Introductory letter from Pedro Nava, Chairperson of the Little Hoover Commission:
Dear Governor and Members of the Legislature:
Earlier this year, following extensive media coverage of an increasing number of home insurance cancellations and rapid growth in the state’s safety-net insurance option, the Little Hoover Commission launched a study to examine California’s home insurance market.
There have been clear signs for many years that serious problems were brewing in the home insurance industry. In some cases, the consequences for failing to promptly address this crisis have had significant impacts across California’s economy, with ramifications spilling into the real estate, construction, and financial services sectors.
In that the responsibility to monitor and regulate homeowner insurance resides with the California Department of Insurance and the Insurance Commissioner, one wonders why action wasn’t taken sooner.
The Commission heard moving testimony from local leaders representing communities across the state, struggling to assist their constituents find affordable and suitable home insurance. On behalf of their constituents, these leaders voiced frustrations many Californians experience when seeking options to insure their homes or understanding what they must do to protect their properties against the growing threat of climate-related disasters, such as wildfire. Too many told stories of homeowners, unable to afford coverage for their home, making the difficult decision to go without.
At the same time, the Commission also heard testimony from insurers who said they were eager to maintain business in the state but frustrated by what they see as an unfair regulatory framework. Some consumer advocates testified in defense of the state’s regulatory system and argued that it was not to blame for whatever problems exist. All agreed more must be done to resolve this market crisis.
Unfortunately, throughout the Commission process one voice was voluntarily absent – that of the Insurance Commissioner or anyone from the California Department of Insurance. Despite repeated invitations from the Commission and offers to schedule a meeting at the convenience of the Department, our efforts were rebuffed. The Commission appreciates the testimony from former Insurance Commissioner Dave Jones and received input from former Insurance Commissioner Steve Poizner. That the current Insurance Commissioner did not participate is inexplicable and irresponsible.
Stabilizing California’s home insurance market will not be easy. Yet, in this report, the Commission offers a series of recommendations to work toward that goal.
The Commission respectfully submits this work and is committed to working with you to build a stronger and more stable home insurance market. Sincerely, Pedro Nava, Chair, Little Hoover Commission
Executive Summary
California’s homeowners insurance market is in crisis, impacting homeowners and insurers alike.
Today, Californians continue to pay more for their home insurance than in previous years. Despite these price hikes, homeowners here have more affordable premiums than those in many other states. In addition, more homeowners are continuing to lose their insurance coverage than in previous years, and many experience frustration trying to find comparable alternatives. With a contracting market, an increasing number of homeowners have turned to the California FAIR Plan, the state’s insurer of last resort, which typically provides basic coverage at higher prices than other policies.
At the same time, insurers say they are contending with growing risks and rising costs, largely associated with the ongoing risk of extreme losses resulting from catastrophic wildfires. In recent years, many insurers have decided to pull back from the state – shrinking their portfolio or pausing writing new home insurance policies – to protect against significant wildfire losses.
While the Insurance Commissioner – who declined to testify before the Commission – has introduced a series of regulatory reforms to make it easier for Californians to obtain home insurance, the changes are not expected to take effect until 2025 with implementation still further away. In this report, the Commission outlines recommendations to inform these reforms and stabilize California’s home insurance market.
Ensure Catastrophe Modeling Regulations Include Public Oversight and Recognize Climate Mitigations
California remains the only state to prohibit insurers from using forward-looking probabilistic models to set their insurance rates. Regulatory reforms are underway to allow insurers to use catastrophe models to better estimate the potential risk of catastrophic events when setting rates for home insurance. While moving forward with these reforms, the state should ensure a strong mechanism for public oversight of the catastrophe models used by insurers, should clarify how insurers will account for any improvements homeowners or communities make to reduce the risks of fire, and require insurers account for mitigations in their underwriting models.
Allow Insurers to Account for Reinsurance Costs in Rate Setting
Insurers currently are prohibited from including the cost of reinsurance when setting rates for home insurance. Proposed regulations would allow insurers to incorporate some of these costs. These reforms should be finalized and implemented with expediency.
Improve Accessibility and Timeliness of Insurance Information
It is excessively difficult to answer basic questions about California’s home insurance market, particularly through information available from the Department of Insurance. Some important data is unavailable online, some is either difficult to access or incomplete, and some is locked away in inaccessible documents. The Department should modernize its website to make data and information more user-friendly and accessible and to ensure that key market indicators are updated regularly, comprehensive, and easily searchable.
Align Information and Requirements to Mitigate Fire Risks and Maintain Insurability
Homeowners need consistent, reliable, science-backed information about how to protect their homes and communities from fire. Today, homeowners may access fire safe guidelines from a variety of sources, but the advice is inconsistent, and it is not clear how improvements may affect a homeowner’s ability to secure insurance. Guidelines for communities to effectively mitigate fire risk are not currently available. The state should define a fire safe minimum set of core, evidence-based mitigations for homeowners and ensure that homeowners are not prohibited from following them. Additionally, the state should work to define similar evidence-based guidelines for communities.
Ensure Homeowners Have Access to All Options for Home Insurance
The state’s home insurance market is intended to be a three-tiered system.
- Most homeowners will insure through the “admitted market” of companies licensed to write policies in the state.
- If unable to acquire coverage through the admitted market, homeowners may turn to “surplus lines” – companies based outside California and regulated by their home state or country.
- As a last resort, homeowners may turn to the state’s FAIR Plan.
Yet it is not clear if brokers and agents are fully aware of the surplus lines as an alternative to the FAIR Plan. The Department should provide on its website clear instructions for brokers and agents on how to contact California-licensed surplus line brokers.
Leverage Property Information to Inform Policy Decisions
Currently, much valuable parcel-level information about a property’s condition and risk is siloed by individual insurance carriers for proprietary use when assessing risk and writing policies. Yet, if made available to the public, this risk information could significantly benefit homeowners, policymakers, fire officials, city planners and others. The state should create an open, shared data clearinghouse of property risk information.
Establish a Public Catastrophe Model for the State
The Insurance Commissioner has formed a work group to explore the creation of a public wildfire catastrophe model, a tool that if created could provide the public and others with a detailed assessment of risk across the state. In partnership with a multidisciplinary team of experts, the state should take steps now to develop an open-source, public risk model to assess the risks of wildfires and other climate-related catastrophes and predict insured losses for homes and communities.
Help Homeowners Protect Their Properties Against Fire
Making a home fire safe can involve significant time and expense, yet doing so can help homeowners protect and insure their properties. California should consider implementing a range of solutions to better support and encourage homeowners to proactively protect their properties against fire hazards.
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The Commission is a bipartisan board composed of five public members appointed by the governor, four public members appointed by the Legislature, two senators and two assembly members. The complete report, titled, “Building a Stronger Home Insurance Market for California”, can be found at: https://lhc.ca.gov/wp-content/uploads/Report283.pdf. Reprinted with permission.