California Insurance Commissioner Ricardo Lara will have to choose whether he wants insurers to charge higher rates or to stop writing homeowners insurance in fire-prone areas, an industry representative said following new wildfire directives announced by the commissioner.
Lara on Thursday addressed a reported lack of insurance availability in wildfire-prone areas of the state by issuing a mandatory one-year moratorium on insurance companies non-renewing policyholders in certain areas affected by wildfires. The moratorium covers 800,000 homes in ZIP codes adjacent to recent wildfire disasters under Senate Bill 824, also known as the Wildfire Safety and Recovery Act.
He also called on insurance companies to voluntarily cease all non-renewals related to wildfire risk statewide until Dec. 5, 2020, in the wake of Gov. Gavin Newsom’s declaration of statewide emergency due to fires and extreme weather conditions.
Rex Frazier, president of the Personal Insurance Federation of California, on Friday said the California Department of Insurance and the previous commissioner have been ordering homeowners insurance rate decreases for nearly five years, putting average premiums near the bottom of the U.S. Member companies of the PIFC include Farmers, Liberty Mutual, Mercury, Nationwide and Progressive.
For 2016, the latest data available from the National Association of Insurance Commissioners, the average HO-3 premium in California was $922, nearly $200 below the national average. The state was ranked 32nd in the nation, with rates having gone up 8.1% in 10 years compared with a 45% average increase nationally during that period, the NAIC data shows.
“(The CDI) is overseeing a rating regime where California lags behind inflation and the rest of county,” Frazier said.
The CDI, which under Proposition 103 can adjust homeowners and auto insurance rates, has kept premiums low, forcing insurers to look more carefully at where they are writing insurance, thereby reducing availability in risky areas, according to Frazier.
He noted that insurers paid out more than they took in during two consecutive years in which massive wildfires plagued the state.
In 2017, insurers paid out more than $2 for every $1 in premiums and in 2018 they paid out $1.70 for every $1 premium, according to figures from the CDI. Losses for 2017 and 2018 combined for the state’s homeowners insurers reached $20 billion, according to the figures from Milliman.
“You can see the precipitous jump in those two years,” Frazier said.
The CDI began a series of downward rate decisions about five years ago following several years of underwriting profitability from the state’s homeowners insurance industry, Frazier said.
Data from Milliman shows cumulative profits for California homeowners insurers from 1991 to 2016 hit $10.2 billion, much of that coming from 2003 to 2015. For several years during that period the state was in the midst of a severe drought, and didn’t experience many wildfires with less fuel to burn, Fraizer said.
Then, around 2015, with industry-wide underwriting showing profitability, the CDI began ordering rate drops for big insurers. In 2016, for example, Insurance Commissioner Dave Jones denied a request from State Farm for a 6.9% rate increase request and instead ordered a retroactive reduction of its dwelling insurance rates by an average of 7%.
“As early as 2015 the Department of Insurance hadn’t been granting rate increases and they stared to push rates down,” Frazier said. “Then they turn around and wonder why there’s a lack of availability in high risk areas when they have a role in creating that. When you control price, it’s restricting availability.”
The CDI has been reached out to for comment for this article.
Lara on Thursday said his action comes amid growing evidence that homeowner insurance has becoming more difficult for Californians to obtain from traditional markets, forcing them into more expensive, less comprehensive options like the FAIR Plan, the state’s property insurer of last resort.
In August, the CDI released data revealing insurance companies are dropping an increasing number of residents in areas with high wildfire risk. The number of non-renewals rose by more than 10% last year in seven counties from San Diego to Sierra, according to the CDI.
The number of consumers covered by the FAIR Plan has risen in areas with high wildfire risk. According to the U.S. Forest Service, more than 3.6 million California households are located in the wildland urban interface where wildfires are most likely to occur.
“I’m hearing the same story again and again,” Lara said during Thursday’s press conference to announce the moratorium. “People have been dropped by their insurance companies after decades of premium payments and coverage.”
Lara last month decreed that no later than June 1, 2020, the FAIR Plan will expand its coverage to offer a full homeowners policy in addition to its current limited fire-only policy.
By April 1, 2020, plans are for the FAIR Plan to increase the dwelling fire combined policy limit from $1.5 million to $3 million. By February 1, 2020, the FAIR Plan will offer a monthly payment plan without fees and allow people to pay by credit card or electronic funds transfer without fees, according to CDI.
“We want the FAIR plan to be a robust policy,” Lara said during Thursday’s press conference. “We know the FAIR plan no longer meets the current needs of fair plan.”
The insurance industry, including FAIR Plan officials, have not fully embraced Lara’s plan. FAIR Plan officials have warned mandating the plan to offer HO-3 coverage, in addition to its current dwelling fire-only coverage, could have unintended consequences and ultimately hurt consumers.
FAIR Plan officials have largely avoided commenting on Lara’s orders.
However, Anneliese Jivan, president of the FAIR Plan Association, sent a letter to Lara on Thursday calling attention to their concerns about the HO-3 coverage, stating that it would “lead to significant adverse unintended consequences that could afflict the very same FAIR Plan policyholders that the CD’ aims to help with its HO-3 Order.”
“Because FAIR Plan rates are required to be adequate to cover expected losses, an HO-3 policy offered by the FAIR Plan would inevitably be more expensive for homeowners than what they can currently purchase, namely a FAIR Plan Dwelling policy and a Difference in Conditions (DIC) policy through the voluntary market,” the letter states. “Additionally, the voluntary market has the infrastructure and expertise to support the coverages in a DIC policy. Water and liability claims are inherently complex and require specialized claims handling and legal expertise, none of which the FAIR Plan has. The voluntary market, on the other hand, has decades of expertise in these claims.”
Frazier summed up his feelings about a state-wide moratorium using an auto insurance analogy in which the insurance industry believed it was insuring a pool of conservative 60-year-old drivers, when in fact, thanks to years of severe wildfires, which some believe to be due to climate change, the industry is actually insuring a bunch of 16-year-old drivers.
The choice facing the industry then is to either increase prices or reduce the number of 16-year-old drivers, he said.
“If the CDI doesn’t start allowing rate increases, then the only reaction they’re going to get is companies trying to reduce the risk,” Frazier said. “It’s their choice as to how the market will move forward.”
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