California governor urges 'prompt' insurance reforms in executive order
The order tasks the insurance commissioner with improving the rate approval process, a long-time sticking point with carriers in the state.
California Governor Gavin Newsom signed an executive order requesting that the state’s insurance regulator take “prompt regulatory action” to correct the state’s faltering property insurance market and to consider if emergency regulatory actions are needed.
The executive order, which was signed on Sept. 21, 2023, tasks the California Department of Insurance (CDI) with stabilizing the market by:
- Expanding coverage options, particularly in underserved areas of the state.
- Maintain the solvency of the FAIR Plan by reducing its overall market share in underserved areas of the state and moving policyholders to the admitted market.
- Accelerate implementation of changes by having the California Department of Finance support CDI in the rulemaking process.
- Improving the rate approval process to make it more efficient, fast and transparent. The process should take into account “all factors necessary to promote a robust, competitive insurance marketplace,” according to a release from the governor’s office.
Carriers in the state have long complained about the rate approval process as it is slow and often unsuccessful, according to Rene Swan, Renaissance Alliance’s regional executive vice president, west.
“Due to an initiative passed in 1988 (Proposition 103) that was intended to protect consumers, when carriers apply to the state’s DOI to raise rates by 7% or more in personal lines or 15% or more in commercial lines, they can face an ‘intervenor’ in a public hearing (which are sometimes delayed for up to two years) to decide whether the rates are warranted,” Swan wrote in a recent piece.
Because of this process, carriers often seek rate increases that are small enough to avoid triggering a public hearing, according to Swan. However, these increases have not been to have been inadequate for insurers, particularly in the face of growing natural disaster losses. As a result, many insurance companies have stopped writing new business in the state or have exited the market completely.
So far this year, two of the state’s largest insurers, representing more than 27% of the admitted market in California, stopped issuing new home and commercial property insurance policies in the state, according to the governor’s executive order.
In addition to the California-specific movements that have shaken this market, carriers in the state are also contending with wider industry trends such as increased replacement costs, higher reinsurance expenses and more frequent catastrophic weather events.
Commissioner promptly responds
In a release that trailed shortly after the governor’s executive order, CDI announced its Sustainable Insurance Strategy plan, which it called the “largest insurance reform” the state has seen since Prop 103.
Some of the key elements of the new plan, according to CDI, include:
- Transition homeowners and businesses from the FAIR Plan back into the admitted market with commitments from insurance companies to cover all parts of California by writing no less than 85% of their statewide market share in areas with high wildfire risks.
- Giving FAIR Plan policyholders who comply with the new Safer from Wildfires regulation first priority for transition to the normal market.
- Expediting CDI’s introduction of new rules for the review of climate catastrophe models that recognize the benefits of wildfire safety and mitigation actions at the state, local and parcel levels.
- Improving rate filing procedures and timelines by enforcing the requirement for insurance companies to submit a complete rate filing, hiring additional Department staff to review rate applications and inform regulatory changes, and enacting intervenor reform to increase transparency and public participation in the process.
- Ordering changes to the FAIR Plan to prevent it from going bankrupt in the case of an extraordinary catastrophic event, including building its reserves and financial safeguards.
“We are at a major crossroads on insurance after multiple years of wildfires and storms intensified by the threat of climate change. I am taking immediate action to implement lasting changes that will make Californians safer through a stronger, sustainable insurance market,” California Insurance Commissioner Ricardo Lara said in a release. “The current system is not working for all Californians, and we must change course. I will continue to partner with all those who want to work toward real solutions.”
Noting that the market is in urgent need of reforms, Denni Ritter, department vice president for government relations for the American Property Casualty Insurance Association, said the state’s 35-year-old regulatory system is “outdated, cumbersome and fails to reflect the increasing catastrophic losses consumers and businesses are facing from inflation, climate change, extreme weather and more residents living in wildfire-prone areas.”
Ritter added that the actions announced by the commissioner are the first steps of many needed to right the market.
“Everyone understands that California’s insurance market is in a spiraling crisis that requires immediate policy solutions to protect consumer access to the coverage they need,” Ritter said in a release. “We will continue to work with the insurance commissioner, the governor, the California legislature and other stakeholders to promote meaningful reforms, including the assurance of timely approval of adequate rates that bring stability and availability to the market so Californians can access the insurance they need to protect their homes, cars, and businesses.”
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