An executive order signed last week by Gov. Gavin Newsom to try and stabilize the straining California’s property and casualty insurance market and lure reluctant insurers back to the state contained some long sought-after industry provisions but it’s too soon to say it will meet its goals.
Three main components of the order, which was immediately embraced by the state’s insurance commissioner, essentially will allow insurers to consider future climate risks when calculating their rates, something that had been prohibited. It also allows for reinsurance costs to be included in the rate change calculations that can be passed on to consumers. In return for those concessions, the department of insurance will require carriers to cover homeowners in wildfire-prone parts of the state at 85% of their statewide coverage. For example, if a company provides 10% of the homeowner polices across California, they would be required to provide 8.5% of the coverage in “at-risk” areas.
Several major insurance companies, representing more than 60% of the P&C market, had abandoned the state or reduced coverage in California because of the increasing wildfire risks. Both State Farm and Allstate said they would not issue new policies while Farmers capped the number of new homeowners policies each month, severely reducing the options for homeowners in high-risk areas. No word from them yet if the executive order will change their decisions.
“These proposals to permit insurers to price catastrophe risk with forward-looking projections will be a game changer in improving market conditions,” said Roger Arnemann, general manager of Guidewire Analytics, an insurance data research and software company. “The current requirements that relied solely on historical data were outdated in a time when weather and natural catastrophe events are changing rapidly.”
Despite current challenges, the state of California is highly insurable, Arnemann believes, provided the right regulations are in place – and the right risk analytics are employed.
Guidewire HazardHub data shows that more than 90% of the property damage in California is concentrated in just 10% of the state. Homes in these areas are 50 times more likely to suffer wildfire damage. With the right regulatory structure and the right data and risk analytics, California’s insurers can more accurately identify, price, and account for risk at the individual property level and the portfolio level, Arnemann said.
According to Guidewire’s data, with an average of 8,273 wildfires per year, California is the state most prone to wildfire risk. Over the past decade, the state has seen an average of 933,000 acres burned yearly by wildfires. California is the nation’s largest P&C market with more than $11 billion in homeowners and fire insurance premiums written.
“The technology and data exist to examine over thirty data elements correlated with higher wildfire risk – and to map and define that risk at the exact property address level,” said Arnemann.
Calif. Proposition 103 contributed to ‘crisis’
The state’s 35-year-old Proposition 103 is largely blamed for leaving the state unable to keep pace with national trends and product innovations.
A new white paper by International Center for Law & Economics said 1988’s Prop 103 rating system, which was intended to protect consumers from arbitrary insurance rates and encourage a competitive marketplace, was “slow, imprecise, inflexible, unpredictable,” and was of questionable value to the state’s unique rate-intervenor system.
“Prop 103’s suppression of property-insurance rates in the private market has contributed to an availability crisis and the shunting of policyholders into the surplus-lines market and the California FAIR Plan, both of which will inevitably have to raise rates accordingly to be able to meet their obligations,” the ICLE authors wrote. “Prop 103 has created an insurance market that struggles to work efficiently even in the best of times and is virtually impossible to sustain in periods of acute stress.”
Ricardo Lara, the state’s insurance commissioner, conceded as much in a press conference last Thursday in which he praised “emergency regulatory action” to address the declining options for California home and business owners.
Insurance commissioner cites current issues
“The current regulatory framework does not meet our needs,” Lara said. “Can consumers get the insurance they need? Can they get it today? And the answer, in all honesty, is no.”
But some are skeptical the new revisions will achieve their goals and sit well with consumers. Moreover, there isn’t enough hazard mitigation measures in the new rules, they said. Although it could have been worse.
“My reaction to Lara’s proposal is that a tradeoff of expanded coverage for higher rates is in my opinion preferable to the outlines of the deal that was reportedly being negotiated by Lara in the final weeks of the legislature,” said Jordan Haedtler, a climate financial policy consultant. “It seems like a very precarious moment to statutorily weaken Prop 103 and institute a charge on all California policyholders.”
Haedtler says he believes the Legislature will have to go back to the drawing board next year.
“Hopefully they’ll pursue a publicly inclusive process is for legislation that includes regulatory reforms like inclusion of wildfire risk in the formula for capital requirements; stronger incentives for homeowners to adopt climate resilience/hazard mitigation measures; and better transparency in the models that Lara’s proposal contemplates authorizing,” he said.
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at firstname.lastname@example.org.
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