Opinion: New Regulations–and a New Approach–Are Key to Solving California’s Insurance Crisis

Up and down the state, but especially in Southern California, homeowners and business owners cannot easily access options for good, affordable property insurance. Risks from wildfires and other natural disasters have increased dramatically due to climate change, and insurance companies, hamstrung by out-of-date regulations, often cannot reflect those risks in their rates.

As a result, in April, State Farm announced it was ending coverage for tens of thousands of San Diego customers — and they are not the only company to stop writing new policies in California. Where policies are still being written, they are more expensive; industry members have reported five-fold increases in monthly premiums, in some cases.

Lenders, too, have had to accept increased risks, agreeing to allow much larger deductibles, or accepting much less coverage than has been the traditional industry standard. The best, most competitive loans are made only to those who possess the financial liquidity to cover the heightened risk.

The effect is felt by multi-family properties, in particular. Insurance unaffordability results in housing unaffordability, as inflated premiums translate to higher building costs, higher rents, and thus much less of a housing market for lower-income families. This is a real barrier to affordable housing.

The underlying issue has to do with the state Department of Insurance’s regulations on how companies can set insurance rates. Basically, while our climate has become hotter and more severe, causing more and larger wildfires and other natural disasters, insurance companies have been unable to account for those new risks when trying to set competitive rates — prevented by regulations that (a) limit the use of technology and (b) move too slowly in assessing and allowing rate updates.

“Catastrophe modeling” is technology using geographical and climate data to estimate or “model” the risk that a future wildfire would harm a given property. This sort of modeling is important not just because it allows for more detailed and accurate forecasts, but also because we lack another, reliable way to assess future risk. However, current regulations preclude its use when companies set insurance rates.

“Historical modeling,” which insurers have traditionally used to calculate risk, based on the details of past wildfires, is less and less reliable. New circumstances demand new strategies. The limitations of historical modeling could, and through new regulations should, be offset by catastrophe modeling.

Without new regulations the current crisis continues — where insurance companies, unable to reflect an accurate level of risk in their rates, increasingly choose to not write new policies, and the insurance market contracts even further.

On June 26, the Insurance Department held an online workshop about catastrophe modeling. With approval of this proposal, insurance companies have committed to writing homeowners and commercial policies again in areas of high wildfire risk. Thus we can begin to restore a competitive and sustainable market for insurance.

This effort would be helped by an additional plan, as proposed by Governor Newsom in May, to require the Department to review insurance companies’ rate approval requests within 60 days. Currently, that process can take many months. This plan was proposed as budget trailer bill language, but wasn’t ultimately approved by the state legislature as part of the June budget deal, as was necessary for it to take effect. Hopefully the Governor, legislature, or Department can find another avenue to see this through.

Furthermore, Insurance Commissioner Ricardo Lara’s Sustainable Insurance Strategy, a package of reforms covering various regulations, promises to fix inefficiencies in the Department’s rules, but not until the fall or the end of the year. We urge the Commissioner’s expediency in finalizing this strategy, given the continuously growing harm from this crisis.

As it is, many home and business owners are forced into the state’s FAIR Plan, which provides only basic fire insurance, or force-placed insurance, in which the lender secures insurance, then charges the homeowner. Both are last-resort options, costing more and covering less than traditional coverage.

Let’s not rely on last resorts. Let’s put proposals — new risk modeling, expedited processing, and related reforms — into action.

Brad Livingston is President of RWM Home Loans in San Diego and Board Member of the California Mortgage Bankers Association, which represents the residential and commercial real estate finance industry.