California’s Lara & the State’s Desperately Needed Insurance Reforms

All eyes are on California’s insurance crisis as California Insurance Commissioner Ricardo Lara pushes his newly announced insurance reform package. He has titled the reforms, the Sustainable Insurance Strategy.

Last week Lara held the second of what he calls a “catastrophe modeling and insurance workshop.” The meeting was with what he calls a “diverse number of stakeholders and experts.”

The point is to figure out ow to fix California’s insurance crisis and Lara called the meeting a huge success.

In researching this story, the Weekly Industry News editor read lots of comments on the reforms from agents and agent groups. Insurers — the editor found — aren’t saying much.

One of our Weekly Industry News sources attended the meeting and talked with us about what happened. The source asked to remain anonymous and we have agreed.

“The general consensus among insurers is that Lara needs to prove he means what he says about improving the CA market,” our source said. “The companies are desperate for reforms, and a big compromise that was negotiated during the session fell apart late in the process, so this is the last best hope to repair a damaged market. If Lara is sincere — and the same for [Governor Gavin] Newsom, there could be some helpful changes.”

PIA Western Alliance Executive Vice President Kim Legato agrees and told Weekly Industry News that the association will take a wait and see stance.

“The PIA Western Alliance is hopeful for meaningful change and will continue to monitor the process,” she said.

Though his department offered no details about the meeting, or what was said and done, for his part, Lara was pleased with the outcome.

“The Department of Insurance remains dedicated to achieving the goals outlined in my Sustainable Insurance Strategy,” Lara said. “We will continue to assess the insights gained from today’s workshop and work diligently to incorporate these perspectives into our ongoing rulemaking efforts.”

At a news conference after the meeting, Lara said the road ahead will not be easy.

“Modernizing our insurance market is not going to be easy or happen overnight. We are in really uncharted territory and we must make difficult choices when the world is changing rapidly,” Lara said.

The biggest issue for insurance companies — says Roger Arnemann of the data and analytics service company, Guidewire — is Lara’s proposal to require insurers to cover all of California and write no less than 85% of their marketshare in the state’s high wildfire risk areas.

Arnemann then outlined what he means.

If a company insures 20 homes in an area with 100 homes, it will be required to write policies for 17 of them. If all insurers are pushing to write policies in that area, the competition may keep individual insurers from being able to meet Lara’s 85% goal.

Also, Lara’s 85% edict means insurers can set rates at catastrophe model levels that reflect actual reinsurance costs and higher risks.

“In the at-risk portions of California, there are a finite number of homes and businesses to be insured. If every insurer is trying to represent its proportion within that fixed body — if that does become a legal requirement — that might not necessarily be easy to achieve,” Arnemann said.

But like most insurers and other interested parties, Arenemann is talking wait and see attitude.

“If insurers can price accurately, and more and more insurers do that, then ultimately there will be increased competition,” he said. “And that completion should keep rates in an area that is appropriate to the actual risk underlying the policy.”

This is a critical part of Lara’s plan. He must allow insurers to price policies in a way that they can actually afford to write one. The Triple-I did an analysis of the state’s homeowners insurance underwriting and found from 2013 to 2022, insurers had an average combined ratio of 108.1.

That’s high and part of why it’s so high has to do with two years in that decade where the combined ratio of claims and expenses went off the charts and more than doubled that 108.1.

In 2017 it was 241.9 and in 2018 the combined ratio was 213.4.

“To accurately underwrite and price coverage, insurers must be able to set premium rates prospectively,” said the report. “One or two years that include major catastrophes can wipe out several years of underwriting profits — thereby contributing to the depletion of policyholder surplus if rates are not raised.”

California’s Proposition 103 gave the insurance commissioner and the California Department of Insurance a lot of power over rates and tied into knots the ability of insurers to price insurance profitably. Thus, in the last few months, many insurers have left California’s homeowners insurance market.

However, the Triple-I report says they really don’t want to leave but just can’t afford to stay.

“This is a large and potentially profitable market in which insurers want to do business. To make that possible in light of ongoing wildfire trends — as well as events like early 2023’s anomalous rains and, more recently, Hurricane Hilary — the state needs to continue making investments that reduce risk,” the report concluded. “It also needs to update its regulatory regime to allow accurate, prospective pricing.”

Mark Robinson is the founder of the law firm and regulatory practice group, Michelman & Robinson. He put Lara’s proposals in perspective and though, so far, insurers aren’t saying anything, it likely is how they’re feeling.

“The devil is in the details,” he said. “These are more broad strokes and concepts, so what are the new regulations going to look like?” he said.

Robinson then put it in an even more detailed perspective and asked how the state will define a high wildfire risk area.

“How is that going to be defined? Is it by county, such as Los Angeles County or Marin County, or is it going to be very specific to historical fire areas?” he said. “I think that’s one factor that insurance companies are going to be interested in knowing. What will be of interest is how it’s going to be regulated and what the requirements are so that it’s fair to consumers and allows for a reasonable, fair rate of return to carriers.”

Source link: California Department of Insurance —

Source link: —

Source link: Insurance Business America —

Source link: Insurance Business America —

About PIA Western Alliance

The Professional Insurance Agents Western Alliance is a membership organization promoting and enhancing the success of independent agencies seeking to grow, learn and be heard within the industry.


More Industry News