Insurance commissioner candidates have a bigger role in California

from Levi SumagasaiCalMatters

This story was originally published by CalMatters. Sign up for their newsletters.

Several of the candidates running for California’s next insurance commissioner want to address the insurance crisis by getting the state to take on a bigger financial role.

Some of the problems they try to solve include:

• Not all insurance companies will write new policies in high-risk areas for wildfires, prompting many homeowners to turn to FAIR Plan, the fire insurance company of last resort.
• Policyholder rates are rising as Insurance Commissioner Ricardo Lara tackles insurance affordability issues by introducing new regulations that allow insurers to use new additional factors in setting premiums.
• Many of those who are insured and have filed claims after a disaster — such as last year’s deadly wildfires in Los Angeles County — have been frustrated by delays, denials and dissatisfaction with insurers’ handling of their claims. The insurance department recently took legal action against State Farm on such matters.

Their proposals run the gamut: Create a public insurer and eliminate private insurers entirely. Introduction of a public natural disaster insurance system that would complement the private market. Provide a government insurance backstop for insurance companies, also known as reinsurance. Create public-private partnerships that would theoretically give insurers the confidence to continue doing business in California.

State coverage for large fires

More state involvement could help, said David Russell, a professor of insurance and finance at Cal State Northridge who co-authored the report for the National Association of Insurance Commissioners, published last December. The report recommends creating a public-private partnership called the California Wildfire Authority that would leave most coverage to private insurers and shift coverage of major wildfires to the state, including by providing additional reinsurance.

“It’s a combination of trade-offs,” Russell told CalMatters. “The government is going to bail people out anyway. Why not plan ahead? Give everyone the handbook now and fund it properly.”

The idea sounds a bit like what Commissioner nominee Jane Kim, a Democrat, is proposing: a state wildfire and flood authority funded by a portion of policyholders’ premiums.

Similarly, Republican candidate Merritt Farron has proposed a state reinsurance authority funded by a fee that insurers charge their customers. Kim and state Sen. Ben Allen, a Democrat, told CalMatters they are also interested in state reinsurance, but have not included it in their platforms like Farren. Stephen Bradford, a former Democratic lawmaker, wants to explore a public-private partnership that he says could help insurance companies with liquidity.

California has tried this before – sort of

In April, the California Earthquake Authority published report analyzing different levels of state involvement in catastrophic risk. One option: a government bailout that would provide catastrophe reinsurance, which Allen said could “help absorb wildfire losses … an analogy, I guess, is (the Federal Deposit Insurance Corporation) — they stabilize the banking system when it’s under a lot of stress.”

The earthquake authority itself may offer some clues about how California should move forward.

Created by the Legislature in 1996 after insurers pulled out of California after the 1994 Northridge earthquake, the authority is a public-private partnership that critics say does not cover enough of the housing market. In addition, critics continue, the authority’s capacity to pay claims of about $20 billion is insufficient.

“It was a terrible deal,” said Jamie Court, president of the consumer watchdog group Consumer Watchdog. He said coverage through the authority was poor, deductibles were high and premiums were expensive. The court said that because earthquake insurance has been separated from homeowner’s insurance, the premiums policyholders have paid over the past three decades have gone mostly to reinsurance and red tape, not to building up enough reserves.

On the other hand, Russell said, the body has not yet been tested by a major earthquake, and “what (creating it) shows is that in California we can do this because we’ve done it before.”

California and reinsurance

Some insurance industry representatives have questioned why commissioner candidates think California would want to take on the financial risk now largely borne by the FAIR plan, which is required by law to offer policies to property owners who can’t get them from private insurers and is run by an industry alliance.

“It’s easy for people to come up with government intervention solutions that nobody wants to fund down the road with taxpayer dollars,” said Rex Frazier, president of the California Personal Insurance Federation. “By the way, we don’t want that.”

But Farron said he developed his plan with help from the insurance industry, including executives from Acrisure, a large insurance broker and financial services company based in Grand Rapids, Michigan. If disasters strike and funds in the proposed state reinsurance authority are insufficient to pay claims, it could raise funds by issuing bonds that would have the same status as municipal bonds, Farron said. His idea was inspired by public reinsurance programs in Florida for hurricanes, the United Kingdom for floods, and the US federal government for terrorism risk.

Several consumer advocacy groups are more receptive to the concept of reinsurance. Court said it might be a good idea for the state or the US government to provide some protection for insurance companies. (U.S. Sen. Adam Schiff, D-Calif., proposed federal legislation to create a federal reinsurance fund for insurance companies that the insurance industry is opposed.) Amy Bach, executive director of United Policyholders, told the state Senate Insurance Committee this week that she supports “some sort of safety net like the Florida Hurricane Disaster Fund.” Bach told CalMatters later that he thinks state help to “take a bite out” of what drives higher premiums could help.

But Florida is different from California, said Carolyn Kowsky, an economist who studies climate risk and disaster finance. Kousky said Florida’s insurance market is dominated by small players who need reinsurance help, while “the big national players are still writing quite a bit in (California).” Those national companies diversify their risk and can buy reinsurance based on their national portfolio, so those insurers have less need for government protection, she said. She questioned whether the creation of a government reinsurer would make a significant difference to consumers’ insurance premium prices.

Kim said critics of her proposal to create a public disaster insurance fund that would separate wildfire and flood coverage from homeowners insurance — inspired by New Zealand’s program — ignore that “California’s current system doesn’t work, it’s too expensive and it doesn’t cover enough.” She pointed to fire victims in Los Angeles who found they were underinsured and didn’t have enough coverage to rebuild their homes. It has not provided specific figures on how much capitalization its proposed system would need; it’s something that needs to be explored, she said. She predicts her plan will create a revenue stream that the state can invest in fire risk reduction.

“At least some of our dollars will be managed by the public,” Kim said.

Another candidate, Lalo Vargas of the socialist Peace and Freedom Party, wants to go further: He calls for an investigation of California’s 10 largest insurance companies and eventually replacing them with a public insurer run by the state.

“Insurance works better when everyone is in the same bank,” Vargas said. That court, he said, could be filled by taxing utilities and fossil fuel companies “so billionaires can pay the costs of the climate crisis.”

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.