California Bill Will Lead to Higher Insurance Rates

12 Aug

According to national insurance expert and actuary, J. Robert Hunter, a package of homeowner insurance bills that California lawmakers are considering could lead to premium hikes of at least 40 percent across the state. It will also increase the number of California homeowners who are struggling to find coverage for their homes. 

AB 2167 (Daly-Anaheim), and its companion bill SB 292 (Rubio-Baldwin Park), will further deregulate homeowner insurance in California by eliminating the protections of voter-approved Proposition 103. This proposition requires insurance companies to show their books to the public and justify rate increases. 

The bill under consideration not only allows insurance companies to pass on the costs of reinsurance without regulatory scrutiny, it also overrides Proposition 103’s protections against price-gouging and discriminatory practices.

In a letter sent to state legislative leaders, J. Robert Hunter who is the Director of Insurance at the Consumer Federation of America (CFA) explained that the insurance industry-sponsored bill (AB 2167) which will pass through the costs of reinsurance to consumers will result in higher premiums for all Californians. He points out that these types of plans have been disastrous in other states and are one of the main reasons home insurance is much more expensive in catastrophe prone states. 

The bill in question is to be considered at a State Senate Insurance Committee hearing on August 4.

“I have no doubt that this provision of AB 2167 will drive up the average cost of insurance in California by hundreds of dollars per home and subject the state’s homeowners insurance market to additional spikes in price and non-renewals as it becomes tethered to unregulated and erratic global reinsurance markets,” said Hunter in a recent press release from the CFA.

“In my actuarial opinion, just the provision … allowing unregulated reinsurance charges to be passed through to California consumers will immediately cause rates to rise by 40%… But not only will rates immediately jump across the board, this change will expose all California homeowners to periodic reinsurance-driven spikes in premiums of 50% or more and spates of non-renewals … [following] a major catastrophe in California or one outside of the state, like a series of hurricanes, or a tsunami on the other side of the world, or even a terrorist attack, he continued.”

According to the letter, current California law prevents the pass-through of reinsurance costs to policyholders. Reinsurance is the coverage that insurance companies purchase to protect themselves from large losses such as hurricanes or wildfires. The law that prevents insurance companies from passing this cost onto consumers has protected California homeowners from the higher premiums often seen in other wildfire prone states such as Colorado and Texas, according to Hunter.

“Nothing in California law stops insurance companies from buying reinsurance to reduce their losses,” Hunter explained in the press release. “The current rules allow sufficient dollars for insurers to purchase reasonably priced reinsurance. Current protections simply prevent insurance companies from jacking up rates on homeowners to cover excessive costs in the unregulated global reinsurance market.”

According to Hunter, California is an above average profit environment for homeowner insurance companies. Data shows an 8.3% average annual return on net worth in California compared to 5.5% return countrywide.  

Hunter also points out that despite the fact that Californians tend to pay much less for homeowners insurance than the national average, there are plenty of residents of the Golden State that are paying extremely high premiums, or even have trouble finding coverage, particularly in areas hit by wildfires

In order to counter these issues, the insurance industry and state legislators should be focused on reducing the threat of wildfires and hardening homes to mitigate the risk, advises Hunter. However, the industry legislation under consideration ignores that basic principle.

“Put differently, the legislation would increase profits for insurers without protecting homes from wildfire losses, because the bill does not address the real issue: exposure to wildfire risk. In that regard, California homeowners would be well-served by loss prevention investments and assurances that mitigation will yield the premium relief that should come with risk reduction.  But allowing insurers to add unregulated reinsurance premiums into rates would neither lower rates, increase access, or reduce risk in the state; indeed, it would do exactly the opposite.”

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