In late May, State Farm made the decision to stop selling new home insurance policies in California, followed by Allstate, who quietly made the same decision last year. This has left Californians concerned about the state of the insurance market and wondering how the state should respond to this crisis. Nancy Watkins, a principal at Milliman, believes that the problem lies in a narrow focus on affordability by the insurance companies, which has compromised availability and reliability. She suggests that the current regulatory system is too rigid and needs to be more flexible in order to accommodate the changing landscape of the insurance market.
While home insurance premiums in California are relatively cheaper than the national average, the state still faces the challenge of expensive housing and the increased risk of disasters. Michael Soller, a deputy commissioner for the state’s insurance department, believes that more companies are unlikely to follow in the footsteps of State Farm and Allstate, but consumer and insurance industry groups, as well as other experts, have proposed various ideas for addressing the issue.
Consumer Watchdog suggests requiring State Farm to continue issuing new policies, arguing that the company has changed the assumptions on which the department’s approval was based. However, the insurance department disputes its legal authority to enforce this requirement. Another suggestion is the use of forward-looking catastrophe models to set insurance prices. Currently, insurance companies rely on past losses to project future losses, but forward-looking models could take into account factors like climate change and the risk of wildfires.
The rising cost of insurance is another challenge that needs to be addressed. The cost of reinsurance, which insurance companies buy to protect themselves, has increased significantly. However, the insurance department has not historically allowed insurance companies to include the cost of reinsurance in their prices. Insurance industry groups argue that incorporating the cost of reinsurance would help them justify their prices better, while consumer groups fear that it would lead to significant premium hikes.
Ultimately, the underlying problem is the increasing frequency of disasters in California due to climate change and the vulnerability of homes. Reducing the risk of disasters would not only benefit homeowners but also make the state less risky for insurers. Measures like installing fire-resistant vents and clearing vegetation around homes have already been implemented, and California has allocated a significant amount of funds to improve wildfire resilience.
In conclusion, the insurance crisis in California requires a more flexible regulatory system, the use of forward-looking catastrophe models, addressing the rising cost of insurance, and implementing measures to reduce the risk of disasters. All these efforts will contribute to a more stable and reliable insurance market in the state.
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