulated and subject to massive swings in response to events anywhere in the world. Experts say that would increase premiums by 30-50% overnight. Lara seemed to acknowledge that danger, saying that he would decide what portion of a reinsurance policy premium could be attributable to California risks. Even if any such allocation were possible, it would inevitably boost prices in California.
 
• California law requires insurance companies to apply for rate increases before they take effect. They must open their books to public scrutiny and prove they need a rate increase; they are permitted to charge enough to cover projected claims, reasonable expenses and earn a fair profit. Insurance companies have bitterly resisted these requirements since they took effect. In his statement, Lara said he would “improve” and “reform” his agency’s review of rate applications, euphemisms for the industry’s goal of eliminating thorough examination of proposed rate changes.  Especially given Lara’s statement that he will allow the use of algorithms and reinsurance pass-throughs, reduced scrutiny of rates will result in unjustified rates and higher prices for consumers.
 
• Knowing that even an elected insurance commissioner might favor the industry over consumers, the voters authorized consumers to independently review and challenge proposed rate increases by hiring their own actuaries, lawyers and experts to go head to head with the industry’s lobbyists and experts. Insurance companies despise this crucial safeguard, which is unique to California. Lara took up insurers’ rallying cry when he announced that as part of the deal he would undertake “intervenor reform.” Consumer Watchdog’s challenges to excessive rates on behalf of consumers have saved an estimated $4.6 billion for California homeowners, renters, motorists and small businesses over the last 21 years. Restrictions on the public’s ability to challenge unjustified rate increases will lead to major premium hikes.
 
No Quid for the Quo: Secret Agreement with Industry to Sell New Policies 
 
In exchange for making changes that allow insurance companies to raise rates, Lara said he had “commitments from insurance companies to cover all parts of California by writing no less than 85% of their statewide market share in high wildfire risk communities.” But he did not provide the agreement or any further specifics. And none of the insurance companies and lobbying organizations that have been pressing for the rollback in consumer rights have made any mention of the promised quid pro quo, much less confirmed the details of their alleged “commitment.” Lara’s press release featured quotes from various business groups but, conspicuously, no insurance companies. 
 
Even if insurers made such a commitment, and assuming that it’s not riddled with loopholes, Consumer Watchdog noted that raising rates will make it harder, not easier, for Californians who live in high-risk communities to afford coverage. If insurance is unaffordable, companies will not be able to meet their 85% target, leaving consumers with higher rates and decreased, not expanded, coverage. 
 
What’s Not in the Plan
 
• Last fall Commissioner Lara finalized long-awaited rules requiring insurers to offer discounts to consumers who harden their homes against fires. Insurers began filing for approval of those discounts in April. However, review of these mitigation discounts has been sidelined at the Department of Insurance for months as the agency focuses on speeding through approvals of rate increases instead. Commissioner Lara’s announcement said nothing about expediting review and approval of the one thing that could, if done right, reduce homeowners’ premiums today.
 
• Conspicuously absent is any requirement that insurance companies reduce their own contributions to climate change. Insurance companies in California insure the fossil fuel companies whose activities are to blame for the worsening climate. California insurers also held $536 billion in investments in fossil fuel companies in 2019. Nothing in Commissioner Lara’s deal with the industry requires them to commit to rolling back their investments or underwriting in the fossil fuel industry.
 
What’s Next
 
California law provides strong public protections against rogue government agencies captured by the industry they are supposed to regulate. Every agency is required to follow specific procedures when changing or adopting new regulations. State agencies must notify the public of proposed regulations; hold public hearings and allow the public extensive opportunity to comment on them. Lara estimated he would complete this process by December 2024. Additionally, any regulations adopted by the Commissioner must be consistent with Proposition 103. Proposition 103 authorizes consumers to go to court to make sure its protections are properly enforced and obeyed by insurance companies and the Commissioner.