California has introduced new regulations to ease the state’s home insurance crisis, but this will mean Americans will pay more.
The new rules, released Monday by the California Department of Insurance, allow providers to pass the cost of reinsurance on to policyholders.
Reinsurance is actually the insurance that insurers take out. It transfers some of the risk so that no company is overexposed to potential catastrophe.
The cost of reinsurance has skyrocketed in recent years due to the increased risk of natural disasters in the state.
This is partly why insurers have pulled out of the state, and regulators hope the reform will make the market more attractive to home insurers.
Earlier this year, State Farm gave the state an ultimatum, threatening to eliminate coverage if the insurer didn’t raise home insurance rates by millions.
This will be the first time insurers can pass the costs on to California consumers, which is common in all other states.
However, consumer advocates warn that this change will likely lead to immediately higher prices for homeowners, many of whom are already struggling to pay rising premiums.
Doug Heller, insurance director for the Consumer Federation of America, speculated that consumers would see price increases of 30 to 40 percent. San Francisco Chronicle reported.
The cost of reinsurance has soared in recent years due to the increased risk of natural disasters in the state (photo: the Franklin Fire in Malibu earlier this month)
The regulation is the latest step in Insurance Commissioner Ricardo Lara’s sustainable insurance strategy, which aims to solve California’s growing crisis.
To compensate for price increases for customers, regulators have attached a condition to the reform.
This means that insurance companies that pass on their reinsurance costs must also commit to writing more policies in wildfire-prone areas of the state or pledge to maintain their presence there.
“Californians deserve a trusted insurance market that doesn’t pull away from communities most vulnerable to wildfires and climate change,” Lara said in a statement.
“This is a historic moment for California.”
Insurers will have to increase their coverage by 5 percent every two years until they reach the equivalent of 85 percent of their market share.
That means if an insurer writes 20 out of 100 state policies, it must write 17 in a high-risk area, Lara’s office said.
The ministry said it will limit costs for consumers by pegging reinsurance costs to an industry standard that cannot be exceeded.
Insurance companies will be able to decide how to allocate their reinsurance costs among customers with different types of risks, and regulators will review those decisions, said Michael Soller, deputy commissioner of the Department of Insurance.
The regulation is the latest step in Insurance Commissioner Ricardo Lara’s sustainable insurance strategy, which aims to solve California’s growing crisis.
To make up for the price increases imposed on customers, insurance companies must also commit to writing more policies in parts of the state prone to wildfires, or pledge to maintain their presence there (photo: a Malibu home that was destroyed by the Franklin fire)
The scheme was praised by trade group the American Property Casualty Insurance Association.
Laura Curtis, the group’s assistant vice president of state government relations, said in a statement that it was “one of many much-needed reforms to stabilize California’s insurance market.”
However, Consumer Watchdog, a Los Angeles-based group, denounced the new rules, saying Lara is too close to the industry – a claim he dismissed as “nonsense.”
The group said this would result in rates for homeowners being 40 percent higher, and claimed the regulations contained loopholes that do not guarantee insurers would write more policies in wildfire-prone areas. Los Angeles Times reported.
“It is telling that the commissioner has not done a cost-effectiveness analysis of his plan for consumers.
“That’s because this plan is from the insurance industry, by the insurance industry and for the industry,” Jamie Court, president of the group, said in a statement.