California lawmakers must act now to reverse the state’s insurance crisis

Have you been dropped by your homeowner’s insurance company? You are not alone, California is in the grip of a home insurance crisis, with insurers abandoning the state’s market at an alarming rate. Daily headlines announce the withdrawal of major insurance companies from California, leaving homeowners scrambling for coverage. USAA, Allstate, and State Farm have either stopped writing new homeowner’s policies altogether or they have drastically limited coverage for policies they offer. But why are these insurance giants fleeing the nation’s largest insurance market?

The answer lies in the state’s extreme losses, particularly stemming from the severe wildfires that ravaged California in recent years. According to the 2021 California Property & Casualty Market Share Report, insurance companies saw their losses skyrocket, exceeding $15 billion in 2017 and $13 billion in 2018. These losses far exceed previous years’ losses, highlighting the severity of the situation.

The most recent example is the Camp Fire of 2018. Triggered due to negligence on the part of PG&E, the fire ignited by a spark from an electric transmission line, and engulfed parched land for more than two weeks, destroying nearly 19,000 buildings, causing $16.5 billion in damages, and claiming the lives of at least 85 innocent people. This tragic incident stands as the costliest, most catastrophic, and deadliest fire in California’s history. And it underscores the dire consequences when there is inadequate maintenance and oversight within the utility sector.

Why were these losses so staggering, especially considering that wildfires have long been a part of California’s landscape? The crux of the issue lies in the state’s inadequate forest management practices. For decades, California’s leaders have neglected essential measures such as tree pruning, vegetation clearance, and controlled burns, leaving forests vulnerable to catastrophic wildfires, particularly during periods of prolonged drought.

While state leaders have sought to deflect blame onto factors like poorly maintained electrical equipment and adverse weather conditions, the underlying issue remains clear: California’s failure to properly manage its forests set the stage for the unprecedented scale and intensity of recent wildfires.

In a free market, insurers facing mounting losses and increased risk would naturally respond by raising premiums. This, in turn, would prompt homeowners to demand better forest management practices to mitigate the risk of wildfires. However, California’s leaders have opted for more interventionist measures, exacerbating the crisis.

Under California’s regulatory framework, insurance rate hikes exceeding 7% require approval from the state’s elected Insurance Commissioner. Additionally, Proposition 103, passed in 1988, imposes stringent requirements on insurers, hindering their ability to adjust rates to reflect the escalating wildfire risk.

As a result, insurers find themselves grappling with insufficient rate increases to cover losses and future risks, leading to desperate measures such as policy cancellations and stringent property inspections to identify non-compliance issues.

Enter the “FAIR Plan,” California’s state-managed insurer of last resort for homeowners unable to secure coverage from private providers. Despite its ironic name, the FAIR Plan offers minimal coverage for wildfire-related losses at exorbitant premiums, leaving homeowners with few options.

The surge in FAIR Plan applications, reaching 270,000 in 2022 alone, has overwhelmed the system, causing severe delays and leaving homeowners without coverage as they await processing. Meanwhile, mortgage companies impose costly forced insurance plans, further exacerbating the financial burden on homeowners.

Ricardo Lara, California’s insurance commissioner, is proposing reforms allowing insurers to implement rate increases faster. He says these changes are needed to stabilize the market and ensure long-term sustainability. While homeowners understand the need to address the mounting risks posed by wildfires and other natural disasters, naturally they are worried that allowing insurers to quickly raise rates is a burden they cannot afford.

So, what can California do to address this crisis? The most effective solution lies in mitigating fire damage through proper forest management. Additionally, preferential tax treatment for homeowners affected by government failures could provide much-needed relief. Failure to take decisive action exposes Californians to unsustainable costs and the risk of being uninsured. As California continues to face severe wildfires, urgent measures are needed to protect homeowners and ensure the state’s long-term resilience.

Lawmakers should approach insurance reform thoughtfully and prioritize solutions that protect the interests of homeowners while effectively addressing the underlying challenges facing our state. Any reforms need to strike a balance between stabilizing the insurance market and ensuring affordability and accessibility for Californians. It is time for California’s leaders to seize the opportunity to address the root causes of the insurance crisis and safeguard the state’s future.

Melissa Melendez previously served as a California State Senator and Assemblymember. She is now Executive Director of the California Chapter of the America First Policy Institute.