Assembly holds hearing on wildfire insurance progress

Reform of wildfire insurance has been a high priority for state
officials – both executive and legislative – for more than a year.
Although the Legislature could not reach any compromises last fall, both
Gov. Gavin Newsom and Insurance Commissioner Richardo Lara moved forward
with administrative and regulatory actions.

Lara’s goal for completing the changes necessary to improve the home
insurance crisis in California is December 2024.

On May 15, Lara testified before the Assembly Committee on Insurance
about these actions and noted some results have already been achieved.
The Committee chair, Assemblywoman Lisa Calderon (D – Whittier) directed
her initial comment to Lara.

“You’ve been clear and upfront about your December 31, 2024, deadline to
complete your strategy, but I must state, time is running out. It’s
imperative that the insurance market stabilize now,” she stressed.

At the end of his press conference about the May revisions to the fiscal
year 2024-25 budget, Newsom announced that he planned to submit trailer
bill language to accelerate the administrative actions. Lara already has
expressed his agreement with Newsom.

While some public hearings are still scheduled and some rulemakings are
not yet complete, Lara stated that insurance companies are already
changing and modifying their insurance activities in California.

“But I can tell you that the conversations I’ve had with reinsurers
around the world is that they’re leaning into California with these
changes,” he announced.

On May 14, Farmers Insurance announced that it will reopen several of
its commercial coverage lines, including for homeowners’ associations,
apartments, and condominiums in California, according to Lara. Farmers
is California’s largest domiciled insurance company and second largest
homeowners write, he added.

In his press release, Eric Coleman, president of Business Insurance for
Farmers^(,) said. “Farmers has operated in California for nearly a
century, and while challenges remain, we are encouraged by the positive
changes taking place in the state’s commercial insurance marketplace.”

“We have been consistent in our belief that a fundamental condition for
offering coverage is that rates need to reflect the risk exposure we are
insuring. Fortunately, through constructive discussions with the CDI, we
are now ready to take this step back into the market,” added Coleman.

Lara added that CDI has approved three of Farmers’ homeowners rate
filings in the last year.

On May 10, CDI approved a homeowner’s rate increase for CSAA Insurance
Exchange. Although CSAA insures in Northern California, Lara told the
Committee, “Earlier this year, my department approved a significant
homeowners rate filing for Triple-A South, so it can continue to write
homeowners policies throughout Southern California.”

In addition, Mercury Insurance Company is working with Tokio Marine to
pick up the bulk of its personal homeowners insurance business. Mercury
is another California-based company that has not stopped writing new
homeowner’s policies.

“A diverse group of entities worked together on this project with the
common goal of providing coverage for California insurance consumers,”
said Gabriel Tirador, Chief Executive Officer, and Director of Mercury.

Lara’s Sustainable Insurance Strategy includes several components.
Progress is being made on each and at different rates. The incorporation
of catastrophic modeling into rate making is critical for insurers.

Currently California only allows historic fire costs to be used to
assess rate increases. The companies want to use models that address
future fires and their size and costs. In April, the CDI released a a
proposal and requested public comment.

Lucy Wang, Special Counsel and Deputy Commissioner at the DOI, told the
Committee, “In California, we are very strong on our consumer
protections and we are the only state mandating where if they use this
risk mitigation tool, cat modeling, they also have to make that
measuring commitment to right policies in our wildfire distressed areas.

“Modeling companies do not want to submit their models under Prop . 103
because it is subject to complete public transparency plus with the
intervention process,” Wang added.

Kimberly Stone speaking for Consumer Watchdog and Intervener, said her
client has “. . . urged the creation of a transparent catastrophe model
to make sure that climate risk is incorporated into insurance rates in a
way that is publicly accountable. . .”

“We’re very glad to hear support from the Commissioner for that idea and
urge the building of a public model as soon as possible,” she added.

In June, a workshop is planned to discuss the effect of these models on
rate applications. At that workshop, Lara said, “We are going to be
identifying wildfire distressed areas where we expect insurance
companies to write more policies.”

The other components of the SIS include incorporating the use of
reinsurance into rate making, which Lara has said is important to the
industry. Lara expects to release a proposed rulemaking on this in July.
Reinsurance is a critical component of how insurance companies manage
their risk, and allowing these costs to be included in rate filings will
support greater insurance availability.

Another critical component, which is being pushed by Newsom, is
improvement to the actual rate filing process. He noted in his May
Revision presentation, that he planned to introduce Trailer Bill
language to speed up this effort. Lara has already endorsed Newsom’s
efforts. Both believe that legislation is a faster means of obtaining
this change than a drawn-out regulatory process.

The rule filing change affects insurance companies as well as DOI. The
insurers must submit a complete file, then the State has 60 days to make
a decision.

“So, in February, we hosted our workshop on the complete rate
application, where we are for the first time in 20 years, updating what
it means to have a complete rate application,” Wang said. “So, there is
clear direction. And that was done as a result of communications with
insurance companies and our department as to what are the components
needed.”

At this point Lara re-emphasized the need to reduce the time for
approving this change. “This is why the trailer bill language we’re
supporting and the Governor’s May Revise is critical because it holds
all of us accountable. It says, insurance companies, you need to provide
a complete rate file. Department, you need to get done within 60 days.”

Another important component is strengthening, through modernization, the
FAIR (Fair Access to Insurance Requirements) Plan. Established in 1968,
the FAIR Plan is a syndicated fire insurance pool comprised of all
insurers licensed to conduct property or casualty business in
California.

Transparency and accountability is the final component of the SIS.

In his conclusion, to the Assembly’s Committee, Lara offered, “These are
signs of progress. However, we are not going to declare success
prematurely, or be reactive to every insurance announcement or headline.
We are all living in a time of uncertainty. I know that this is
frustrating for anyone who is trying to buy or sell a home, or worried
about whether they can even afford the insurance coverage they need as
we face another fire season.

“Now we are facing the accumulated stress of decades of long-needed
reforms and neglected decisions,” Lara emphasized.

During the hearing Assemblyman Damon Connolly (D-San Rafael) questioned
whether wildfire mitigation efforts will likely reduce insurance policy
costs and what is the actual discount policy holders may receive.

“Farmers Insurance, for example, estimated that the average policyholder
in an area with high fire risk would only save $42 to $75 a year for
taking mitigation steps,” he specifically posed to Lara. “I also have
heard that multi-pane windows and no flammable structures within 30 feet
of a home results in only a 0.1% discount for each.”

“Obviously, these policies differ from homeowner to homeowner. Cause all
the residencies are are different,” Lara replied. “I can tell you that
from what we’ve approved, and I can only give you the macro numbers.
We’ve actually seen a 20% to 30% discount.”

He then stressed that mitigation work needs to generate a discount
significant enough for the resident to make the investment in home
hardening.

Assemblywoman Gail Pellerin (D-Santa Cruz), then raised the issue of
policy bundling.

“I guess the other thing that we’re hearing about is that somebody had
their home insurance bundled with their car insurance. Then they get the
non-renewal, and then their car insurance goes up because it’s no longer
bundled,” she said.

To which Lara agreed that is one of the most frequent questions his
office receives. “. . . through our community meetings, which we’ve met
with 150,000 people, if a company is no longer writing in a community,
why are we letting them write auto insurance?”

However, the solution is not to simply prohibit this behavior. Lara
noted that auto and fire insurance are two different lines of business.

“I don’t want to create unintended consequences. Where now we create a
crisis on the auto part,” he said, explaining why this is a complex area
to resolve.

John Norwood spoke on behalf of the Independent Insurance Agents and
Brokers of California and offered several comments.

“As we look at the wildfire problem, I don’t think we can suppress or
insure our way out of this issue,” he said to the Committee. “[I] just
came from an insurance conference where reinsurers are concerned that
California’s still not spending enough money on fire resiliency. This is
something that’s going to have to be done. It’s not one and done. It’s
day in, day out every year. That money is going to have to be put up.
There are some communities that have spent thousands, and that’s very
positive, but it’s going to have to be an ongoing commitment.”

As the hearing ended after Norwood spoke, the members are awaiting the
trailer bill language that Newsom and Lara have promised on how to speed
up the rate filing process.