The latest news from a Reinsurance News headline:
State Farm to pull out of 72,000 California [homeowners] insurance policies.
This from reason.com.
State Farm provides nearly 21 percent of state homeowner policies, so this is big news. Last year, it stopped writing new homeowner policies. Now it’s “non-renewing” existing homeowner policies and getting out of apartment policies entirely.
Stories about the state’s crisis du jour have seeped into the mainstream media too. Earlier this month, Newsweek reported on the exit of Texas-based American National:
The ongoing home insurance crisis in California is about to deepen as yet another company has announced its withdrawal from the state over profitability concerns.
However, the California Department of Insurance website’s top item boasts that Insurance Commissioner Ricardo Lara “protects policy holders affected by wildfires from non-renewals.”
How’s that working out for us? The state’s insurance problems have plagued wildfire-adjacent homeowners for a few years, but it’s rapidly spreading to homeowners in non-wildfire-adjacent areas. The state’s “protections” are window dressing.
Some residents have talked with their insurance agents and have agreed to pay the higher premium and be thankful for the renewal. An alternative denotes an increasing number of Californians now rely on the so-called FAIR Plan (Fair Access to Insurance Requirements), the state-created, industry-funded insurer of last resort—one that provides only barebones coverage.
However, the burdens on the FAIR Plan have become so severe it now has three times more insureds than it was designed to cover and there is open talk about what will happen if it fails. Insurance is a necessity and without a functioning insurance market, California’s economy is in peril. Yet the state’s response has been as lamebrain as its response to most other crises.
Instead of focusing on critical insurance, Gov. Gavin Newsom has invested his political energy into securing passage of a $6.4-billion mental-health measure (Proposition 1) and burnishing his reputation on the national stage.
There are some reforms, but they are just proposals (and one imposes new burdens on insurers)—and they avoid the root of the insurance problem including the bureaucratic hurdles that distort the marketplace and reduce competition. They won’t do what’s necessary—speeding up the rate-review process.
The state’s leaders are acting like this is some unexpected perfect storm, but it’s one that’s been on the horizon for several years.
As was previously reported:
California’s one-two punch—forcing companies to write risky policies while also limiting their ability to charge market rates—would leave insurers with little choice but stop writing new policies.
In its latest rate filing available on the Department of Insurance website, State Farm General Insurance Co. (the insurer’s California homeowners’ company) explained that, despite being granted a recent rate hike, its surplus is low—leaving an unacceptable level of exposure.
Obviously, insurance companies are in the business of writing insurance policies, but they can’t entertain a level of risk that could obliterate their ability to pay out claims. They can’t put the business at risk of insolvency.
State regulations have not enabled insurers to adjust pricing to reflect inflation and market conditions over time. Sure, they obviously get occasional rate bumps, but “state control has turned pricing into a Byzantine regulatory process rather than a simple business decision.”
The problem is tied to Proposition 103, the 1988 ballot measure that gave the insurance commissioner the power to approve and roll back rates.
Elected commissioners have little incentive to approve rate hikes. Consumer groups are paid to oppose rate hikes, which creates a long, complex, and antagonistic process. In most industries, companies set prices as they see fit and competition tempers the prices. Imagine if in your field you had to petition the government every time you want to adjust prices.
Final thoughts: Examples abound of what could and should be done at the state leave to solve this home insurance conundrum, however, liberalism being best likened to mental illness, California elected and appointed leadership is either short-bus simple or socio-cultural suicidal.
To wit:
One of many issues plaguing insurance rates in California is wildfire-adjacent homeownership. However, California’s current plan for Forestry and Fire Protection seems to be woefully inadequate. Please, correct me if I’m wrong.
