Could The Cure For California's Insurance Crisis Be Worse Than The Disease?

California, like Florida, is experiencing a full-blown home insurance crisis characterized by some of the nation's major insurers leaving the market because of the increasing cost of covering claims. To stop more insurers from leaving the state, California Insurance Commissioner Ricardo Lara has proposed sweeping changes that would give insurers greater flexibility to increase homeowner premiums. However, his predecessors fear the proposed cure could be worse than the disease.

California Insurance Commission Makes Huge Concessions

Lara's plan would allow the state's remaining insurers to use predictive modeling for climate-based catastrophes like wildfires as justification for raising premiums. That would be a major change in state policy because California's current insurance regulations limit insurers to using historical data on the cost of covering claims as a basis for premium increases.

The ability to use climate modeling in calculating rate increases is not the only concession Lara granted the industry. Current California law requires that any across-the-board premium increase by insurers must be approved by regulators. This requirement has always been a bitter pill to swallow for California insurers. The commissioner has also agreed to speed up the process where the insurance commission reviews proposed rate increases before approving or disapproving the rates.

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It doesn't take a genius to predict the outcome of California's new policies governing home insurance premiums. If the rate increase approval process is sped up, and the state's remaining insurers can use predictive modeling for climate-related disasters as the basis for rate increases, home insurance premiums aren't going anywhere but up. That's difficult news for prospective buyers in a state where affordable housing is already scarce.

A Home Insurance Market In Chaos

With that said, the current situation is unsustainable. So many home insurers have left the state that California's government-run FAIR plan receives thousands of new applications weekly. The FAIR plan advertises itself as an "option of last resort" on its website, but the volume of applications it's receiving means it has become a first option for too many Californians. It's no wonder that former Insurance Commissioner John Garamendi said California's market is "in chaos."

The latest domino to fall is State Farm Insurance Co., which recently announced it will cancel another 72,000 homeowner and condo policies in the state. That news comes on the heels of Allstate Corp. and Farmers Insurance limiting new policies and writing restrictions on policy renewals in 2023. Altogether, those three companies account for 40% of the state's home insurance policies.

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In their announcements explaining the decision to leave California or restrict policies, the companies cited increased costs associated with covering disaster claims on California homes, many of which are worth over a million dollars. All these factors combined to put Lara in the difficult position of trying to save the state's insurance market while also keeping premiums from skyrocketing.

Are Lara's Changes Enough To Stabilize The Market?

It may turn out to have been both a thankless and impossible task. Lara's predecessor as insurance commissioner, Dave Jones, is currently the director of the Climate Risk Initiative at the Center for Law, Energy & the Environment at UC Berkeley School of Law. He noted that Florida's insurance commission made similar concessions to home insurers regarding climate modeling, and the Sunshine State now has average insurance premiums that are triple the national average.

Florida's state insurance policy, which is also supposed to be an option of last resort, is also carrying 1 million policies. All that means that despite Lara's best efforts, California homeowners could be in for a lot more sticker shock and pain when it comes to home insurance premiums. At this point it's difficult to know which option is worse, Lara's new plan, or a continuation of the status quo.

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