By Kathleen Pender, SAN FRANCISCO CHRONICLE
August 8, 2020
Nearing the end of their legislative session and the beginning of wildfire season, state lawmakers are pushing through an industry-backed homeowners' insurance bill despite fierce opposition from consumer groups and California Insurance Commissioner Ricardo Lara.
The complex bill essentially would let insurance companies request higher rates than currently allowed for homeowners' and renters' policies in selected wildfire-prone areas in exchange for promising to sell a certain number of policies in all those areas combined.
Backers say it would encourage mainstream, state-regulated companies to write and renew more policies in higher-risk areas, so consumers aren't forced into the Fair Plan, the state's insurer of last resort. Fair Plan policies, which are backed by state-regulated insurers, generally provide less coverage at higher prices than standard, comprehensive homeowners policies.
Some insurers stung by losses from the state's devastating wildfires have pulled back in risky areas, forcing more homeowners to buy policies from the Fair Plan or from surplus lines carriers such as Lloyd's of London that are not state-regulated.
Lucy Smallsreed and her husband were forced into the Fair Plan in 2019 after Allstate refused to renew a policy on a home they own in Inverness, in West Marin. The Fair Plan policy cost $2,235 a year, but "it basically only covers the house for fire. It doesn't cover water damage; contents unless it's from fire, smoke or internal explosion; no personal liability; living expenses; debris removal; no fence or other structures" or building code upgrade, Smallsreed said.
The Allstate policy cost $1,995 and covered those things. "We are now getting way less for more money," she said.
Opponents of AB2167 say it will set up a pricing mechanism outside of Proposition 103, the 1988 law that has kept homeowners insurance rates in California below the national average, and won't guarantee that all homeowners in a targeted area will be offered a policy.
"What it lacks is a requirement to provide insurance coverage in ZIP codes where homeowners are struggling to get that coverage," said Assemblyman Marc Levine, D-San Rafael. He voted against the bill when it passed the Assembly 61-3 on June 8. On Tuesday, it passed the Senate Insurance Committee 12-0 following a hearing, and has moved to the Senate Appropriations committee.
Under the bill, a company could propose an "insurance market action plan," or IMAP, for one or more "eligible counties" of their choosing.
These are counties where Fair Plan policies account for a certain percentage — ranging from at least 0.15% in the largest counties to 1% in the smallest — of all homeowners' policies in that county. The insurance department says 21 of the state's 58 counties would qualify today.
The industry says 28 would, including Los Angeles and San Diego but no Bay Area counties. A proposed amendment would add Sonoma, Napa and other counties that have had declared wildfire disasters in the past five years.
For better or worse, the plan would not apply to homeowners like Smallsreed, who live in fire-prone areas in non-eligible counties, such as the Oakland hills and parts of Marin.
For each county where it files an IMAP, the insurance company would define areas within the county where it "proposes to sell policies" covered by the plan.
In these areas, the insurance company could include two things in its rates that are not allowed under insurance department regulations. One is its net cost of reinsurance, which is insurance that insurance companies buy that pays some of their claims after a big disaster. It could also factor in expected losses based on catastrophic-risk models, which are computer programs designed to predict losses from hurricanes, earthquakes, wildfires and other catastrophes. The bill says these rates "shall not be excessive, inadequate, or unfairly discriminatory," and shall be "actuarially sound."
This alternative rate-setting mechanism would result in premiums that are higher than what companies can charge now, but below Fair Plan prices, said industry spokesman Rex Frazier, president of the Personal Insurance Federation of California.
Frazier said some companies simply won't sell at the allowed rates and this new plan would pull them in. "The goal is to have a plan that depopulates the Fair Plan," he said.
Companies can choose which areas, they want in the plan, but the bill says they should "avoid overconcentration in any one particular area."
In exchange for higher rates, the company must commit to selling enough policies so that their market share in all areas where they are getting IMAP rates is equal to at least 85% of their statewide market share.
The 85% requirement does not apply to each county or portion of a county individually; it applies to all of their IMAP regions combined. So there's no guarantee a homeowner in an area included in the IMAP could get insurance.
Companies could "cherry-pick places they think are the safest risk," said Bryant Henley, special counsel to the insurance commissioner.
Harvey Rosenfield, the founder of Consumer Watchdog who wrote voter-approved Prop. 103, said the bill "allows insurance companies to maneuver all around Prop. 103 controls around price gouging."
Robert Hunter, an actuary and director of insurance with the Consumer Federation of America, said in a letter that allowing reinsurance in rates could raise them by 40%.
The industry argues that all IMAPs would require insurance department approval before they could take effect, giving the commissioner the power to prevent price gouging and cherry-picking.
The bill's co-author, Assembly Insurance Committee Chairman Tom Daly, D-Anaheim, said during Tuesday's hearing that, "The bill does not in any way change or limit the authority of the insurance commissioner under Proposition 103." He added, "The committee has suggested amendments ... to make that point absolutely clear."
If an insurer submits an IMAP that is not approved within 120 days, the bill says the insurer "may continue with its previously approved rate" and the insurer's 85% market share commitment would be suspended until the commissioner and insurer reach agreement on the filing. Critics say this means if an insurer gets an IMAP approved, then filed a subsequent plan that was not approved, it could continue charging its previous IMAP rates without having to meet the commitment.
At last week's hearing, Lara argued that insurers can already request higher rates to compensate for wildfire risk, "and if the insurance company can clearly demonstrate that the filed rate under Prop. 103 is not excessive, not inadequate and not unfairly discriminatory," it will be approved. The department says it approved 92% of rate filings last year.
If the bill is passed by the Senate, and again by the Assembly with amendments, by Aug. 31, and signed by the governor by Sept. 30, it would take effect immediately. A linked bill in the Senate, SB292, would also have to pass. But it probably would take at least six months before IMAPs could be submitted, approved and sold.
A competing bill backed by Lara and consumer groups went nowhere this year. It would have set statewide standards for fire-hardened homes and communities and required insurers to sell policies on homes that have met them.
The industry-backed bill says an IMAP filing "shall set forth community and parcel-level mitigation standards," and "procedures for verifying mitigation activities," but it's unclear what this means.
This bill has support from groups outside the industry, including from the Rural County Representatives of California. Homeowners in rural areas have been especially hard hit by nonrenewals, "and now farms and farmlands are getting non-renewed," said Staci Heaton, a lobbyist for the association.
"The insurance industry is suffering a lot of losses. There's not a lot of sympathy for that, but we don't want them to pull out of California," she said. "Most residents in high fire risk areas understand that they may have to pay higher rates, but they'd rather do that than go on the Fair Plan."
The bill "isn't perfect," but "it's a good jumping-off point," Heaton added. "We have to start somewhere (and it's) better than what we have now. The commissioner and insurance industry — one's on the moon and one's on Jupiter."
Kathleen Pender is a San Francisco Chronicle columnist. Email: [email protected] Twitter: @kathpender