California Homeowners Facing Insurance Rate Hikes

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a state parched by a three-year drought, wildfires are at least partly
to blame for the price increases, industry officials and even some
consumer advocates agree.

Sacramento. CA — As
California heads into another season of wildfires that have been
growing more frequent and more ferocious, homeowners are facing higher
prices to insure their property.

In the last year, some big
insurance companies have won approvals from regulators for premium
hikes ranging from 4% to 7%. And a round of requests for similar
increases has been submitted to the state insurance commissioner.

a state parched by a three-year drought, wildfires are at least partly
to blame for the price increases, industry officials and even some
consumer advocates agree.

"We seem to be having year after year
of [major wildfire] events, when before they occurred every six or
seven years," said Sam Sorich, president of the California Assn. of
Insurance Cos., a lobbying group in Sacramento.

But Amy Bach,
executive director of the San Francisco-based consumer group United
Policyholders, said she was more concerned about the quality of the
coverage than its cost. She said more fire victims could find that they
didn’t have enough coverage to pay the entire cost of rebuilding their

"My big concern is that the insurance companies are going
to use these fires as an excuse to increase their rates, and the
underinsurance problem is going to be the same as it ever was," Bach
said. "People are going to be paying more for less."

With an
estimated 15 million homes statewide, even a tremendously destructive
wildfire like the blaze that destroyed 3,000 San Diego homes in 2003
shouldn’t cause a massive surge in the cost of insuring a home, experts

In addition, rate increases, which must be approved by
the state Department of Insurance, are based on three years of loss
experience, delaying the effect on premiums of the fires that occur in
any one year.

The dramatic images of firestorms now sweeping
through the San Gabriel Mountains produce fear and dread "but don’t
make for any actuarial implication," said Douglas Heller, executive
director of Consumer Watchdog, a Santa Monica group. "We’re talking
about not even 1% of homes."

But the cumulative effect of six
years of more frequent, larger and costlier fires in built-up parts of
once rural extended suburbs is bound to show up in homeowners’
insurance bills, industry officials say.

Late last year,
California Insurance Commissioner Steve Poizner approved a 6.9%
increase in homeowner insurance for the state’s biggest insurer, State
Farm Mutual, and a 4.1% hike for third-ranked Farmers Group Inc.

A request for a 6.9% increase at No. 2 Allstate Corp. is pending.

year, the commissioner is reviewing requests for similar-sized rate
jumps from State Farm, Farmers, Hartford, Travelers and a number of
smaller companies.

A spokesman for Poizner characterized the
premium increases that he had approved as negligible compared with a
series of rate cuts that began in 2006 under former Insurance
Commissioner John Garamendi (now California’s lieutenant governor) and
continued into Poizner’s tenure, which started in 2007.

For example, premiums fell 18% at Farmers in 2006, 20% at State Farm in 2007 and 28% at Allstate in mid-2008.

Reductions approved by Poizner saved policyholders an estimated $700 million, the Department of Insurance said.

But even as insurers were rolling back rates, pressures were building to raise them again.

first wave of wildfires early this decade, combined with the housing
boom, led to greater-than-expected increases in rebuilding costs, said
Bob Deverereux, a State Farm spokesman.

Faced with potentially
catastrophic losses, Allstate opted in 2007 to limit its risk by no
longer seeking new homeowner insurance customers in California,
spokesman Peter DeMarco said.

Although California for now
remains a competitive market for homeowner insurance, consumer advocate
Bach is concerned that more companies could follow Allstate’s lead and
partially or completely pull out of the state. That’s what happened in
Florida after a rash of powerful hurricanes.

"I’m worried that
people are going to have fewer choices," Bach said, and be forced into
a state-backed, insurer-of-last-resort plan that provides extremely
limited coverage.

A smaller insurance market with poor coverage
could exacerbate the underinsurance problem after fires that wipe out
entire neighborhoods, Bach said.

Last year, Poizner proposed
legislation to encourage insurers and policyholders to ensure that
dwellings have enough coverage to pay for their reconstruction.

The bill, Poizner’s spokesman said, failed to gain traction and was dropped.

Contact the author at: [email protected]

Consumer Watchdog
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