New Regulations Aimed at ‘Easing’ California’s Property Insurance Market Crisis

With the California commercial property and homeowner’s insurance markets increasingly stressed with fewer and fewer insurers willing to write policies in the Golden State, the insurance commissioner has floated a plan aimed at easing the crisis.

The main thrust of the new proposal is to make it easier for insurers to get their rate-hike requests approved, efforts that have been stifled due to regulations that have been on the books since the early 1990s.

Under current rules, insurers are limited in the number of factors they can use to justify rate increases, which has constrained them from being able to ask for hikes that are adequate to cover their potential liabilities.

The proposed rule changes, along with others that are coming this year, are aimed at luring insurers back into the marketplace after one carrier after another has either:

• Stopped writing commercial property and homeowner’s insurance in the state altogether,
• Ceased accepting new policies, or
• Severely restricted how many policies they are willing to write in California, and where.

For example, all three of the state’s largest homeowner’s insurers — State Farm, Farmer’s and Allstate — have stopped issuing new policies in the state and have been non-renewing hundreds of thousands of policies.

Many insurers have also gotten pickier about homes they are willing to cover, with many setting limits on the age of a home and taking into consideration whether the homeowner has filed any insurance claims in the last three years.

A number of factors have converged to create the property availability crisis that California now finds itself in, including (but not limited to):

• Massive wildfire insurance claim losses, which have increased exponentially as wildfires have grown more destructive and in number.
• The cost of rebuilding, which has surged as construction and material costs have exploded.
• The rising cost of reinsurance, which carriers buy to cover themselves if they have catastrophic claims.

With these factors and more piling up, insurers have been unable to get the rate increases they need to stop losing money due to state laws that limit the factors they are allowed to consider when asking for rate hikes.

The department’s plan

Insurance Commissioner Ricardo Lara announced last fall a multi-pronged plan that includes planned legislation and regulations to address the problems that are causing insurers to pull back from California.

The newly proposed regulations, one of those prongs, would allow insurers to use catastrophe models to better predict insurance rates for wildfire, terrorism and flooding. Currently, they are only allowed to use historical claims data, which is backward-looking and does not account for the surge in risk and costs that’s occurred during the last five to 10 years.

As well, they are not allowed to consider the growing risk caused by climate change, or wildfire risk mitigation measures taken by communities or regionally as a result of local, state and federal investments.

Mark Sektnan, vice president for state government relations for the American Property Casualty Insurance Association, said this change would go a long way towards addressing the insurance crisis in the state.

“As Californians grapple with record inflation and become increasingly vulnerable to climate-driven extreme weather, including catastrophic wildfires, this is a critically needed tool to help identify future risks more accurately and set rates that reflect our new reality,” he said. “More accurate ratemaking will help restore balance to the insurance market and ensure all Californians have access to the coverage they need.”

The trade-off for consumers will be the likelihood of more insurers coming back into the market to write commercial property and homeowner’s insurance in exchange for them asking for large rate hikes.

The latest proposed regulation follows another that was introduced in late February that would speed up approvals of rate increase requests. These can sometimes take years if the department asks for more supporting documentation, which can reset the rate approval process, delaying final approval. Some insurers have waited more than two years to get their rate hikes even considered.

Current rules “lack clarity and fail to specify the exact materials and information required in a complete rate filing application given the change in times and increased complexity of filing,” according to the Department of Insurance.

This proposed rule codifies clearer instructions for what supporting documentation insurers must submit when filing for rate increases.

The takeaway

A public hearing on the proposed catastrophe-modeling regulations will be held on April 23 and it’s the department’s plan to get these new rules implemented by the end of 2024, along with the rules on speeding up rate increase requests.

In the coming months, the department plans to propose additional regulations as well as legislation to get insurers to write business in the state again.

If enacted, it’s hoped that the various planned changes will coax more insurers to start writing business in California again and provide some relief to homeowners and businesses in the state.

We’ll keep you posted on this story.