Reinsurance Association Releases Paper on California Homeowners Insurance Market, Urges Policymakers Consider Risks of Inaction

The Reinsurance Association of America has come out with a white paper on the California homeowners insurance market that urges policymakers consider the risks of inaction.

The paper, “Dynamics and Challenges in California’s Homeowners Insurance Market,” provides background and recommendations for policymakers as they continue to debate solutions to address the current wildfire related homeowners insurance crisis.

“Governor Newsom, Commissioner Lara, and the legislative and its leadership deserve praise for their willingness to address the root causes of the current insurance crisis, including their funding of wildfire risk reduction efforts,” RAA President Frank Nutter said in a statement. “The next step is ensuring insurance companies receive timely approval to charge an adequate, risk appropriate rate, enabling them to insure catastrophe exposed properties prudently.”

California policymakers are currently discussing possible legislation to address the current crisis, including Proposition 103 compatible modernization to the rate regulatory structure for new policies. One proposal under consideration would expressly permit the inclusion of an insurer’s reinsurance costs in its rate filings. Under a related provision, catastrophic models would be authorized as support for estimating expected insurance losses. In exchange, insurers would be required to increase their share of catastrophe exposed “distressed” markets to at least 85% of their statewide market share.

Nutter expressed concern about some of those ideas.

“While a commitment to increase writings in catastrophe exposed areas is understandable, we are concerned that the 85% threshold is too high. Insurers need to have adequate rates before they expand their writings. They should not be encouraged to expand rapidly. Many insolvencies have been caused by rapid growth by insurers.”

He added: “The actual costs of reinsurance risk transfer should be permitted to achieve rate adequacy first. If a commitment to grow market share in distressed areas is required, it should be achieved in a measured, financially prudent way to ensure insurance promises are kept. Reinsurance is a tool that helps insurers keep their promises.”

Related:

• Report: Climate Change Boosts Risk of Extreme Wildfires 25%
• Viewpoint: California’s Next Steps on Cat Models, Challenges and Issues in Insurance Rate-Making‎
• Delos to Insurers Shedding Wildfire Risk: Send the Homes to Us