“Once the carriers see the changes that are going to be happening, they will start coming back into the state,” says Mark Robinson, co-founder of law firm Michelman & Robinson and leader of the firm’s regulatory practice group. “It’s obviously a huge market, but they need to have the rates in order for them to not lose money. So they need to be able to rate the fire areas appropriately.” Credit: jdoms/Adobe Stock

While California’s property insurance reform proposals are yet to be ironed out, the industry is striking an overall optimistic note on the suite of changes being offered up by the state’s insurance regulator, industry sources tell PropertyCasualty360.com.

“My initial reaction was very positive that the department of insurance is taking steps to fix the property insurance issues in California and revising some of the regulations to allow insurance companies to get rate increases that they need in order to stay in the state and continue writing,” says Mark Robinson, co-founder of law firm Michelman & Robinson and leader of the firm’s regulatory practice group.

He notes the proposed changes show a lot of movement from where the California Insurance Commissioner Ricardo Lara was six months to a year ago.

Robinson does caution that it will take some time for these proposals to start healing the market, noting California Department of Insurance (CDI) is planning to have all of the updated regulations in place by the end of 2024. “Once the carriers see the changes that are going to be happening, they will start coming back into the state,” Robinson says. “It’s obviously a huge market, but they need to have the rates in order for them to not lose money. So they need to be able to rate the fire areas appropriately.”

Bill Martin, president and CEO of Plymouth Rock Home Assurance, says the actions taken by California Governor Gavin Newsom and Commissioner Lara should be commended.

“They could have just ignored it and let the market shake out,” Martin says, continuing: “There have been times in the past when regulators and legislators have said ‘good riddance to insurance companies.’ These two have said: ‘This isn’t a problem that they’ve created, it is a problem that is bigger than that.’”

He adds it isn’t an enviable position the two are in, as they have a tight line to walk. Much like other regulators and political leaders across the country, they must attempt to keep rate growth in check to appease voters and consumer groups (more on that below), while also ensuring carriers can collect enough in premium for it to make financial sense to write in the state.

“At some level, rate adequacy is more important than any other part of the discussion,” Martin says. “The margins in this industry are thin and most companies aren’t making them, so the idea that there are savings to be had by eliminating insurer margins is a little bit misleading.”

3 big reforms

Among the proposals currently on the table, the three biggest changes would be allowing the use of forward-looking risk models, the ability to include reinsurance costs into a policy and the requirements that carriers have to have participation in at-risk areas as defined by the state, according to Roger Arnemann, general manager and senior vice president of analytics and data services at Guidewire.

Reinsurance is one of the biggest expenses insurance carriers face when dealing with catastrophe-exposed areas and previously those costs couldn’t be factored into rates, Arnemann says.

“Being able to price accordingly so (carriers) can afford reinsurance actually makes the market viable,” he says. “Without that, it is not viable and I think that is why we have seen so many insurers pull out.”

The second biggest change that will lead to more accurately priced policies, he says, is the ability to use forward-looking models instead of carriers being tied to historic loss data.

In addition to looking at what might happen, these forward-looking models can also give carriers a better idea of not only the future possible losses but also the present state of risk at a property. This is achieved by giving an overview of the vegetation level around a structure, what the wildfire break looks like and community-level mitigation efforts, Arnemann explains.

The proposals around reinsurance costs and forward-looking catastrophic modeling drew a quick rebuke from consumer groups in the state. In a statement, Consumer Watchdog said Lara had “capitulated to the insurance industry demands,” and that the changes would result in dramatic increases to home and renters insurance premiums.

“The use of catastrophic modeling and adding of reinsurance costs to premiums has pushed Florida premiums up two to three times higher than California’s,” Jamie Court, president of Consumer Watchdog, said in a release. “California is in danger of becoming Florida with these changes that mimic the failed strategies in the Florida.”

85% requirement

One potential sticking point among the proposals is the requirement that carriers “cover all parts of California by writing no less than 85% of their statewide market share in high wildfire risk communities,” according to a CDI release.

This means that if a company writes 20 out of 100 homes statewide, it must write 17 out of 100 homes in a distressed area, CDI reported. Arnemann says this requirement would create a lot of competition to write policies in these parts of the state as carriers could potentially find it numerically impossible to achieve the obligation.

“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. ”

All in all, he says California has taken a step in the right direction that will allow carriers to more appropriately price policies in the state. “If insurers can price accurately, and more and more insurers do that, then ultimately there will be increased competition. And that completion should keep rates in an area that is appropriate to the actual risk underlying the policy.

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