Gov. Gavin Newsom leaned into California’s home insurance market meltdown with an executive order Thursday urging the state’s elected commissioner to speed approval of rate increases and let insurers base requested hikes on factors posed by increasing risks of extreme weather and wildfires fueled by climate change.
Consumer advocates have long opposed the overhaul, but insurance companies say it is key to making coverage more accessible.
“It is critical that California’s insurance market works to protect homes and businesses in every corner of our state,” Newsom said in a statement announcing the order. “A balanced approach that will help maintain fair prices and protections for Californians is essential.”
Industry representatives said the order is an important step in averting collapse of the state’s insurance market due to losses from recent wildfires and other disasters and state regulations that make it hard to quickly raise rates to account for expected future risk from climate change.
“It is painfully clear the current system is not working properly,” said Rex Frazier, president of the Personal Insurance Federation of California, which represents the industry. “Today’s actions are an important first step in stabilizing California’s insurance market. We look forward to the next steps of reforming the system in a way that can increase insurance availability and signal the realities of what it will take to adapt to climate change and to increase the resiliency of California communities.”
But consumer advocates said the order urges approval of the industry’s “wish list” and will only lead to massive increases in insurance rates without guaranteeing companies continue to provide coverage.
“Why would Gov. Newsom give his blessing to the insurance industry’s wish list that will cost Californians hundreds of thousands of dollars more on their insurance bills?” asked Harvey Rosenfield, founder of Consumer Watchdog and author of the state’s 1988 Proposition 103 voter insurance revolt that rolled back rates and required state approval for increases.
Homeowners in many parts of the state, particularly in and around wildland areas, have been rocked by sharp increases in insurance policy prices and many have had their coverage canceled and been forced onto the FAIR Plan, a private temporary coverage-of-last resort system the state called for decades ago when urban riots caused insurers to withdraw coverage.
California’s elected Insurance Commissioner, Ricardo Lara, is expected to speak about the order at a 3:30 p.m. news conference.
Newsom’s order lays out alarming figures capturing the state’s insurance market meltdown. Two of the state’s largest insurance carriers, representing over 27% of the state’s insurance market, have announced they would stop issuing new homeowners and commercial property insurance policies in California. Several others, representing an additional 36% of the market, announced plans to limit new policies. And company non-renewals were 28% higher statewide in 2019 through 2021 than in 2015 through 2018.
In the 10 counties with the highest wildfire risk, non-renewals increased by 158% over that time period, and the number of FAIR Plan policies in 2021 was more than 10 times the total in 2018, threatening its ongoing stability.
Newsom’s order asks the Insurance Commissioner “to take prompt regulatory action to strengthen and stabilize California’s marketplace for homeowners insurance and commercial property insurance, and to consider whether the recent sudden deterioration of the private insurance market presents facts that support emergency regulatory action.”
The order asks the commissioner to craft “an appropriate regulatory response” expanding coverage choices for consumers, particularly in underserved areas and improve “the efficiency, speed and transparency of the department’s rate approval process.”
It also asks the commissioner to “tailor the rate approval process to account for all factors necessary to promote a robust, competitive insurance marketplace, including through potential revisions to the way catastrophe risks and insurer costs are accounted for.”
Rosenfield said that is a reference to the two top asks on the industry’s wish list: the ability to base rate increases on risk projections from computer models, and to bill consumers for insurer costs for “reinsurance,” or insurance for insurers to help them absorb catastrophic losses.
The state currently requires insurers to base requested rate hikes on past loss experience, which insurers say doesn’t account for rising risks from a warming climate and can leave them underfunded to cover massive wildfire losses. But Rosenfield argues that computer risk models produce “black box” projections based on proprietary formulas that may have little basis in reality. And he says reinsurance, sold by global financial institutions, is totally unregulated.
The governor’s order also asks the commissioner to “maintain the long-term availability of homeowners and commercial property insurance coverage, and to “maintain the solvency of the FAIR Plan to protect its policyholders and promote long-term resiliency in the face of climate change,” including by reducing its share of the overall market.
The order also asks that the state’s finance department consult with the insurance department “to support the potential rulemaking.”
Rosenfield argued that will simply lead to faster rate increases with less public oversight.
The order comes after the apparent collapse earlier this month of a behind-the-scenes effort by lawmakers to consider a legislative solution, which consumers also decried as secret dealmaking.