Insurance czar needs to step up his efforts
After California endured a long and record-setting drought, Mother Nature bailed us out with a season of unusually heavy rains. It’s a good thing, too, given that our policy makers — mainly the governor and Legislature — seemed like deer in the headlights in the face of the water crisis. Now the state is facing another crisis, but it’s one that won’t fix itself without sensible political intervention.
We’re referring to the insurance crisis. State Farm, which insures more than one in five California homeowners, announced in late May that it won’t offer new policies, although it will service existing customers. Many California homeowners already struggle to find affordable fire insurance following rough wildfire seasons. Since this announcement, Allstate Insurance made a similar move.
For other signs of trouble, the California FAIR Plan — a state-created, insurance-industry funded insurer of last resort — has roughly three times the number of insureds than it’s designed to handle. Auto insurance carriers are pulling out of the market as insurance losses have grown by 25% in recent even though premiums increased only 4.5%.
Other states, such as Florida, face insurance pullouts also, but for different reasons (e.g., hurricanes). California’s problems certainly are tied to our wildfire situation, but the fundamental problem is a political one. In 1988, voters passed Proposition 103 — a measure backed by consumer activists that limited insurance-rate hikes.
Insurers and the Department of Insurance blamed a variety of factors for the latest pullouts (inflation, climate change, etc.) but the problem is tied to the initiative. It gave the insurance commissioner the power to approve or roll back rates. Insurers needed “prior approval” before increasing prices. Because they have political ambitions, few commissioners want to approve major rate increases.
While few consumers get warm feelings about insurance companies, price controls led to predictable results: fewer insurers entered the market. In a healthy market, companies offer policies at competitive prices based on their risk assessments. The government has a crucial role in ensuring that the companies can and do pay out legitimate claims.
But giving government rate-setting powers has distorted the market. When companies can’t quickly adjust rates — rate filings can take six months to two years – they have little choice but to pull back. This leads to less competition. Lawmakers understand California needs more insurers, but Prop. 103 limits their authority. Still, the commissioner and Legislature have tools at their disposal.
Insurance protects our homes and businesses and allows us to drive without facing potential bankruptcy from an accident. So the lack of affordable policies threatens the business climate and Californians’ personal budgets. This situation puts Insurance Commissioner Ricardo Lara on the hot seat.
As the San Francisco Chronicle explained, Lara is in a bind – between insurers who need relief and politically powerful consumer activists who are demanding that he stand up to the industry. The latter have called on Lara to force insurers to write policies — something Lara correctly said he lacks the authority to do. Nevertheless, he needs to get off the fence.
Even with Prop. 103’s constraints, Lara could speed up the mind-numbingly slow rate-approval process. He could allow insurance companies to include the rising price of reinsurance — the insurance that insurance companies purchase — in the rate-determination process. The more reinsurance companies can buy, the more policies they can write.
He could reject vocal efforts to “get tough” with insurers, which will discourage more companies from jumping into our market. We need more choices, not fewer. The insurance crisis seems unlikely to dissipate on its own. We’ll see if Lara is up to the task.