Proposed regulation could change California home insurance

GRANITE BAY, Calif. — California’s Insurance Commissioner proposed a new rule this week that could lead to more accurate pricing for homeowners insurance policies.

This is part of Commissioner Ricardo Lara’s major overhaul of the homeowners insurance market, as ABC10 reported back in September. We spoke with the commissioner Friday about what this week’s news could mean for the cost and availability of insurance.

To understand the proposed rule’s potential impact, however, it helps to meet Dan Raley.

“I put in cement and I put in blacktop to mitigate the fire hazards,” he said, giving ABC10 a tour of his yard.

Raley, 63, has lived in his rural Granite Bay home for more than 30 years.

“I want to live here for a long time, but I want to be able to afford to live here for a long time,” he said.

He had been paying about $1,800 a year for homeowners insurance. This year, his insurance company — which he asked ABC10 not to name — more than doubled his annual premium to nearly $4,200 dollars.

“It’s a struggle,” Raley said. “I’m a blue-collar worker.” 

The reason his company gave him, Raley said, is “‘Your rate change is based mainly on your fire rating now.’ And I’m like, ‘Excuse me? My fire rating? Because I’ve lived here 32 years and that’s never been brought up before.’”

He has never filed a claim, he said, and has only made his property safer from wildfires over the years.

“When I called many insurance companies — eight to 10 other insurance companies to try to get quotes to possibly change my insurance — everyone asked me my ZIP code,” he recalled. “When I gave them my ZIP code, they told me their company wouldn’t even insure me, that I had no chance of even getting a quote from their company.”

It’s illustrative of the current state of California’s homeowners insurance market that Raley counts himself lucky. His insurance company hasn’t dropped his policy and he hasn’t had to resort to the California FAIR Plan, homeowners’ so-called ‘insurer of last resort.’ He also is able to absorb the increase, though not easily. He said he’s aware of other, older folks on fixed incomes who couldn’t weather such an premium spike.

This all comes as most major companies in California’s homeowners insurance market have limited their business here, citing wildfire risk, the rising cost of building materials and a need for updated state regulations. That’s why more and more Californians are having to resort to the FAIR Plan.

Now, homeowners like Raley might have some hope on the horizon. Just this week, the California Department of Insurance (CDI) proposed a new rule they say could allow insurance companies to more accurately price their policies, by using forward-looking modeling, allowing them to better take into consideration things like what a property-owner has done to protect their home against wildfires.

“This regulation is long overdue,” said California Insurance Commissioner Ricardo Lara.

The rule would allow insurance companies to use forward-looking catastrophe modeling, or ‘cat modeling,’ when justifying a proposed rate hike. Currently, companies are only allowed to use 20 years’ worth of historical data, which they say don’t allow them to price on the most accurate, granular level.

Lara said his proposed rule would also help companies identify which property owners are protecting their property against wildfires — and offer discounts to those customers.

“Right now, that’s not being rewarded. And so these ‘cat models’ are going to allow us to do that and, in the long run, will stabilize rates and bring rates down because insurance companies will be once again writing in those communities, bringing down the cost,” he said.

Carmen Balber is the executive director of the consumer group Consumer Watchdog.

“Let’s be very clear: insurance companies want catastrophe models because it will allow them to raise rates,” Balber said. “That is what the insurance industry is arguing: ‘We can’t charge enough because we can’t use these models.’ So there is no question that the use of catastrophe models is going to raise rates for Californians. Because it’s going to do that, we need to make sure those models are fair.”

She is worried the state’s process of approving these catastrophe models won’t be transparent enough, since private companies that develop these models consider them proprietary.

The Department’s rule regarding catastrophe modeling is currently in a public comment period and will go through a hearing next month before it can go into effect. People can read the newly proposed rule, get details about the hearing and submit comments to CDI HERE.

Part of the proposed rule lays out how before an insurance company can use one of these models, the model itself must go through an approval process involving a panel of experts and any members of the public who want to participate. People involved in this process, however, will have to sign a confidentiality agreement, CDI says.

“One of the most important things that a model could do for us is help consumers better understand their own risk,” Balber said. “And if all of this is contained behind a (non-disclosure agreement) process, how is that ever going to help consumers better understand their own risk of fire?”

Lara said he thinks Consumer Watchdog is getting ahead of itself.

“Consumer Watchdog is already trying to predict what’s going to happen. We are barely in the process of working on our own transparency process, making sure the public understands through our public hearing what we’re going to need, get their input,” Lara said. “Those are all inputs we’re going to take into consideration as we develop these models, as we develop this regulation. So we’re very in the early stages.”

“We are not opposing the idea of catastrophe models,” Balber pointed out. “We’d simply want them to be available for public review. We think the easiest way to do that and to get around the industry’s trade-secret claims is simply to create a public model in California, where we don’t have to worry about any private company’s profit concerns.”

Lara told ABC10 his department wants to create its own public model eventually, but will turn to existing private companies’ models now — pending the regulation’s approval — to give insurance companies the opportunity to use catastrophe modeling in their rate-setting sooner rather than later.

“We’re going to be working on a tool that is another big win for the department. Florida has something similar, where they have a public model that we’re looking at and studying as well,” Lara said. “It’s a good benchmark to make sure that these (private) models are being accurate and they’re not somehow incongruent to what what’s being done.”

He pointed out that building a public model will take time and money.

“We’re trying to figure out if there’s ways we can do that, that cost less, using some other technology companies that we have here, or maybe even partnering with the Florida public model that can help us as we develop our public model. That’s the long-term goal,” Lara said. “But, immediately, we need to make sure that consumers are being rewarded for the hard work that they’re undertaking and for the thousands of dollars that they’re spending in hardening their home.”

Granite Bay homeowner Dan Raley said he and other insurance customers need to see change — and soon.

“Right now, it’s doesn’t seem to be working for the insurance industry or the homeowners,” Raley said. “Something’s got to change because there’s just no way everybody can afford it.”

Insurance expert Karl Susman, of Susman Insurance Agency, said he expects CDI’s regulations will eventually lead to a righting of the market.

“Rates are high. Competition is non-existent, for the most part, though we’re going to see that — as these regulations start going into place and as the carriers start entering the market and start competing with one another — we know what happens when all the carriers come back: then premiums will start coming down,” Susman said. “I wish it would happen faster.”

WATCH MORE: Homeowners complain of insurance issues with CA FAIR Plan