Like earthquakes, perfect storms quietly rumble along for years, and yet it is only when the final eruption occurs that we realize the signs were there all along.
California’s homeowners’ insurance crisis had been gaining momentum for decades, but many people only became aware of it when the final eruption occurred in March, when Illinois-based insurance giant, State Farm, announced it would no longer be renewing 72,000 California policies.
Insurance companies blame the California Department of Insurance (CDI) – specifically its Commissioner, Ricardo Lara – for the current situation. They say they want to continue in California, but current rates are not representative of the growing risk caused by climate change and rising construction costs. They also say they had advised how this impending crisis could have been avoided for years.
Speaking at the City of Orinda’s Town Hall meeting on May 29, Mayor Darlene Gee reminded the audience that California’s current insurance situation – based around Prop 103, which was passed by 51% to 49% in 1988 – was “the result of a very contentious ballot proposition at the time.”
The problem is that the world has changed since 1988.
Since that landmark decision almost four decades ago, California’s insurance rates have been kept artificially low, compared to other states. Between 2010 and 2017, California’s premiums rose by just 10.6%, while the average increase across the United States hovered around 53%.
Meanwhile Colorado, which, according to Irvine-based CoreLogic’s 2023 Wildfire Risk Report, is second only to California with regard to fire risk, saw premium increases of 77.6% in that same time span.
According to the National Association of Insurance Commissioners, while homeowners in disaster-prone Florida were paying an average of $2,437 for home insurance in 2021, Californians only paid $1,403 – slightly less than the national average of $1,411.
So it is hardly surprising that California’s premiums appear to have suddenly shot through the roof, when in fact they are merely playing catch-up with the rest of the country. And ultimately, as much as insurance companies like to amuse viewers with their witty TV commercials full of familiar actors and ex-politicians, we must never forget that all insurance is about profit.
Beyond satisfying their shareholders, insurers need to maintain plentiful reserves in case of disaster.
According to CAL FIRE, five of the largest wildfires in the state’s history have occurred since 2017, with the 2017/18 wildfire seasons wiping out almost twice the combined underwriting profits of the previous 26 years.
Originally intended to protect consumers from arbitrary insurance rates and practices, the 36-year-old Prop 103 has remained implacable in its premise that, unlike earthquake insurance, scientifically based catastrophe models should not be used for predicting future wildfire losses. California is the only state in the country still following this directive.
Similarly, California is unique in not allowing insurers to pass along actual reinsurance costs to policyholders when establishing rates – a stipulation that was perhaps acceptable in 1988, but one that can no longer be sustained: State Farm’s reinsurance costs are predicted to reach $1 billion in 2024.
Perhaps the most frustrating of the Prop 103 terms is that all insurance rate increases of seven percent or higher must be approved by the CDI – a process that typically takes around six months. Moreover, there is no guarantee that it will be successful because California – yet again the only state to permit this – allows advocacy groups, or “intervenors” to challenge the rate request. This latter process averages 402 days, with all costs absorbed by the insurance companies. If and when the request is granted, the new rate is likely to be out of date.
Insurance companies say they have long warned the CDI about the looming crisis, and made it obvious that if their warnings went unheeded, they might end up voting with their feet.
At the beginning of April, Gee wrote to Governor Newsom, Insurance Commissioner Lara, Senator Glazer and Assembly Member Bauer-Kahan, telling them that “the time for action is now.”
When her letter received no acceptable response, Gee set up a Town Hall meeting, and hoped that Julia Juarez, Deputy Commissioner with the Community Relations and Outreach Branch of the California Department of Insurance, might come up with some definitive answers for disheartened Orindans.
None of the four elected officials to whom Gee addressed her letter attended the standing-room-only meeting, although both Jennifer Rizzo and Don Tatzin from Senator Glazer’s office were present.
Juarez went through her slides, talked about the FAIR Plan, and praised Orinda’s mitigation efforts by saying “you have done a marvelous job of doing your part to lower that risk, but I know that has not been enough.” That was greeted by a murmur of agreement since nobody in Orinda has yet reported that their mitigation efforts have turned a non-renewal letter into something more positive.
Juarez then went on to speak about the California Sustainable Insurance Strategy, with a December 2024 deadline, which promises to be California’s “most comprehensive insurance regulatory reform in a decade.” It includes:
• Increasing insurance availability and access by seeking a commitment from insurance companies to write a minimum of 85% of their statewide market share in historically underserved areas
• Decreasing the number of FAIR Plan policyholders
• Incorporating new catastrophe models that will lead to more accurate risk pricing
• Modernizing the FAIR Plan.
But it was the question-and-answer session that the restless audience found more relevant. When longtime Orinda resident, Nick Waranoff, took his turn at the podium, he immediately told Juarez that the CDI had “made the insurance industry your enemy” and said that “you’ve tied the insurance companies’ hands to the point that they’ve said we’ll make our money elsewhere.”
Encouraged by the loud cheer that went up in the room, Waranoff then “urged” the CDI “not to come up with more regulation, but streamline the rate increase process.”
“It’s great having low rates, but if no one’s writing insurance you’re winning the wrong battle, so my suggestion is to grant the increases, get the insurance companies back in the market and reserve a right to claw back any excess,” said Waranoff.
As the 150-plus Orindans made their way out of the Insurance Commissioner’s 90-minute address, there were distinct mutterings of “gaslighting,” with one Orinda resident left wondering why “our state officials aren’t being more vocal in support of their constituents,” adding that “both Senator Glazer and Assemblymember Bauer-Kahn live in Orinda, so it would be almost impossible for them not to know that a significant number of their neighbors have received non-renewal letters from their insurers.”
Another attendee praised Gee for being “willing to stick out her neck, call the situation what it is, a homeowner’s insurance crisis, and ask our state officials for help.”
Despite the lack of state officials at the event, Gee later said, “I’m very happy that Orinda was able to convince the Insurance Commissioner’s office to attend an in-person town hall. I believe that our residents deserved to have access to ask questions and share concerns with the Insurance Commissioner’s representative in a community forum, given how hard-hit Orinda has been in the homeowner’s insurance crisis.
“I’m glad that Orindans were able to add to the on-going call for urgency in asking the state to find solutions sooner rather than later,” added Gee. “And I was happy to see that steps are being taken in California that may ease the access to homeowner’s insurance by 2025.”