California governor hits the gas pedal on property insurance changes

California Gov. Gavin Newsom is seeking to halt the trend of property insurers exiting the state, citing losses, by expediting how quickly they can increase rates.

Newsom announced plans to draft a trailer bill to speed up work done by the state’s Insurance Commissioner Ricardo Lara during Friday’s briefing on May revisions to his proposed budget. A trailer bill is late-session legislation that codifies an aspect of the state budget agreed to by the governor and lawmakers.

The bill would cut the current property insurance rate-approval process to 60 days with the aim of ending the exodus of insurers and calming residents’ fears of canceled policies.

Residents view the remains of their Aguanga, California, home, destroyed in an October 2023 wildfire. Property insurers cite unpredictable wildfire risks for pulling back coverage in the state.

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“We need to stabilize this market,” Newsom said. “We need to send the right signals, and we need to move.”

Municipal analysts have been tracking the challenges faced by home insurers in states subject to extreme weather events as a harbinger of risk.

California, Florida and Louisiana have been hit the hardest by a wave of insurance companies exiting or reducing policies offered in areas of the state most at risk to extreme weather events, but Moody’s Ratings said every state has seen double-digit rate increases over the past five years.

Among the risks with uncertainty in the property insurance space is increasing dependence on the states’ insurer-of-last-resort programs as private insurers struggle or depart, said Triet Nguyen, DPC Data’s vice president of strategic data operation.

“You have to worry about blowback on the state’s own credit at some point,” Nguyen said.

He noted that Florida recently issued a $1 billion bond for its Hurricane Catastrophe Fund.

“The needs are escalating — and the states aren’t capitalized like an insurance company where they can match the assets and liabilities,” Nguyen said. “There is a lot of political pressure on them to not waste premium.”

In California, “nobody has any idea how to cover wildfire risks in terms of the actuarial analysis to know how capitalized they should be. If you are an insurance company that is your business, but do the state entities know how to manage this? Probably not,” Nguygen said. “The politicians have been compressing the premium to protect the consumer.”

The insurers’ actions are a red flag for municipal analysts, because difficulties in obtaining insurance could result in property values declining, which in turn would reduce tax coffers if assessed valuations drop, Nguygen said.

In late 2023, four smaller insurance companies followed Allstate and Farmers Direct Property and Casualty Insurance Company’s decision in 2022 to reduce car and homeowner policies in California. Farmers took a similar tack in Florida.

“This is yet another example of how climate change is directly threatening our communities and livelihoods,” Newsom said. “It is critical that California’s insurance market works to protect homes and businesses in every corner of our state.”

The fifteen largest wildfires in California history have taken place since 2003, according to the Western Fire Chiefs Association, with the largest eight since 2017. The 2018 Camp Fire, which isn’t among the 20 largest, was the deadliest, killing 85 people and destroying the town of Paradise.

The insurance companies cited both flooding and wildfire risk in reducing the number of policies in California.

Persistently high weather-related losses and rising costs to rebuild and repair homes has weakened profitability in the U.S. homeowners insurance sector in recent years, according to a May 8 Moody’s Ratings report.

The insurers have responded with sharp increases in premiums and tighter policy terms, and some have exited high-risk regions.

“Over the past decade, the average combined ratio for the industry was 101.3% ­—  meaning insurers paid out more claims than they received in premiums,” Moody’s analysts said.

In 2023, U.S. property & casualty insurers reported almost $58 billion of losses from severe convective storms, well above the 10-year average and surpassing the prior record in 2020, Moody’s said. In 2022, Hurricane Ian caused an estimated $52.5 billion of insurance losses, said Moody’s analysts citing a report from Aon.

In addition to the costs of climate-related catastrophes, homeowners’ claims have also risen as a result of increasing construction costs.

Though it may seem counterintuitive to speed up rate increases when people are struggling to afford insurance, proponents say it will create a rate structure that enables insurers to either return or remain in the state, encouraging a more competitive environment.

Insurers have pointed to faster approvals for rate hikes as a key reform necessary for them to ride out challenges as costly claims tied to recent wildfires and other climate change factors have driven up costs.

“Expediting the rate review process is a vital component to addressing California’s insurance crisis,” Denni Ritter, the American Property Casualty Insurance Association’s department vice president for state government relations, said in a statement.

“We look forward to working with the administration, Legislature and Department of Insurance on this crucial reform and other reforms necessary to fix our broken regulatory system and increase the availability of insurance for California homeowners, drivers, and businesses,” Ritter said.

Having more options available may also allow residents to avoid signing on to California’s FAIR Plan, the state’s insurer of last resort, which has historically offered exorbitant premiums compared to regular insurance, and is undergoing its own financial struggles.

The Department of Insurance can now take up to 84 days to approve filings for insurance rate increases, but public hearings requested by consumer advocates can substantially stretch that timeline.

In the fall, the state’s elected insurance commissioner, Ricardo Lara, started working on a plan to overhaul the state’s insurance regulations. His plan would allow insurance companies to use catastrophe models to set rates and bill consumers for the costs of reinsurance, which is insurance for insurers.

Newsom had issued an executive order in September asking that Lara “take swift regulatory action to strengthen and stabilize California’s marketplace.”

He asked that reforms expand coverage choices for consumers, particularly in underserved areas of the state; speed up the rate approval process to ensure a competitive market, and strengthen the FAIR Plan to ensure long-term resiliency in the face of climate change, partly by identifying mechanisms to reduce its share of the overall market.

This time, instead of issuing an executive order, the governor said he decided to work with lawmakers to craft a trailer bill.

Lara has said he doesn’t expect the reforms to be ready until December, but Newsom said that is not fast enough.

If Newsom’s bill, which has yet to be introduced, is passed as part of the 2024-25 budget, it may take effect as early as July 1. A spokesman for the governor said the trailer bill is expected to be introduced within the next several days.

California Insurance Commissioner Ricardo Lara, second from right, surveys remains of the 2018 Camp Fire in Paradise. His office is trying to keep property insurers from leaving the state.

California Insurance Commissioner’s Office

The governor lauded Lara’s team for their hard work on the reforms, and noted the Legislature considers it a priority, but he added, “December? I don’t think we have that much time.”

On Friday, Lara thanked the governor for making sure his staff has the resources to implement the “Sustainable Insurance Strategy” in a post on X, formerly Twitter.

“Newsom is right: time is of the essence,” said Lara, adding he is working with Newsom and the Legislature “on critical budget language that keeps us on track to get the job done, strengthen our insurance market for homeowners and businesses, and protect consumers.”

“We are well on our way to enacting the largest insurance reform in 30 years,” Lara said.