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California is spiraling into an insurance crisis. A pullback and exodus by the state’s major insurance carriers are causing property owners to scramble for coverage. The problem is heading toward a crisis.
California property owners soon may not find private insurance companies willing to write policies. Seven of the state’s top 12 property insurers have either placed new restrictions on where they do business, or stopped selling new policies. Among those companies is State Farm, the biggest player in the state, which announced in May a freeze on new policies.
Insurers cite three reasons for the pullback — escalating fire risks; increasing construction costs; and the price of reinsurance. These are policies insurance companies buy to cover their big losses.
California has the nation’s most regulated insurance industry. In 1988, voters passed Proposition 103, which created an elected insurance commissioner post and required insurance companies to obtain state approval for insurance rate increases. Companies also were prohibited from passing along their reinsurance costs to customers.
In addition, California does not let insurance companies consider future risks when deciding how much to charge for an insurance policy. They only can consider what’s happened on a property in the past to set the price.
Weather-related disasters, such as wildfires, floods and windstorms, have intensified in California. With meteorologists predicting a “super El Nino” 2023-24 winter, disasters likely will increase. According to the California Department of Forestry and Fire Protection, of the 20 most destructive fires in state history, 15 have occurred since 2015.
Kern County has seen some of California’s most devastating fires. The Bull Fire was the state’s largest fire of the 2010 season. Estimated to cost $19.3 million, the fire burned 16,442 acres and destroyed 16 structures, as it chewed its way through the Sequoia National Forest, heading for Kernville. That same year, the West Fire, near Tehachapi, destroyed 50 structures.
In 2011, the lightning-caused Comanche Fire Complex, near Arvin, burned 29,338 acres and was California’s largest wildfire. The cost of the Shirley Fire in the southern part of the Sequoia National Forest in 2014 came in with a hefty $12.1 million price tag. Two years later, the Erskine Fire, near Lake Isabella, delivered an even bigger blow, with 100 structures destroyed, 80 of them residences, at a cost of $19.3 million. Just two years ago, the French Fire burned 26,535 acres and threatened the communities of Shirley Meadows, Alta Sierra and Wofford Heights.
But not all weather-related disasters in Kern have been wildfires. Just last winter, as storms slammed the state, the southern San Joaquin Valley was inundated by floodwaters.
The question: Who should pay for the cost of providing insurance coverage for these increasing disasters? Insurance companies? Property owners? Taxpayers? Likely all of them.
The Legislature adjourned last month without agreeing on a plan to keep insurance companies from fleeing California, while protecting consumers from potential price gouging — the precise reason why voters passed Proposition 103 years ago.
State Insurance Commissioner Ricardo Lara now proposes a tentative insurance reform. Still in its concept stage, the plan is not expected to be implemented until December 2024.
It would streamline consideration of company rate-increase requests; allow reinsurance costs to be passed along to consumers; use “catastrophic modeling” to project climate change effects; and allow companies to distribute insurance costs and premiums according to risks.
In exchange for these concessions, companies would be required to return coverage to fire risk zones. Credit would be given to property owners and communities that implement fire prevention strategies. Theoretically, consumers will be protected from price gouging by imposing more transparency over the rule-making process.
No doubt, Californians, who have been enjoying some of the nation’s lowest insurance rates, will see significant cost increases. But the alternative is having few, if any, private insurance carriers to provide coverage.
The details of this plan will be complicated and the process contentious. All interests — insurance companies, government regulators, consumer watchdogs and property owners — must be given an equal voice. The process for reforming the industry must be fair and open.
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