It would have taken a rare combination of courage and toughness to resolve California’s three-month property insurance crisis fairly.
Neither Governor Gavin Newsom nor Insurance Commissioner Ricardo Lara showed any of these qualities, and so, for the second time in 27 years, extortionate insurance companies won out over ordinary Californians.
How cowardly were these two officials? First, on a chilly day in late September, Newsom issued a uniquely unspecific executive order, essentially telling Lara to do something, almost anything, about the crisis created by the insurance industry, whose biggest companies had stopped writing new property policies anywhere in California for the previous three months because of huge wildfire losses.
Lara’s response was to capitulate to the companies, including State Farm, Allstate, USAA, Farmers and others. Exactly one week after the legislature refused to give them carte blanche to set new rates, Lara effectively did just that.
Several leading insurers now have rate hike applications pending before Lara’s department for increases averaging about 34 per cent starting sometime next year. Under a deal struck by Lara just hours after Newsom’s flailing order, they will almost certainly get the bulk of those increases. In return, all they have to do is issue or reinstate policies to homeowners in wildfire-prone areas, charging pretty much whatever they want.
Homeowners elsewhere may also see their rates increase to subsidise the companies and keep them in the California market. For the first time, the industry will use projections of future fire losses to justify rate increases, rather than just past performance, and it will not matter if their profit-driven predictions never come true.
All this, the companies say, because they’ve lost a lot of money in California since wildfires became bigger and more frequent in 2017.
But how much have they actually lost? Over the past two decades, these companies have made far higher profits in California than nationally, even more so if you include the $12.1 billion that utilities have been forced to pay them to reimburse insurance companies after fires caused by the utilities.
Between 1997 and 2021, insurance companies enjoyed a 8.8 per cent return on spending in California, compared with 6.2 per cent nationally, according to figures reported by the advocacy group Consumer Watchdog and not disputed by the industry. Add in the big money from utilities, and the profits were even higher.
Consumer Watchdog founder Harvey Rosenfield, author of 1988’s Proposition 103, which made the insurance commissioner elective and required him to set rates based on past costs, says his outfit – which often intervenes in insurance rate cases – will not meekly accept Lara’s capitulation to the insurance companies.
“Insurance companies used their economic power to create shortages (and) pressure elected officials to change the (Proposition 103) rules that have kept insurance stable, affordable and available in California for decades,” said Rosenfield. “Consumer Watchdog will not allow Lara to derail consumers’ rights.” Translation: “We’ll see you in court, Mr Lara.”
The fair way to end the insurance boycott would have been to tell the companies that if they don’t sell all kinds of insurance here, they can’t sell any. Boycotting companies should lose their licences to sell any new insurance here for several years, including highly profitable cover such as life insurance.
But Lara took well over $100,000 in campaign contributions from the industry he regulates, despite earlier promises not to accept donations from insurance companies. When the donations were revealed, Lara was forced to return most of the money.
Still, the industry’s obvious influence over him was clear in the deal he made. Lara acted much like 1990s commissioner Chuck Quackenbush, who also accepted insurance company donations and then caved in to the industry’s earlier boycott of California over a requirement that anyone selling homeowners insurance also sell earthquake insurance.
Quackenbush orchestrated a deal that scrapped the requirement and created the California Earthquake Authority to replace the industry’s long-standing policies. In both cases, California was blackmailed and elected commissioners who had taken insurance company money capitulated.
That’s not how government is supposed to work, but it’s the reality when leaders lack the courage and toughness to resist obvious blackmail.
