No Sugarcoating: Availability Before Affordability, California Regulator Says

If the old adage “As California goes, so goes the nation” is true, then 2024 will be another year of industry retooling as insurers and regulators set a path for the future of the U.S. P/C property insurance market.

Homeowners in the nation’s most populous state will likely be waiting until 2025 to start seeing rate relief as regulatory modernization takes shape, California Insurance Commissioner Ricardo Lara told state lawmakers at an Assembly Insurance Committee hearing in mid-December, reiterating a December 2024 target date for completing the regulatory reforms set forth in the department’s “Sustainable Insurance Strategy,” announced in September 2023.

“I’m not going to lie. It’s going to still be expensive,” Lara told Assemblymember Avelino Valencia, D-Anaheim, one of several lawmakers concerned with what he should tell constituents in wildfire-prone areas of the state facing skyrocketing insurance property insurance premiums.

“What is to be expected in this transition? In your assessment, do you think that the rates will increase? Do you think the situation will worsen moving forward? And if so, have we discussed or planned any potential softening for consumers — payment plan systems or a tiered implementation of these new rates?” Valencia asked Lara directly after the commissioner outlined plans to have insurers increase market share in wildfire-distressed areas and depopulate the FAIR plan in exchange for the ability to include reinsurance costs and indications from catastrophe models in insurance pricing.

Lara responded: “We’re never going to get to affordability, Assemblymember, if we don’t have availability. If insurance companies keep exiting the market or contracting their footprint, we’re never going to get to affordability. The first action of this plan is to get insurers to write back — to write in these communities themselves.

“It’s going to be tough, I want to say, for the next couple of months. But hopefully you’re going to start seeing the market start stabilizing itself. I know it’s not what you want to hear, but I also don’t want to sugarcoat that. We are living in unprecedented times,” Lara said.

Offering some reasons for optimism, the commissioner stated that “the signals” CDI is sending to insurers about its understanding of the need for “massive changes” and about putting those changes on the 2024 agenda are already having positive impacts. They are spurring “changes in the outlook of insurance companies looking at us again.”

He added: “You’re going to see next year, hopefully some balancing out of the market,” and praised CDI staff for opening up a dialogue with insurers — an activity that he said has not happened in the past.

“We continue to be vilified because we’re actually having conversations with the entity that we regulate, which makes no sense to me. We should be talking to the entity that we regulate,” he asserted.

“What do we tell our constituents?” Assemblymember Jim Wood, D-Healdsburg, asked Lara at a later point during the hearing. “People that are being canceled now, being forced onto the FAIR plan … They want to know when are we potentially going to see some relief — a range, a period. Is it a year? Two years? Is it five years, because they have to plan their lives out.”

Lara used the word “hopeful” multiple times in responding about milestones possible in 2024 and 2025.

“Hopefully by the beginning of next year, some of these insurance companies, hopefully, are starting to write new business as we’re expediting and really working hard to finish [reviewing] rate applications,” Lara said, referring to a backlog of 95 rate and rule filings that CDI needs to work through apart from working on the modernization effort. He also reiterated his idea that allowing California-only reinsurance costs and catastrophic model results to boost rate indications is “already sending the signal that California is going to modernize, finally,” to insurers poised to expand or return to write business they have been shunning in 2023.

“Nobody wants to leave California; we’re the largest market. But it’s come to the point that because we’re so archaic with these rules,” insurers were forced to exit. Staying put was an option “back in the day, when there was one catastrophe … Now, [there are] multiple catastrophes, particularly since 2017. And then you have an increasing amount of reinsurance to cover the catastrophic losses happening around the world,” Lara said.

Coming back to address the question, he said, “I’d tell your constituents that hopefully we start seeing some relief by next year as we look at these rates. And [then] I would say by hopefully 2025 we start seeing some sort of the market fixing itself. That’s definitely my hope.”

Wood worried aloud that things will get worse for his constituents before they get better.

“I will tell you that my biggest fear is that we have another 2017 or 2018 that unravels this agreement,” Lara said, referring to years of significant wildfire losses. Still, putting that prospect aside, he added, “I don’t think it’s going to get worse,” suggesting that insurance businesses, like homeowners, “need certainty. They need to know that we’re moving in the right direction,” he said. Now, they have some sense of that direction. “Even the conversations we’re having have improved our opportunity to be able to keep and maintain insurance growing. You can ask the insurance companies yourselves,” he suggested.

Why Is This Taking So Long?

Echoing a repeated refrain from insurers, who routinely list extensive delays in getting rate filings approved in California among the reasons they’re abandoning distressed parts of the state’s homeowners market, 2023 Assembly Insurance Committee Vice Chair Bill Essayli, R-Corona, asked Lara why it would take so long to get all the components of the Sustainable Insurance Strategy completed.

“I agree with the strategy. It is just more on the timeline,” Essayli said. “Just so I understand better why you said you hope to have these elements in place by December of 2024, can you just walk me through why does it take that long? Are we talking about issuing rules? Regulations?”

Lara pointed to a talent shortage in the department and explained the need for three branches of the department — a legal team, rate regulation team and a climate team — to be involved with different facets of the modernization process before everything comes together.

“We’ve had record amounts of folks, since the pandemic, retire,” Lara said, thanking the lawmakers for giving CDI the budget to hire analysts and actuaries needed to plow through 95 outstanding filings.

He also walked lawmakers through the steps involved with making reforms a reality. “I recognize that time is of the essence … but this is not something that can happen overnight,” referring specifically to the intricacies of incorporating cat model output into rates. “The process is really a complicated one, as I’m quickly finding out, and involves multiple branches of my department to work together on a solution,” he said, reporting that the CDI legal team needs to examine how the introduction of models to the rate approval process will meet the public inspection requirement set forth in Insurance Code Section 1861.07.

“It is important to consider California’s public inspection requirement and the extent to which the inner workings of catastrophic models can be publicly disclosed.”

The CDI climate team, he said, is working on how the department will engage with experts to strengthen its understanding of wildfire modeling factors, and is “also using a data-driven process to define what will constitute a distressed area for the purpose of meeting an insurance company’s commitment to increasing their market share in these areas.”

‘We can’t operate under outdated regulations that no longer reflect the risk that we’re living in,’ Commissioner Lara said at a Dec. 13 hearing before California’s Assembly Insurance committee, stressing the need to incorporate catastrophe modeling and reinsurance costs in rate determinations going forward.

In addition, the rate regulation team is working on the regulatory text, which will set forth how the models are going to be used in rate applications. “The current rulemaking process formula is not structurally set up to accept the modeled losses,” Lara said, noting that once all the regulations are finished, before year-end 2024, the Office of Administrative Law must approve them — and then insurance companies can come in with their new rate filings.

No More Games

At other points during the hearing, Lara suggested that insurers themselves delayed approvals with incomplete rate filings in the past, and also made reference to delays caused by intervenors empowered to represent the interests of the public by a decades-old law, Proposition 103. CDI will demand that both tighten their processes to improve timelines, the commissioner said.

“For insurance companies, we intend to enforce the requirements that a complete rate application must be submitted to the department before the clock on reviewing the application begins. Let me tell you in the past we have allowed insurance companies to submit their application without the complete data needed,” Lara said.

Going forward, CDI will provide insurers with “the right reconciliation tool to assist them” in providing complete filings, he said.

“Similarly, we will allow third-party intervenors in a rate application to only raise issues that are relevant in the application. Raising unrelated or irrelevant issues only serves to slow down the process, which has a direct impact on consumers and insurance availability,” he said.

Wait. What?

Wood requested more specifics on the baffling idea that an insurance company would submit an incomplete rate filing application.

“What we discovered when I came in was that this was just par for the course,” Lara insisted. “Submit an incomplete application, have it start with the analyst, and then you’re working back and forth, which also creates this backlog and really just exacerbates the time that you need.”

Carriers would ask, “‘What’s happening with my rate application?’ I can tell you, 80% of the time,” according to CDI analysts, “we still haven’t received information. We’re waiting on them [carriers] to respond [with] the information that we need.”

Recalling his early days as a new insurance commissioner back in 2019, Lara said he was as mystified as Wood when CDI approved a rate, and the insurance company getting the rubber stamp on its rate filing immediately submitted another. More often than not, the new filing “was incomplete, creating this animosity once again with our department, which really has no time to start second-guessing these numbers,” Lara said.

(Editor’s Note: On earnings conference calls, carrier executives often note that their companies typically file for multiple 6.9% rate increases in California, even though they need higher jumps. The 6.9% requests escape the lengthy intervenor process, which kicks in for reviews of rate filings with indications higher than that threshold.)

As part of the negotiations to allow carriers to include cat model output and reinsurance costs in ratemaking going forward, “both parties came together and said we’re no longer playing this game,” Lara said, referring to a “domino effect” that past practices had on Wood and his constituents.

“You can’t find insurance. You can’t sell your home. It lowers property values. Then guess what? The local government doesn’t have the resources to actually pay for firefighters, right?

“It is just this evil cycle that happens … By the time we’re finishing this back-and-forth, the risk is going up. But the rate is still staying flat because we’re still negotiating a complete application. So, we’re never going to close that protection gap and we’re never going to get to be able to have the adequate risk being reflected in these rates” unless the process is tightened up, Lara said.

Diverse Intervenors

At several points during the session, Lara also described intervenor routines that have delayed rate filing approvals, reporting that intervenors aren’t always ready on Day 1, as required by Proposition 103 — the law that allows public participation in the rate review process — and often just “cut and paste” objections raised by CDI experts.

Referring to the most active intervenor group, Consumer Watchdog, Essayli insisted that Lara should support elimination of the intervenor process. “You are the consumer watchdog. You are elected by the majority of voters in the state. You look out for the consumer,” the assemblymember said.

In Lara’s view, intervenors, which are unique to California, play a pivotal role working with CDI. “What we need to do is make sure that it’s not just one organization that’s doing the intervening — that we actually allow for diverse intervenors, people that come from the communities that are suffering, that want to understand the rate process,” he said.

That’s a tall order, admitted Chief Deputy Commissioner Michael Martinez, who noted that nonprofits that CDI has encouraged to take intervenor roles in the past are hampered by the costs involved with engaging analytic staff, and by the fact that compensation for intervenors (ultimately paid by insurers) comes after the fact, requiring approval of an administrative law judge.

Urgent and Deliberate Actions

Lawmakers also asked for some specifics on how CDI could come up with a workable formula for California-only reinsurance costs and cut down the complexity involved with greenlighting cat models.

On the cat model front, Lara disclosed some news — that CDI is examining the use of both private and public cat models. “We are going to be pursuing both tracks,” he reported, noting that creating a public model is a goal because such a model can be used as a benchmark. “One thing is clear — we can no longer rely on historical data to determine the risk, right? So, we eliminated that immediately. Now we’re looking and working with our counterparts throughout other states, in particular, the western half of the country … How are they protecting consumers?”

As for reinsurance, Lara said he has stressed to reinsurers that California is the largest market in the country and fourth in the world and has asked them whether a California’s-only reinsurance formula can be developed. “They’ve all come back and said there’s absolutely something we can do,” he said, noting that the process of introducing this needs to be done through a public forum.

“I guarantee that will be one of the toughest things that we do, and we’re committed to getting it done by 2024 in December. It’s all hands-on deck for us,” Lara said.

During his opening remarks, Lara reported that seven of the top 12 property insurance groups had paused or restricted new business in California in the past year. “For many people who cannot obtain insurance at any price except from the California FAIR plan, this is truly an insurance emergency,” he stated, asserting a rising number of policyholders in the FAIR plan threatens the solvency of insurance companies in the voluntary market. “If the FAIR plan experiences a massive loss and cannot pay its claims by law, insurance companies are the ones on the hook for the unpaid FAIR plan losses. While this assessment on insurance companies hasn’t happened in nearly 30 years, it’s the uncertainty that is driving insurance companies to further limit coverage to at-risk Californians,” Lara said.

“We are moving with urgency and deliberately based on facts, and we won’t be pressured by entrenched groups seeking to defend a broken status quo that puts their interest ahead of the public,” he said.