California Legislature Punts on Badly Needed Insurance Fix

Written by Apartment Management Magazine on . Posted in Blog

By Steven Greenhut

The basic rule of thumb in the California Legislature is that lawmakers will spend the bulk of their time meddling in areas they should avoid while steadfastly not addressing the matters they should. So as the Legislature finishes up until next year, it’s not surprising that legislators were busy, say, boosting the minimum hourly wage to $25 for health care workers, forcing companies to reveal their “carbon footprint,” and requiring employers to give earlier layoff notices.

The latter is timely, given that so many companies are fleeing the state, but I digress. However, lawmakers really should have addressed the state’s burgeoning homeowner-insurance crisis, as a variety of major companies — including its largest insurer, State Farm — have announced that they no longer will write new fire policies. That leaves homeowners in fire-prone areas with little choice but to rely on the state-created, industry-funded temporary “safety net” insurer known as the California FAIR Plan.

“A rumored legislative deal aimed at keeping home insurance companies from bailing on California is dead now that the deadline for a bill has passed,” the Mercury News reported this week. “But a consumer group that has been attacking what it called a back-room insurance bailout plan warned Tuesday that those secret talks with the state’s Insurance Commissioner haven’t ended.”

It was no back-room deal but, reportedly, an effort by Gov. Gavin Newsom and more sensible Democratic lawmakers to implement some reforms to streamline the way the California Department of Insurance approves proposed rate hikes. As I’ve explained in previous American Spectator columns, voters in 1988 passed Proposition 103. That required the insurance commissioner to approve any rate increases in advance — and also gave the commissioner the power to roll back prices.

The ensuing bureaucratic process disconnected rates from actual risks — and empowered consumer group attorneys to act as “intervenors” who are paid legal fees to essentially oppose proposed hikes. After the state endured a few grueling wildfire years, insurers have been unable to price their policies to cover their risks. The approval process can take many months, and insurers always face the risk of having grandstanding commissioners demand a rate reduction instead.

The obvious result — and this takes place whenever price controls govern any industry — is that insurers exit the market, and policies become pricier and harder to find as a result. During a recent interview, Newsom “called the retreat of home insurers amid rising climate disaster costs a ‘waving red flag’ and compared California to Florida, where Gov. Ron DeSantis is also grappling with insurers leaving the state in the wake of costly weather events,” per a Politico report.

Newsom said the legislative deal “unfortunately” fell through: “I say unfortunately, because time is of the essence.” Yet timing wasn’t essential enough for his state’s Legislature, which does have the knack for punting on the state’s truly pressing problems (homelessness, pension debt, failing public schools, etc.). It’s unclear what Insurance Commissioner Ricardo Lara, who has been chastened for his inaction by some media sources, plans to do about a crisis that he continues to blame on climate change, inflation, and everything other than the state’s price controls and inefficient rate-approval system.

The department issued a vague but encouraging statement this week that, at least, promised “a package of regulatory solutions that will streamline the Department’s rate review process, opening it equitably to public input — not just the entrenched interests that have benefited materially from the status quo.” The department can fix some of the issues without running afoul of Proposition 103. We’ll see what that package includes, but, as Newsom said, time is of the essence.

For starters, both men should stop worrying about demands from Consumer Watchdog. The Mercury News reports that the group, whose founder authored Proposition 103, demanded that Attorney General Rob Bonta investigate insurance companies under antitrust laws for their decisions to stop offering policies — even though their decisions each came individually over the course of several months.

Investigating insurance companies for not offering more policies will hardly encourage them to offer more of them. Consumer Watchdog’s letter made some ridiculous allegations, such as this one: “The insurance industry is at this very moment executing the final steps of its plan to instigate and coordinate shortages in California’s insurance markets for its financial benefit.”

The group claims that writing insurance is highly profitable in California, but, if it’s so profitable, then why would the state need to force them to sell more insurance? Typically, companies are eager to participate in markets where they stand to gain large profits. By the way, insurance premiums have mostly fallen in urban areas. It’s the wildfire-prone areas that pose troubling levels of risk and where streamlined pricing approvals are so crucial.

Yet these consumer groups and some legislators apparently believe that the best way to encourage more insurance underwriting is to harangue the insurance companies that are expected to provide the policies. The state’s increasing dependence on a bare-bones insurance provider poses a threat to the state’s insurance industry. Grandstanding isn’t going to solve it.

It should go without saying that a properly functioning insurance market is crucial for homeowners and businesses. But apparently the Legislature isn’t in a rush to solve the problem. But don’t worry; it did have time to pass a bill outlawing the watering of some decorative grasses. That’s perhaps the best example of the state’s recent priorities.