West Coast
State Insurance Commissioner Ricardo Lara speaks during a press conference with Los Angeles labor leaders and advocates in Commerce on Sept. 26, 2022. Photo by Alisha Jucevic for CalMatters

CA - California Lawmakers Failed to Fix the Insurance Market. So What Comes Next?

As a string of last-minute deals surfaced this week before tonight’s end of the legislative session, one highly anticipated proposal was not among them — a plan to keep insurance companies in California even as the financial risk from wildfires grows.

A key deadline passed Monday night without a bill, dooming the effort for the year, despite involvement from legislative leaders, Insurance Commissioner Ricardo Lara and Gov. Gavin Newsom. Negotiators struggled to find a balance between loosening regulations on an insurance system that has been pushed to the brink and maintaining protections for homeowners who could face much higher premiums to stabilize the industry, a politically fraught prospect.

The Legislature won’t return to Sacramento until January, leaving the issue unresolved for another fire season, though there will be hearings and potentially regulatory changes in the months ahead that could reframe the conversation.

“That’s the progress we’ve made here,” said Michael Soller, a spokesperson for Lara’s Department of Insurance. Fixing the home insurance market is now a priority across state government, he said, and there is urgency to get something done.

During an interview Tuesday night with Politico California, Newsom said a working group within his administration has focused on this “waving red flag issue” for months, in addition to the discussions with the Legislature.

“So we’ve gamed out some different strategies,” he said, declining to specify whether that might include calling a special legislative session or issuing an executive order this fall. “We can do a lot of things. And I’m very mindful. We can do all of that.”

A spokesperson for the governor said he would have more to announce as soon as next week.

Wildfires fueled a looming crisis in California’s insurance market for years. After disastrous fire seasons in 2017 and 2018 wiped out decades of profit, insurance companies began dropping tens of thousands of customers by refusing to renew their policies.

But the situation reached a blaring emergency in May, when California’s largest home insurer, State Farm, announced that it would stop selling new policies altogether across the state. Another major provider, Allstate, soon acknowledged that it had done the same months earlier, while Farmers Insurance limited its offerings in July.

The industry says it has become too expensive to operate in California, blaming the high cost of rebuilding, growing risk from natural disasters and increasing expenses from buying “reinsurance,” or insurance for their losses, which state law prohibits them from passing onto customers.

The rippling consequences make it more difficult to build new homes, because of a lack of insurance options, as California tries to climb out of a severe housing shortage. It also imperils the state’s FAIR Plan, which offers limited insurance to homeowners who cannot secure a plan through a private insurer. The FAIR Plan is funded by a levy on insurance companies, so it faces insolvency as they leave the market and more customers are pushed into the program.

Negotiations for a legislative solution considered whether to allow companies to use forward-looking catastrophe models, rather than past losses, to set insurance rates, as they are already allowed to do for earthquakes; whether to let them factor reinsurance into their prices; how to set assessments for the FAIR Plan; how to speed up regulatory review of rate increase requests; and whether to require insurers to operate in communities with the biggest threat of wildfires.

“We thought we had a sensible, viable solution that we could continue to massage,” said Sen. Susan Rubio, a West Covina Democrat who leads the Senate Insurance Committee. “We were ready to act this year.”

With just a few weeks to maneuver at the jam-packed end of session, however, lawmakers and advocates say it was too late to reach an agreement that could earn widespread support.

Denni Ritter, a vice president of government relations for the American Property Casualty Insurance Association, one of several insurance industry organizations, said there was broad consensus around incorporating catastrophe modeling and reinsurance costs into rates, but a framework for FAIR Plan assessments was still unresolved. Many legislators also wanted to ensure the bill would offer as much benefit to consumers as it did to the industry, she added.

“Everybody was still trying to wrap their heads around hard solutions,” Ritter said. “We just ran out of time.”

Read more.