By Jake Sorensen
09/21/2023
Is California teetering on the edge of an insurance market crisis? For decades, Californians have basked in the sunshine of relatively low home and auto insurance premiums compared to the rest of the country. But recent natural disasters, soaring crime rates, and a web of regulations have brought a storm to the Golden State's insurance landscape. Many of you may not be aware of the impending insurance crisis that has already arrived in California and is impacting parts of the nation.
Historical Context
Before delving into the current state of the market, let's rewind and understand the history of the insurance industry in California. In 1988, the state passed Proposition 103, officially known as "The Insurance Rate Reduction and Reform Act." This legislation aimed to regulate property and casualty insurance rates and introduced several crucial provisions:
1. Rate Regulation: Proposition 103 granted the California Department of Insurance (CDI) the authority to oversee insurance rates for various policies, including auto and homeowners' insurance. Insurance companies were required to seek CDI approval before implementing rate changes, preventing unfair hikes.
2. Rate Rollback: The law mandated insurance companies roll back their rates to 1987 levels and offer refunds to policyholders if rates were excessive. This rollback translated into significant savings for California consumers.
3. Consumer Advocacy: Proposition 103 established the Office of the Consumer Advocate within the CDI, advocating for fair and reasonable rates on behalf of the public.
4. Transparency: The law increased transparency within the insurance industry, necessitating insurance companies to disclose information about their rates, profits, and expenditures. This transparency aided regulators and consumers in comprehending rate determinations.
While consumer protection is essential, overregulation can stifle business, potentially leading to challenging situations for consumers. Insurance companies are businesses that need profitability to provide services. More choices for consumers increase the chances of finding affordable coverage tailored to individual needs. However, excessive regulation and bureaucratic delays within the CDI impede insurance production, prompting carriers to exit the state.
The California Fair Access to Insurance Requirements (Fair) Plan
Some homeowners are already familiar with the challenges of obtaining home insurance and resort to the California Fair Access to Insurance Requirements (Fair) Plan. This state-mandated program serves residents unable to secure coverage in the traditional market due to high-risk factors like wildfires. However, the Fair Plan offers limited coverage, primarily for Fire, Wind, and Hail, leaving significant gaps, such as general liability, for consumers. Annual premiums under the Fair Plan are often 3-5 times higher than traditional home insurance, making it financially burdensome. Furthermore, this program is funded by insurance companies operating in California, who share the risk based on market share.
The Perfect Storm: A Confluence of Factors
Leading up to 2020, consumers in California reveled in unbelievably low home and auto insurance premiums compared to the rest of the nation. However, this optimism was short-lived as a series of events unfolded. The COVID-19 pandemic disrupted supply chains, causing construction and automobile repair delays. Inflation and rising labor costs further strained the insurance landscape. To alleviate some consumer burden, the CDI mandated auto premium reductions and imposed a two-year moratorium on rate increases through the rate filing approval process outlined in Proposition 103. Civil unrest resulted in billions of dollars in property damage and theft, coinciding with a surge in natural disasters. Increased claims coupled with rising repair costs created a perfect storm, jeopardizing insurance company profitability.
The Role of Reinsurance
Reinsurance, often called "insurance for insurance companies," is crucial. It allows insurers to transfer some insured risk to a reinsurance company, reducing the impact of catastrophic claims and ensuring solvency. However, the reinsurance market has tightened, making it challenging for insurance companies to secure coverage. Rising costs and reduced availability are pushing insurers to reconsider their capacity (the ability to retain and support consumers).
Actions Taken by Insurance Companies
In the first quarter of 2023, the property and casualty market suffered over $7 billion in losses. Insurance companies realize they cannot sustain such losses. Homeowners' insurance has been hit the hardest. Presently, 99% of insurers writing home insurance in California have stopped accepting new business. This poses a predicament for new homebuyers and strains smaller carriers still accepting new business, resulting in prolonged wait times and delays in underwriting disputes. Major carriers like State Farm and Allstate have also ceased taking on new clients. Berkshire Hathaway's subsidiary, AmGaurd, is exiting the state and non-renewing 50,000 active policies in California.
Challenges in the Auto Insurance Market
Auto insurance is also feeling the strain. While Proposition 103 mandates that insurance carriers cannot deny good drivers, many have introduced hurdles. Waiting periods, stringent document requirements, and elevated underwriting guidelines have become the norm. All carriers are tightening their underwriting criteria, sometimes declining coverage based on the type of vehicle, like Kia or Hyundai, due to increased auto theft.
Strategies to Mitigate Risk
Large and small insurance companies are seeking ways to reduce risk exposure until they can achieve profitability. This includes not accepting new business, strengthening underwriting guidelines, non-renewing customers for minor violations, and raising rates. While insurers file rate increases with the CDI, the traditionally sluggish approval process, exacerbated by increased filings, may delay relief by at least another year or more.
Lobbying for Urgent Action
Lobbyists and representatives from large insurance companies are lobbying in Sacramento, seeking expedited rate filings. Their intent is not greed but a desperate plea to safeguard the insurance market's existence in California. So far, their pleas have been disregarded, with the CDI showing no urgency.
Impact on Consumers and Related Markets
Customers with insurers that remain in California but no longer accept new business will likely see significant premium hikes. Rate filings have already indicated increases of 30% to 50% in both home and auto insurance. Expectations are that premiums could more than double over the next 1-2 years. Moving poses challenges as carriers may not rewrite home insurance policies, potentially eliminating bundle discounts.
Broader Implications
The crisis extends beyond consumers and insurance professionals to the real estate and lending markets. Current lending requirements demand home insurance policies for closing escrow. Rising insurance premiums, coupled with escalating interest rates, are negatively affecting buyers' purchasing power, potentially stalling the housing market.
A Call to Action
While insurance may not be the most exciting topic, its role in our financial security cannot be understated. Waiting for a complete crisis is unnecessary. Rate increases are inevitable, but the industry should not collapse, leaving consumers without options. The CDI must recognize the urgency and work with insurance companies to restore business.
Your Voice Matters
To effect change, engage your local state representatives, share your experiences, and educate your network about the issue. The insurance commissioner is elected; use your voice at the ballot box. California's policies on crime, the environment, economics, and health affect the insurance industry and your financial well-being. Please don't wait until it's too late; act now to secure California's insurance future.
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