California Insurance Crisis Panel: The State of the Insurance Industry

Levi Sumagaysay: I want to start off with a number. I checked the website of the FAIR Plan this morning, just to double-check how many policies the FAIR Plan has in force. As of March, there are almost 575,000 policies in force at the FAIR Plan. 

I’m starting off with that number and the FAIR Plan. The FAIR Plan is the fire insurer of last resort in California — it’s where people turn to when they can’t find insurance elsewhere. And so the fact that it has 575,000 policies in force — to give you an idea of how much that’s changed, when I first started covering the insurance market for CalMatters in October 2023, that number was at around 300-something thousand. I start off with that number because it’s a really great indicator of the health of the California insurance market — it’s poor, right? I want to quickly summarize some of the factors that got us to where we are, and then I want to ask our panelists to sort of talk about them. One of the factors, of course, is climate change. It has increased the risk of wildfires and other natural disasters in California. Several years ago, we had devastating fires in California. They were deadly; they wiped out whole towns and communities, and insurance companies had to pay billions of dollars in claims after those fires. Shortly after that, we had the pandemic, which upended everything, and it raised the prices of everything and caused inflation… some of which we’re still dealing with today. 

During that time, insurance companies were unable to get approval to raise their rates, and so they started non-renewing Californians. They started pulling out of the state. I want to mention one other thing, which is that insurance companies have at their disposal now some new tools to help them assess these increased risks.

Meredith Fowlie: My name is Meredith Fowlie. I’m a professor at UC Berkeley. I’m Director of the Energy Institute at Haas. I’m not a climate modeler, I’m an economist: I want to be very clear about the limits of my expertise. But I do spend a fair bit of time thinking about how climate change is putting pressure on key sectors in California and driving up the cost of living in California. So, I spend a lot of time thinking about electricity, and increasingly, a lot of time thinking about insurance. The way I think about it, there’s sort of a number of channels through which climate change is creating challenges for insurance markets.

I think first, just the increase in frequency and severity of these extreme weather events — climate is changing, and with that, we’re seeing more of these damaging events. In addition, we’re seeing more people move into harm’s way. We just have more houses in the WUI, which is the wildland-urban interface. We’re building more everywhere, but more in the WUI, and affordability challenges have a role to play in that. That just means when these extreme events happen, there are more people who can be impacted.

As people, it’s expensive to live in the city. When you get pushed out into these areas, you’re also getting pushed into areas that maybe have high fire risk, so that’s one factor. Another factor is that there are plenty of insurance company representatives in the room, so you know more about this than I do, but these extreme weather events are really hard to insure. They’re spatially and temporally concentrated, and insurers have to hold enough reserves to be ready to pay out the claims that happen all at once when these big events strike. That means either you have to hold more capital reserves and/or you have to buy reinsurance, and that increases costs. I want to make one last point, and this is something I think about a lot: when you think about how we’re going to adapt to climate change, insurance is a critical, critical strategy for adaptation. Helping households and firms, and businesses in California adapt to climate change, providing a well-functioning insurance market, is a really pivotal piece of that adaptation strategy.

Levi Sumagaysay: Thank you for that. I think that’s a really good segue for Rex to talk about some of the tools that are available to the insurance industry now, and how that all figures into—you know, insurance companies are saying that you have to adequately price your products to match the risk.

Rex Frazier: Sure. Good morning. For those of you I’ve not met, I’m Rex Frazier. I’m president of the Personal Insurance Federation of California, which is a group that represents about, at this point, maybe 75 to 80% of the market share of the property insurance sold by very large companies.

The problems of today are long in their making. If the goal of this panel—one of the goals—is to help people understand how we got here, it’s because of the state public policy choices that we made, really from 2010 through 2021, where we have just old regulations that do not allow insurance companies to keep up with the actual costs they face to run their business. From 2010 to 2021, we did not even keep up with the national average for premium increases, when it was a low-inflation environment, back in the good old days. Meanwhile, you look at Covered California—let's say in the health insurance context—and they raised average premiums seven, eight, ten percent per year, and nobody bats an eye. But that’s because the federal government subsidizes so much of that purchase.

But when it comes to property insurance, for some reason, we were content during that period of time to allow rates to go up two, two and a half percent a year, and we just got far behind. By the time we got to 2017 and had those massive fires, then we had a repeat in 2018, I think we were really suffering just from those previous decisions that the state had made to not allow companies just to calculate a rate that allows them to do business. Instead of having an orderly transition to a higher-loss world, where, between utility-driven fires and hotter, drier weather, and in particular longer periods of sustained dry coinciding with the seasonal winds that we know we're going to get—instead of having a one-month fire season, what’s our fire season now? No one even really knows how long it is. Where we have the coincidence of these huge, unfightable winds in an extremely dry environment that produce fires that are really not controllable, and as the previous speaker noted, now we have a whole lot more property in proximity to that.

One of the three elements of the Commissioner’s sustainable insurance strategy is we have to be able to have a system that allows pricing to risk. And that’s going to mean a higher price level. Who—who legitimately can talk about the perils of climate change and then expect it to be a lower-loss environment? Are we going to get fewer fires? Are we going to get fewer losses, particularly when there’s more homes near the fire? Of course not.

It’s going to be a higher-priced environment. It’s not a joy to say that—that is just the reality. So, the way that we currently require insurance companies to project their future wildfire losses is we ask them to look backward for the last 20 years. Look at their average losses over the last 20 years and use that to project forward. Meanwhile, all public policymakers regularly talk about the perils of climate change, but we’re supposed to project future losses by looking backward over the last 20 years? That’s nonsense. We have to fix that.

…The Department of Insurance, for the last year and a half, has been working on regulations to allow insurance companies to use those forward-looking, more complicated models. We hope those regulations will be done. But they’re still not done, and it is presently illegal for companies to use these tools when they calculate their rates. As a result, it’s a very difficult environment in which to do business. Until we update, among other things, those pricing rules, it’s hard to foresee the market roaring back.

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Levi Sumagaysay: I want to switch gears a little bit and ask Amy. You know, since this panel is about what’s going on right now—and keeping in mind that there’s going to be a whole panel on the LA fires later—I’m wondering, as executive director of United Policyholders, which educates consumers and helps consumers deal with insurance, what are some of the most common complaints and hardships that Californians are talking to you guys about right now?

Amy Bach: I’m Amy Bach, and I run United Policyholders. We are... let’s see, 34 years old, and we were founded here right around the time of the Oakland-Berkeley fire. Property insurance issues are the primary focus of our work: helping consumers make good decisions when protecting their assets, dealing with the current crisis, working with a lot of people in this room in the pursuit of solutions. But then we are heavily involved in disaster areas and helping people get what they paid for and navigate the claim process. There’s a lot of interplay between what’s going on right now in LA and the marketplace issues that we’re here discussing at a higher level, right? 

There’s been sort of a decades-long struggle over, “Well, what can we do on the front end so that people’s policies actually do cover the full extent of their losses?” That endeavor is being a little bit stymied by the marketplace crisis, because I think a lot of people out there are just trying to keep some coverage in place, and having it be full coverage feels, for some people, like it’s out of price range. Then, of course, people kind of migrated onto the FAIR Plan. That coverage is relatively thin, and unless they’ve been working with a sophisticated agent or broker, they may not have the companion policy that fills some of those gaps. On top of that, some of the legislative mandates that we’ve put into place to try to remedy underinsurance, such as requiring that insurers offer 36 months of temporary rent coverage. I mean, insurers have sort of come back and said, “Well, if you’re going to make us do that,” then those carriers that had had no dollar limit are now putting dollar limits.

For every action, there’s a reaction. We do want to solve the underinsurance issue, but we also recognize that in today’s marketplace, it’s really not feasible for some people to have that coverage. Meredith did a great job at isolating the factors that are causing the crisis. Back in 2015, a woman named Naomi Klein wrote a book called Capitalism and the Climate: This Changes Everything, and she had a chapter about how climate change was going to impact the insurance sector, and she quoted me. This was back in 2015, and I started saying, like, “Well, clearly the consumer is going to be the loser here,” because insurers are not in the business of losing money, so they’re going to make sure that this hot potato of climate change, they're not going to be the ones just sitting there holding that, right? 

Anyway, so clearly the problems people are having in LA—they do derive in part from the reality that insurance companies are for-profit entities, and they’re going to protect themselves. I don’t blame them, I mean, that’s just logic, right? They’re going to make those business decisions because they are businesses. 

…[Amy Bach continued..] Our challenge now, why we’re here, is to really innovate. There’s a press conference that some of these people impacted by the fire have sprung up. They’re mad about not having enough insurance, about being in the FAIR Plan. They’re very, understandably, very upset about how the smoke claims are playing out and all that. They put all this pressure on the commissioner. They wrote to him, they did a press conference saying, “You shouldn’t approve State Farm’s rate increase until they straighten up and fly right on our claims,” and that put some very challenging lines we have to walk. Ultimately, we know those are sort of apples and oranges. The rate that they need is one thing, and then their claim handling is something else. We have done our best to help point these activists in a constructive direction, but I would say it’s a pretty fractious situation right now down in LA.

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Levi Sumagaysay: Let’s talk about mitigation. I want to ask Rex: Do you think that these regulations the commissioner has put in place—which are just now starting to be implemented—will help? Can you talk about whether the industry is going to be able to more accurately take mitigation into consideration when pricing policies?

Rex Frazier: …What’s causing our problem is: if a company has to make a certain amount of money on a statewide basis in order to pay their claims, pay their employees, pay their agents’ commissions, and do the other elements of running their business—and they’re not allowed to charge enough to meet those obligations—what are they supposed to do?

That’s when they start having to non-renew people. It’s a self-inflicted wound, the position that we are in right now. When we get questions about mitigation, and someone says, “Well, when are you going to start allowing a discount for this or that?”—it’s like, let me get this straight—a company is not allowed to earn enough money to pay their claims, and you’re asking when they’re going to discount their premiums while they’re already losing money? Why are we having that conversation?

What’s causing the problem is the current regulations, which are not mandated by Proposition 103, and as much as people don’t love Proposition 103 because it’s more regulation, but that’s not what’s doing it. It’s the regulations the Department of Insurance put in place in the early 1990s, and have refused to change. It’s a state public policy choice, unilaterally made by the Department of Insurance. They can unilaterally fix it, and we look forward to them fixing it.

Levi Sumagaysay: I, too, am a homeowner in California. I’m with State Farm, and my husband did say that our insurance agent has already been in touch because of what happened yesterday. My question is—because the new regulations will allow for cat modeling—I’m just asking a question that I’ve been asked by many readers who have written to me. They’re asking about mitigation and whether that’s going to help them with their insurance, whether it’s with price or with availability. Because the insurance industry has been asking for these new regulations, and I think I’ve talked with you, and you have said, “Okay, yes, I’m cautiously optimistic about cat modeling and being able to factor in reinsurance.” I’m asking what other people have asked me: If I try to protect my home, my property, against fire—will the insurance companies give me a discount? Because I am having a hard time affording these insurance premiums.

Rex Frazier: There are already regulations in place that mandate a discount regime by the Department of Insurance, required by law, and every rate filing has to outline very specific rules for the mitigation discounts they provide. Unfortunately, the Department of Insurance chose to do it in a way that was not particularly helpful, because what the fire research shows is that there are six areas of improvement on a home, and they each must be done.

Just because you do one or two or even five, each one is an independent vulnerability to an ember that lands on your property. Just because you put mesh on your attic vents and you cover your eaves, well, if you don't have the proper roof, or if you don't have dual-pane windows, or if you don't have six-inch exterior siding gap above the ground, or you don't have a five-foot ember-resistant zone around your house—each one of those is an independent source of ignition from an ember.

The Department of Insurance—we said, hey, have regulations that acknowledge these, all six things have to be done. They said, no, we'd prefer an a la carte approach: if someone does one thing but not the other five, they deserve a discount. We say, okay, but that doesn’t merit very much because you haven’t functionally done anything. The Department of Insurance regulations say you have to give a non-zero discount for each individual mitigation. Non-zero. As we predicted, guess what companies did for each individual mitigation? They did a tiny, tiny discount that isn’t worth it, right? But if you do all six things, you get substantial discounts. That’s already the law now, but the important message is you have to do all of them. But even if you do all of them, there’s a limit to parcel-level mitigation. If anyone tells you that you, on your parcel, can stop a 100-foot-high wall of flame from consuming your home, that’s not a realistic expectation. Because in these wind events over 50, 55 miles an hour, you can't even assault the fire from the air, because planes and helicopters have to be grounded.

Now, what are you going to do if you haven’t perfectly pre-positioned assets, like they did for the fire in Windsor a couple of years ago, which was an excellent response and they saved that town? That was great. But they didn’t have pre-positioning of assets for the LA fires, because you can’t always predict exactly where the fire’s going to take off. What do you do? A fire of that magnitude, with that wind, and without pre-positioning of resources—a parcel-level mitigation effort is not going to stop homes from burning, and that’s what happened. Of course, the insurance industry believes heavily in mitigation. We’re one of the largest funders in the United States of mitigation research.

But we have to be clear about what that mitigation can do at the parcel level and what needs to happen at the community level. There’s a lot of discussions at the community level that city councils and supervisors don’t want to have, because it’s going to change what the community looks like, and neighbors are going to be angry when there’s substantial efforts to reduce vegetation. Those are much harder discussions than we’re having here today.

Amy Bach: I want to talk a little bit about what's actually happening on the ground, because Rex lives in Sacramento, and is very steeped in the policy and many years of frustration, I think, with Prop 103. But it's fascinating to hear his perspective, because on the consumer side, there's been a lot of criticism that the sustainable insurance strategy was a giveaway to insurers, and now they got everything they wanted. You know, they get to use cat models, which, by the way, they do get to use in almost every single other state. It did kind of disadvantage us in that way that they were not allowed to use them.

It's working its way through. It's on its way. The print process is happening. But I want to go back..so my organization, we try to be problem solvers. We're very pragmatic. When we saw the markets start deteriorating back in 2017, actually, even before the Atlas and Tubbs fires, we had started this as the Governor’s Tree Mortality Task Force sprung an insurance subgroup. We all started meeting. A lot of the people that were in this group with me were fire regional, rural firefighting agencies that would recount these organic programs they had built when somebody would get non-renewed.

By the way, we're talking about discounts. I think the biggest impediment we face right now is that people are not getting rewarded with renewals when they invest time and money. So, it's in home hardening, defensible space, community-wide efforts—that's a bigger problem to me than the discounts. I'm not trying to underemphasize the pain of the premium increases, but I think we really need a scenario where insurers feel a lot more confident about coming back into areas, and not just because they’re getting the rate that they need, but because they feel that the risk has been meaningfully reduced.

We're trying to find those points of restoring insurers' confidence in areas, as one palliative, right? While we do the regulatory work, while we do the consumer education, while we are looking for entrepreneurial activity in the space that's not just non-admitted, less regulated insurers coming in. But anyway, at the end of the day, I would say one of the biggest heartbreaks I’ve had recently was to have Mark Brown, who's with the Marin Wildfire Authority. They floated a bond measure, got to finance matching grants for their homeowners to do the work. They have all kinds of events that they do that are very helpful for property owners to do their part, and then for the community as a whole to try to reach that, not just get the Wildfire Prepared Home designation from IBHS or meet the Safer from Wildfire standards that the DOI and Cal Fire put together, but to get that sort of saturation of take-up that makes it a Wildfire Prepared Community.

We pushed very hard for the development of the official six steps before they were even in place. Let's make sure everybody knows what they can do now, and we’re doing everything we can to help them do those things, which often means grant funding. But the biggest heartbreak with the Marin Wildfire Authority is a community that is investing a lot of money, a lot of time, a lot of work into helping their residents reduce risk—and Mark Brown is everywhere, speaking on panels, and he’ll tell you that he can’t give me a single example of one of his homeowners who was able to get a renewal reversed on the basis of the work they did.

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Levi Sumagaysay: Amy, do you think California consumers are aware that as the State tries to fix this problem, they're most likely going to be facing higher and higher rates? I want to pose that same question to Rex and ask him, Will these higher rates that are sure to come help with the availability of insurance in California?

Amy Bach: There's a spectrum of people's views on people who live in rural areas, or if anybody who lives in an area where there's been a wildfire is a little more pragmatic and recognizes that, you know, the days of paying $1,000 a year for your home insurance [are] long behind us. People understand that. They're willing to pay more to keep their assets protected. But the problem is, how much more? People were hearing insane premium quotes from non-admitted and also the FAIR Plan, and that’s been a challenge. At the end of the day, we're on the road to fixing what insurers didn’t like about the regulatory system. We're on the road to helping people understand that if they want to live in these beautiful places, now that the risk is higher, they're going to have to pay a little more. But the challenge is that people are frustrated that they don’t have a remedy, that they don’t have a hook when they have invested time and money to do these hard things. Almost everybody is on the same page about the importance of supporting mitigation, supporting home hardening, and supporting defensible space. Everyone agrees. The insurance industry wants to buy in. They just need a little bit more confidence in the magnitude of risk reduction.

Rex Frazier: I can say we have been involved in plenty of public opinion research activities just to understand where the population is. I think it’s fair to say, the average resident in California knows that rates are going to be higher. They don’t love that, but they accept it. They’re very adult about it. They just want to know that whatever the price is going to be, it doesn’t break the bank for them, and they’re with a company that they understand and have trust in, and they can not worry. Now that doesn’t mean there’s going to be endless patience for rate increase after rate increase, but I’ve been pleasantly surprised by the outlook of people who just understand the serious situation that we’re in. Remember, this is a situation that developed over a long period. We should have had an orderly rate increase process over an extended period of time, but we chose not to do that. That’s not climate change’s fault. That’s not inflation’s fault. That is, the state of California chose, over an extended period of time, not to allow rates to go up, not even to match the national average increase in rates. Relative to the rest of the United States, we are an average premium state that is not anywhere near the top, and while that may not be pleasant news, that is just the fact. We’ve chosen to continue to have an environment where we make it difficult for companies to raise prices.

Why do we think that’s going to be a system that works? It doesn’t work, and we’re seeing that. You know, the traditional resting point of the FAIR Plan is about 125,000 policies at any one time, and now we’re certainly going to be above 600,000 by the end of the year. It’s growing, what, 20,000 a month? Because of what we’ve done in the regular market to hold prices down, and made it so that companies cannot continue to bring in enough money to have a funding system to fund the fires all across the state, what do we do? We create a situation where they can’t do business everywhere, and we’re somehow self-satisfied that we drive people to the FAIR Plan or the non-admitted market. It’s a total bad policy decision that we’ve made that we have to correct. So it does mean that we have to get to a real price. And remember, under Proposition 103, as much as people like me whine about Proposition 103, remember the language of Prop 103: no rate shall be inadequate, excessive, or unfairly discriminatory.

It’s the state’s responsibility to make sure that there are rate levels that do not jeopardize a company’s solvency. We are with the state’s largest company, and they had to make a rate filing saying, “We need higher rates than the state’s formula will allow because of our financial position.” They needed a special process, which made it way more complicated. The judge’s decision yesterday he noted that at the end of 2022, State Farm’s surplus was $2.2 billion. And at the last count, it was $620 million. 

We have chosen this system, and it’s getting the predictable result. Now we can’t have rate increases forever. I’d love to be in a position where companies have enough rate increases so that they can start doing business again in more communities, and then we can start talking about: what are we going to do to bend that cost curve down, and what are going to be the expectations for communities—well beyond parcel-level mitigation—what are going to be the expectations for communities to start figuring out a way to stop these huge urban conflagrations which drive these unimaginable losses?