California Insurance Commissioner Proposes New Rule for Fairer Homeowners Rates

California’s Insurance Commissioner suggested a new rule this week that might result in more realistic pricing for homeowners insurance plans.

This is part of Commissioner Ricardo Lara’s comprehensive overhaul of the home insurance market, According to  ABC10. We spoke with the commissioner on Friday to discuss the implications of this week’s announcement for insurance costs and availability. To comprehend the possible implications of the proposed rule, however, you should meet Dan Raley.

“I put in cement and blacktop to mitigate the fire hazards,” he said while giving ABC10 a tour of his yard.

Raley, 63, has resided in his rural Granite Bay house for more than three decades.

“I want to live here for a long time, but I want to be able to afford to live here for a long time,” he was quoted as saying.

He had been paying approximately $1,800 per year for homeowners insurance. This year, his insurance company—which he requested ABC10 not name—more than increased his annual rate to nearly $4,200.

“It’s a struggle,” Raley remarked. “I’m a blue-collar worker.”

Raley stated that his firm provided him with the following reason: “Your rate change is primarily based on your current fire rating.” And I’m like, “Excuse me?” My fire rating? Because I’ve lived here for 32 years and that has never been brought up before.”

He has never filed a claim, claiming to have merely made his property safer from wildfires over the years.

“When I called many insurance companies — eight to 10 other insurance companies to try to get quotes to possibly change my insurance — everyone asked me my ZIP code,” he said. “When I gave them my ZIP code, they told me their company wouldn’t even insure me, that I had no chance of even getting a quote from their company.”

It’s indicative of the current status of California’s homeowner’s insurance market that Raley considers himself fortunate. His insurance provider has not canceled his policy, and he has not had to use the California FAIR Plan, homeowners’ so-called ‘insurer of last resort.’ He is also able to absorb the increase, albeit not readily. He added he knows of several senior people on fixed incomes who couldn’t withstand such a premium increase.

This comes as most major businesses in California’s homeowners insurance market have reduced their business, citing wildfire risk, rising building material costs, and the need for updated state rules. This is why an increasing number of Californians are turning to the FAIR Plan.

Raley and other homeowners may now see some hope on the horizon. Just this week, the California Department of Insurance (CDI) proposed a new rule that they say will allow insurance companies to more accurately price their policies by using forward-looking modeling, allowing them to take into account things like what a property owner has done to protect their home from wildfire.

“This regulation is long overdue,” declared California Insurance Commissioner Ricardo Lara.

The law would let insurance firms to justify proposed rate increases using forward-looking catastrophe modeling, sometimes known as “cat modeling.” Currently, corporations are only authorized to access 20 years of historical data, which they claim prevents them from pricing at the most accurate, granular level.

Lara said his proposed rule would also assist businesses in identifying which property owners are safeguarding their property from wildfires – and offering discounts to those consumers.

“Right now, it is not being rewarded. And so these ‘cat models’ will allow us to do that, which, in the long term, will stabilize and lower rates because insurance firms will resume writing in those communities, lowering costs,” he said.

Carmen Balber is the Executive Director of Consumer Watchdog.

“Let’s be very clear: insurance companies want catastrophe models because it will allow them to raise rates,” he remarked. “That is the insurance industry’s argument: ‘We can’t charge enough because we can’t use these models.'” So there is no doubt that the usage of disaster models will increase rates for Californians. Because it is going to accomplish that, we must ensure that the models are fair.”

She is concerned that the state’s approval process for these catastrophe models will be insufficiently open, as the private corporations that build them consider them confidential. The Department’s catastrophic modeling regulation is presently up for public comment and will be heard next month before going into force. People can read the revised proposed rule, learn more about the hearing, and send comments to CDI HERE.

Part of the proposed rule specifies that before an insurance company can adopt one of these models, it must go through an approval process that includes a panel of experts and any members of the public who wish to participate. According to CDI, those involved in this procedure will be required to sign a confidentiality agreement.

“One of the most important things that a model could do for us is help consumers better understand their own risk,” he said. “And if all of this is contained behind a (non-disclosure agreement) process, how is that ever going to help consumers better understand their own risk of fire?”

Lara believes Consumer Watchdog is getting ahead of itself.

“Consumer Watchdog is already trying to predict what will happen. We’re only just getting started on our transparency process, making sure the public understands what we’ll need and getting their feedback,” Lara added. “All of these are inputs that we will examine when we construct these models and regulations. So we’re still in the early stages.

“We do not oppose the idea of catastrophe models,” Balber stated. “We just want them to be available for public examination. We believe the simplest way to accomplish this and avoid the industry’s trade-secret allegations is to simply build a public model in California, where we don’t have to care about any private company’s profit concerns.”

Lara told ABC10 that his agency intends to develop its own public model in the future, but will rely on current private company models for the time being, awaiting regulatory permission, to allow insurance firms to employ catastrophe modeling in rate-setting sooner rather than later.

“We’re going to work on a tool that will be a significant win for the department. Florida has something comparable in the form of a public model, which we are also looking at and examining,” Lara explained. “It’s a good benchmark to make sure that these (private) models are being accurate and they’re not somehow incongruent to what’s being done.”

He pointed out that creating a public model will require time and money.

“We’re trying to figure out whether there are any cost-effective methods to achieve it, such as collaborating with the Florida public model or leveraging other technological businesses that we have here. “That’s the long-term goal,” Lara explained. “But, immediately, we need to make sure that consumers are being rewarded for the hard work that they’re undertaking and for the thousands of dollars that they’re spending in hardening their home.”

Granite Bay resident Dan Raley believes he and other insurance customers need to see change – and quickly.

“Right now, it doesn’t seem to be working for the insurance industry or the homeowners,” said Raley. “Something’s got to change because there’s just no way everybody can afford it.”

Insurance expert Karl Susman of Susman Insurance Agency believes CDI’s regulations will eventually lead to a market recovery.

“The rates are high. For the most part, there is no competition; however, as these regulations are implemented and carriers begin to enter the market and compete with one another, we know what happens when all of the carriers return: premiums will begin to fall,” Susman stated. “I wish it would happen faster.”

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