Washington, D.C. – A package of homeowners insurance bills in Sacramento will lead to premium hikes of at least 40% across the state and increase the number of Californians who struggle to find coverage. In a letter to state legislative leaders, CFA’s Director of Insurance J. Robert Hunter – a nationally recognized actuary, former Federal Insurance Administrator, and former Insurance Commissioner of Texas – explained that the insurance industry-sponsored plan (AB 2167) to pass through the costs of reinsurance to consumers has been disastrous in other states that allow it and is one of the reasons home insurance is much more expensive in other catastrophe prone states. The bill is likely to be considered at a State Senate Insurance Committee hearing on August 4.
“I have no doubt that this provision of AB 2167 will drive up the average cost of insurance in California by hundreds of dollars per home and subject the state’s homeowners insurance market to additional spikes in price and non-renewals as it becomes tethered to unregulated and erratic global reinsurance markets,” Hunter, a Fellow in the Casualty Actuarial Society, wrote. “In my actuarial opinion, just the provision … allowing unregulated reinsurance charges to be passed through to California consumers will immediately cause rates to rise by 40%… But not only will rates immediately jump across the board, this change will expose all California homeowners to periodic reinsurance-driven spikes in premiums of 50% or more and spates of non-renewals … [following] a major catastrophe in California or one outside of the state, like a series of hurricanes, or a tsunami on the other side of the world, or even a terrorist attack.”
The letter explains that current California law, which prevents the pass-through of reinsurance costs – the coverage insurance companies purchase to insulate themselves from some large losses – has protected consumers from much higher premiums faced in other large states such as Florida and Texas and other wildfire-prone states like Colorado. While insurers in California do purchase reinsurance, the premiums charged to customers reflect the actuarial rate the companies need to provide coverage without adding in the extra costs if companies decide to off-load some of their exposure to reinsurers.
“Nothing in California law stops insurance companies from buying reinsurance to reduce their losses,” Hunter explained. “The current rules allow sufficient dollars for insurers to purchase reasonably priced reinsurance. Current protections simply prevent insurance companies from jacking up rates on homeowners to cover excessive costs in the unregulated global reinsurance market.”
Hunter also highlights industry data showing that California has long provided a better than average profit environment for homeowners insurance companies, even after accounting for the disastrous wildfire seasons of 2017 and 2018: 8.3% average annual return on net worth in California vs. 5.5% return countrywide. He notes that once insurers receive the billions of dollars of subrogation payments from PG&E stemming from the utility’s settlement with insurance companies over wildfire liability, the industry data will be revised to further increase companies’ profit margins in California.
In Florida, after two bad hurricane seasons in 2004 and 2005, Hunter helped the state craft a response to exorbitant premium increases and non-renewals. Central to the problem was that insurance companies were including their reinsurance costs in customer premiums. The key reform the state adopted, which saved Floridians billions of dollars at the time, was limiting the amount of reinsurance that could be foisted upon homeowners. But, as Hunter wrote, “[t]he legislation under consideration in California would do precisely the opposite and allow insurers to include in customer premiums the same unregulated costs that devastated Florida after it and neighboring states faced consecutive years of hurricane catastrophes.”
In his letter, Hunter points out that while Californians on average pay much less for home insurance than the national average, there are many in wildfire prone areas facing extremely high premiums. In order to address that, energy and resources should be focused on reducing the threat of wildfires and hardening homes to mitigate the risk, but the industry legislation ignores that basic principle.
Hunter said: “Put differently, the legislation would increase profits for insurers without protecting homes from wildfire losses, because the bill does not address the real issue: exposure to wildfire risk. In that regard, California homeowners would be well-served by loss prevention investments and assurances that mitigation will yield the premium relief that should come with risk reduction. But allowing insurers to add unregulated reinsurance premiums into rates would neither lower rates, increase access, or reduce risk in the state; indeed, it would do exactly the opposite.”