California Homeowner Insurance Wildfire-Prone Area Bill

14 Aug

As wildfire season kicks off, lawmakers in California are pushing through an insurance industry backed homeowner insurance bill. While the bill seems popular with a number of lawmakers, it is receiving fierce opposition from consumer groups as well as California Insurance Commissioner Ricardo Lara.

The bill addresses a number of issues, from letting insurance companies pass-through reinsurance costs to policyholders to allowing insurance companies to request higher rates than currently allowed for homeowners’ and renters’ policies in selected wildfire-prone areas. In exchange for the higher rates, insurance companies must promise to sell a certain number of policies in all those areas.

Proponents of the bill claim it will encourage mainstream insurance companies to write policies in higher risk areas which will hopefully keep homeowners out of the state’s Fair Plan which is the insurer of last resort. Fair Plan policies typically provide less coverage and cost more than standard homeowner policies. Many insurers who suffered losses due to wildfires have stopped writing policies in certain parts of the state. 

Opponents of the bill (AB2167) claim it will do an end run around Proposition 103, which is a 1988 law that requires insurers to open their books to the public and justify rate increase requests. Prop 103 has helped keep homeowners insurance rates in California below the national average according to many industry experts. They also point out that this bill will not guarantee that all homeowners in a targeted area will be offered a policy.

“What it lacks is a requirement to provide insurance coverage in ZIP codes where homeowners are struggling to get that coverage,” said Assemblyman Marc Levine, D-San Rafael in a recent San Francisco Chronicle article. 

How the bill works

The bill allows insurers to propose an “insurance market action plan,” or IMAP. They can do this for one or more of the “eligible counties” of their choosing. Eligible counties are based on where the Fair Plan policies account for a certain percentage of policies in that area. This can range from at least 0.15% in the largest counties to 1% in the smallest. According to the state insurance department, 21 of the state’s 58 counties would qualify today.

The insurance industry claims that 28 counties would meet the requirements, including Los Angeles and San Diego. However, no Bay Area counties would meet the requirement.  A proposed amendment would also add Sonoma, Napa and other counties that have had declared wildfire disasters over the past five years.

Insurance companies would have to define the areas within the county where it proposes to sell policies in the IMAO when they file. Within these IMAO’s, insurers would be allowed to include items in its rates that are not allowed under current insurance department regulations. Insurers would be allowed to add in the net cost of reinsurance as well as factor in expected losses based on catastrophic risk models. The bill states that these rates “shall not be excessive, inadequate, or unfairly discriminatory,” and shall be “actuarially sound.”

Using these catastrophic risk models would most likely result in premiums higher than what is allowed now but lower than Fair Plan prices said industry spokesman Rex Frazier, president of the Personal Insurance Federation of California in the San Francisco Chronicle article. 

The bill would allow insurers to choose which areas, they want to write policies in, but the bill says they should “avoid overconcentration in any one particular area. In exchange for allowing insurance companies to charge higher rates, the insurer must commit to selling enough policies to make their market share in all areas where they are getting IMAP rates equal to at least 85% of their statewide market share.

This 85% requirement does not apply to each county or portion of a county where they are selling policies individually; it applies to all of their IMAP regions combined. This means that there is no guarantee that a homeowner that falls in an IMAP could get insurance.

Consumer Groups Concerned

Numerous consumer groups have concerns about the bill. “Companies could “cherry-pick places they think are the safest risk,” said Bryant Henley, special counsel to the insurance commissioner in the San Francisco Chronicle article. 

Harvey Rosenfield, the founder of Consumer Watchdog is also unhappy with the bill. In the article he said the bill “allows insurance companies to maneuver all around Prop. 103 controls around price gouging.”

On the other hand, the insurance industry argues that IMAPs require insurance department approval before they can go into effect which gives the commissioner the power to prevent any signs of price gouging or cherry-picking.

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