Special Episode: California Insurance Crisis – The State of the Insurance Industry

CAPITOL WEEKLY PODCAST: This Special Episode of the Capitol Weekly Podcast was recorded live at California Insurance Crisis, which was held in Sacramento on Wednesday, May 14, 2025

This is Panel 1: The State of the Insurance Industry, featuring Amy Bach of United Policyholders; Rex Frazier, Personal Insurance Federation of California; Meredith Fowlie, UC Berkeley.

Moderated by Levi Sumagaysay of Calmatters

This transcript has been edited for clarity.

LEVI SUMAGAYSAY: Hi, everyone. That was a very nice introduction by Tim. So yes, I am Levi. I am the economy reporter at Calmatters, and part of my beat is covering this insurance market, and it’s been quite an education. I want to start off with a number. I checked the website of the fair plan this morning, just to double check how many policies the FAIR plan has in force.

As of March there are almost 575,000 policies in force at the fair plan. So I’m starting off with that number and the FAIR plan. So the fair plan is the fire insurer of last resort in California. It’s where people turn to when they can’t find insurance elsewhere. And so the fact that it has 575,000 policies in force… to give you an idea of how much that’s changed…. when I first started covering the insurance market for Calmatters in October of 2023, that number was at around 300 something thousand.

So I start off with that number because it’s a really great indicator of the health of the California insurance market. It’s poor, right? And I want to quickly summarize some of the factors that got us to where we are. And then I want to ask our panelists to sort of talk about them.

One of the factors, of course, is climate change. It has increased the risk of wildfires and other natural disasters in California. Several years ago, in 2017, 2018, we had devastating fires in California. They, you know, like I said, they were they were deadly. They wiped out whole towns and communities. And insurance companies had to pay billions of dollars in claims after those fires.

And then shortly after that, we had the pandemic, which, as we know, upended everything and which raised the prices of everything and caused inflation, some of which were still dealing with today. And during that time, insurance companies were unable to get approval to raise their rates. And so then they started nonrenewing Californians. They started pulling out of the state. And that’s what happened, right?

And then I want to mention one other thing, which is that insurance companies have at their disposal now, some new tools to help them assess these increased risks.

So with those factors, I sort of want to turn it over to the panel. Now, I want to start with Meredith. And if you know you can see in the program who Meredith is. But Meredith, if you wouldn’t mind just telling us quickly, you know, who you are, what you do, and then if you could talk about climate change to start us off and how it got us to this point.

MEREDITH FOWLIE: Okay. Thank you very much. Appreciate being part of this conversation. My name is Meredith Fowlie. I’m a professor at UC Berkeley. I’m a director of the Energy Institute at Haas. I’m not a climate modeler,I’m an economist. So I want to be very clear about the limits of my expertise. But I do spend a fair bit of time thinking about how climate change is putting pressure on key sectors in California and driving up the cost of living in California. So I spend a lot of time thinking about electricity and increasingly a lot of time thinking about insurance.

So I want to just briefly, this is how I think about it. And I appreciate that it’s not the only factor driving, forcing, forcing, creating the challenges in insurance, but it is an important one. And the way I think about it, there’s sort of a number of channels that climate change is creating challenges for insurance markets.

“When you think about how we’re going to adapt to climate change, insurance is a critical, critical strategy for adaptation.” – Meredith Fowlie

I think first, just the increase in frequency and severity of these extreme weather events. Climate is changing. And with that, we’re seeing more of these damaging events. In addition, we’re seeing more people move into harm’s way. We just have more houses in the WUI. We’re building more, building more everywhere, but more in the WUI. And affordability challenges have a role to play in that. But that just means when these extreme events happen, there’s more people who can be impacted.

LS: And can you quickly say what the WUI is?

MF: Oh I’m Sorry, My favorite acronym. I figured this crowd would… Wildland Urban Interface. We’re just, you know, as people, it’s expensive to live in the city. So when you get pushed out into these areas, you’re also getting pushed into areas that maybe have high fire risk. So that’s one factor.

Meredith Fowlie. Photo by Ellie Appleby, Capitol Weekly

Another factor is and there’s plenty of insurance company representatives in the room. So you know more about this than I do. But these extreme weather events are really hard to insure. Unlike health events or, you know, car break ins, when they happen, they’re massive and they’re spatially and temporally concentrated. So insurers have to hold enough reserves to be ready to pay out the claims that happen all at once when these big events strike. So that means either you have to hold more capital reserves and or you have to buy reinsurance, and that increases costs.

I think a third factor that I think is important to keep in mind, because as we see these rates increase so quickly, I think it’s important to distinguish, part of that is the climate is changing and risks are escalating. But part of it is as these risks have become more salient, like those 2017 2018 wildfires. That’s when I started working on wildfire because I just hadn’t appreciated the degree of risk we face here in California and elsewhere. Same thing happened at insurance companies who started investing more heavily in more sophisticated models and analytics, and got a sense of just how high those risks are.

So I think part of what we’re seeing is climate change is increasing and rates are rising. But part of what we’re seeing is we’re catching up and realizing the extent of the risk we face and adjusting premiums accordingly. So all those factors are contributing.

“Who legitimately can talk about the perils of climate change, then expect it to be a lower loss environment? Are we going to get fewer fires?” – Rex  Frazier

I want to I want to make one last point and something I think about a lot. When you think about how we’re going to adapt to climate change, insurance is a critical, critical strategy for adaptation. So helping households and firms and businesses in California adapt to climate change. Providing a well-functioning insurance market is a really pivotal piece of that adaptation strategy. So I’ll stop there and turn it over to the panelists.

LS: Thank you for that. I think that’s a really good segue for maybe Rex to talk about some of the, you know, some of the tools that are available to the insurance industry now and how that all figures into, you know, insurance companies are saying that you have to adequately price your products to match the risk.

REX FRAZIER: Sure. Good morning. For those of you I’ve not met, I’m Rex Frazier. I’m president of the Personal Insurance Federation of California, which is a group that represents about, at this point, maybe 75 to 80% of the market share of the property insurance sold. So very large companies.

And the problems of today are long in their making. If the goal of this panel… one of the goals is to help people understand how we got here, it’s because of the state public policy choices that we made, really from 2010 through 2021, where we have just old regulations that do not allow insurance companies to keep up with the actual costs they face to run their business. And from 2010 to 2021, we did not even keep up with the national average for premium increases when it was a low inflation environment back in the good old days.

Meanwhile, you look at Covered California, let’s say, in the health insurance context, and they raise average premiums seven, eight, 10% per year. And nobody bats an eye. But that’s because the federal government subsidizes so much of that purchase. But when it comes to property insurance, for some reason, we were content during that period of time to allow rates to go…. [mic cuts] ….Someone doesn’t like what I’m saying. We were allowing rates to go up 2 – 2.5% a year, and we just got far behind.

So by the time we got to 2017 and had those massive fires, then we had a repeat in 2018. I think we’re really suffering just from those previous decisions that the state had made to not allow companies just to calculate a rate that allows them to do business. And so instead of having an orderly transition to a higher loss world where between utility driven fires and hotter, drier weather, and in particular, longer periods of sustained dry coinciding with the seasonal winds that we know we’re going to get…. instead of having a one month fire season, what’s our fire season now? No one even really knows how long it is where we have the coincidence of these huge unfightable winds in an extremely dry environment that produce fires that are really not controllable. And as the previous speaker noted, now we have a whole lot more property in proximity to that.

And so one of the three elements of the commissioner’s sustainable insurance strategy is we have to be able to have a system that allows pricing to risk. And that’s going to mean a higher price level. Who legitimately can talk about the perils of climate change, then expect it to be a lower loss environment? Are we going to get fewer fires? Are we going to get fewer losses, particularly when there’s more homes near the fire? Of course not. So it’s going to be a higher price environment. It’s not a joy to say that that is just the reality.

And so the way that we currently still in California require insurance companies to project their future wildfire losses is we ask them to look backward for the last 20 years, look at their average losses over the last 20 years and use that to project forward. So we have that. Meanwhile, all public policy makers regularly talk about the perils of climate change, but we’re supposed to project future losses by looking backward over the last 20 years? That’s nonsense. So we have to fix that.

And so, you know, companies do have access to tools now that allow them to look at where the properties are, that they’re insuring. Their proximity to things like hills and valleys or creek beds, which can exacerbate fire behavior, have the ability to look at vegetation density and moisture and start to get a better estimate of what their likely losses are going to be based on where they’re doing business and the hazard associated with that.

Now, the Department of Insurance, for the last year and a half, has been working on regulations to allow insurance companies to use those forward looking, more complicated models. We hope those regulations will be done, but they’re still not done, and it is presently illegal for companies to use these tools when they calculate their rates. And so as a result, it’s a very difficult environment in which to do business. And until we update, among other things, those pricing rules, it’s hard to foresee the market roaring back.

LS: So I want to say something about that real quick. That was definitely going to be my next round of questions, like we were going to talk about, you know, Commissioner Lara’s plan, etc. but so we’ll get back to that later. But thank you, Rex. I want to switch gears a little bit and ask Amy, since this is sort of about this panel is about what’s going on right now. Keeping in mind that there’s going to be a whole panel on the LA fires later. I’m wondering if, you know, as the executive director of United Policyholders, which, you know, educates consumers and, and helps consumers deal with insurance, what are some of the most common complaints and hardships that Californians are talking to you guys about right now?

AMY BACH: So are you asking about not in connection with claims. You’re talking about the marketplace?

LS: Yes.

AB: Okay. Yes. So I actually so I’m Amy Bach, I run United Policyholders. We are three, let’s see, 34 years old. That and have been…. we were founded here right around the time of the Oakland-Berkeley fire. So property insurance issues are the primary focus of our work helping consumers make good decisions when protecting their assets. And dealing with the current crisis working with a lot of people in this room in the pursuit of solutions. But then we are heavily involved in disaster areas and helping people get what they paid for and navigate the claim process.

And so you know, there’s a lot of interplay between you asked about the problems. There’s a lot of interplay between what’s going on right now in LA and the marketplace issues that we’re here discussing at a higher level. Right? So they are people under insurance is always sort of the number one, one of the number one challenges people face after particularly after wildfires where everything’s incinerated, there’s nothing left. All their possessions and all that. And there’s been sort of a decades long struggle over. Well, why, you know why. What can we do to on the front end so that people’s policies actually do cover you know, the, the full extent of their losses?  And, you know, we’re that that endeavor is being a little bit stymied by the marketplace crisis, because I think a lot of people out there are just trying to keep some coverage in place. And then having it be full coverage feels for some people like it’s out of their price range. And particularly then of course, people who are have migrated onto the FAIR plan. That coverage is relatively thin, and unless they’ve been working with a sophisticated agent or broker they may not have the companion policy that fills some of those gaps.

And, and then we have on top of that some of the legislative mandates that we’ve put into place to try to remedy underinsurance, such as requiring that insurers offer 36 months of temporary rent coverage. I mean, insurers have sort of come back and said, well, if you’re going to make us do that, then those carriers that had had no dollar limit are now putting dollar limits. And so for every action there’s a reaction. Right.

So we’re trying to we do want to solve the underinsurance issue. But we also recognize that in today’s marketplace it’s really not feasible for some people to to have that coverage, some of the other issues. I mean, you know, we have a there’s a lot to unpack here. I thought Meredith did a great job at isolating the factors that are causing the crisis. And, you know, back in 2015, a woman named Naomi Klein wrote a book called Capitalism vs. the Climate: This Changes Everything. And she had a chapter about how climate change was going to impact the insurance sector. And she quoted me, and this was back in 2015, and I started saying like, “well, clearly the consumer is going to be the loser here because insurers are not in the business of losing money. So they’re going to make sure that this hot potato of climate change is they’re not going to be the ones just sitting there holding that. Right. So there are going to put rate increases into effect. They are going to reduce coverage. They are going to change. They’re going to adapt. We have to help consumers adapt.”

So in the beginning of kind of watching all this and remember, my organization has been on the ground after every one of the wildfires since we were founded. So the ones that hit high affluent areas, the Woolsey Fire,you know, hitting Malibu. The Thomas Fire in Ventura, Big Sur. And then, of course, the Tubbs and Atlas fires hitting Napa and Sonoma, high value real estate, incredible numbers. The Camp Fire, high numbers, not as high value real estate, but still jaw dropping. 18,000 structures, 7000 each time one of these crises hit, the numbers go up. Right.

But we thought the Oakland Fire was the biggie, right? That was like, that’s sort of been dwarfed repeatedly, right, by the Cedar Fire and Ridge Creek Fire, on and on. Anyway so clearly for, for, for the problems people are having in LA, they do derive in part from the reality that insurance companies are for-profit entities and they’re going to protect themselves.

But when I started and that there’s… I mean, I don’t blame I mean, that’s it’s just logic, right? That’s they’re going to make business decisions because they are businesses. And our challenge now is why we’re here, is to really innovate. Because this is a classic example. And I’ll, I’ll wrap up with my comments and answer your question.

Yesterday was sort of a fascinating day because as everybody knows, you know, there’s been this back and forth with State Farm’s rate increase, which I think originally the request was like 33. And then it came down and then all this stuff happened. And LA wildfire community is getting very loud on insurance. There’s a lot of, you know, there’s a press conference that some of these organic groups that have sprung up of people who are impacted by the fire. They’re mad about not having enough insurance. They’re mad about being in the FAIR plan. They’re very understandably very upset about how the smoke claims are playing out and all that.

“The costs of adapting to climate change are high. The frequency of these extreme weather events is increasing. The intensity is increasing, so our costs of insuring homes in harm’s way is going to increase.” – Meredith Fowlie

So they did a press. They put all this pressure on the commissioner. They wrote to him, they did a press conference saying you shouldn’t approve State Farm’s rate increase until until they straighten up and fly right on our claims. And that put my organization in. As always, we have some very challenging lines. We have to walk because ultimately we know those are sort of apples and oranges, right? It’s like the rate that they need is one thing, and then their claim handling is something else. So we have done our best to help point these activists in a constructive direction. But but it’s… I would say it’s it’s a pretty fractious situation right now down in LA.

LS: Absolutely. I’ve been talking to them as well. I wanted to turn to now the Commissioner’s plan to address the issues. Right. The main parts of his plan, the main parts, the new regulations that went into effect at the beginning of the year. One is speeding up rate reviews because the insurance industry has said that, you know, because California has to approve each rate increase. And so insurers have said that that takes way too long. And so one of the parts of Commissioner Lara’s plan is to try to speed up those rate reviews. The other, which Rex touched on earlier, is allowing for catastrophe modeling to be factored in to insurance rates and then also allowing insurance companies to factor in their reinsurance costs.

Levi Sumagaysay, Photo by Ellie Appleby, Capitol Weekly

I know that everyone here is probably very well versed in what reinsurance is, but for those who might be watching on zoom, reinsurance is insurance for your insurance company, right? So a lot of this stuff is stuff that the insurance industry has long sought in California, in which, you know, it has been unable to get in California, because California has some of the strongest consumer protection rules around insurance. That comes out of Prop 103 and it was voted in by California voters. So, I wanted to quickly ask Meredith your research on insurance and wildfires explored pricing and how the information insurers use to price risk can vary significantly. Can you share your thoughts about how now a California allowing for cat modeling will help that?

MF: Sure, I’ll give it a try. Realizing there’s some real experts in the room. So yeah, we spend a lot of time we, a bunch of economists, poring over the rate filings that insurers need to submit when they want to change their rates.

And I just want to clarify something that was confusing to me initially. Rex knows his stuff. I’m not saying he’s wrong, but he said it has been illegal for insurers to use these cap models when setting prices. And that’s right in some respects, right. They are limited in their ability to use those to set the overall rate increase that they want to ask for, but once they have that rate increase set, they can and they have been using catastrophe models quite extensively to say, okay, now that I have that rate increase, now I want to look across the parcels in my book of business and price them. And if I see if I if my models and simulations are telling me that that is a high risk parcel, I’m going to charge a higher premium that’s commensurate with that risk.

So we’ve already seen and part of what we were doing was just looking at different firms. We were struck by the variation in the information that different insurers were using to set relative prices across low, medium, high risk areas. So you have some firms who are you know, when we look at State Farm and we estimate how wildfire risk is varying across properties using the best models we can find, and then compare that to how their premiums are varying across properties with very similar characteristics, otherwise, it does track relatively well. So there has been some use of these of these models already. But the barriers to using them and the extent to which firms can use them to ask for overall rate increases has been limited. And that’s, I think, a key part of what the regulation is addressing.

So in terms of thinking about what this could mean for rates, I mean, Rex already made this important point. The costs of adapting to climate change are high. The frequency of these extreme weather events is increasing. The intensity is increasing, so our costs of insuring homes in harm’s way is going to increase. And so the more advanced modeling is going to give us a better read on that exposure. And we should expect rates on average to go up.

I think another important thing is it allows more granular risk classification. So for firms that were pricing more coarsely at the zip code level now, they can price more granularly. So that does I live in 94611. We got a lot of variation. I live in the flats. My colleague lives on a steep hill. So within that zip code that used to be priced like similarly for wildfire risk by some firms, now we can really tell who’s high risk and who’s low risk.

We’ve been doing some preliminary work using one kilometer granular data to just look at the correlation between income and wildfire risk exposure. And we are finding, on average, that lower income households are living in higher wildfire risk areas, especially within county. So what that means is as we get more granular pricing, we might you know, there will be some implications for who’s seeing higher prices because they are higher than average. And so that is something we need to think about.

And finally there is some hope. And this is part of the reform to use premiums to say, okay, I see your house, I’m going to try and assess the risk, which is a very complicated and challenging exercise with lots of uncertainty. And I’m not a modeler, but I think it’s important to keep in mind that these models are not perfect, but we are hoping that we can use these models to try and assess the value or the risk reduction achieved when a homeowner does everything she’s supposed to do defensible space and building with fire safe materials. And that’s hard.

So I think we need to pursue that potential. Like, it’s exciting to think that we can use premiums as an incentive to householders, like homeowners. If you do this, your risk is reduced and you’ll pay lower premiums. But we also have to be realistic about how much of those reductions we can capture meaningfully and how much we can rely on premiums. Because my final point is these are annual premiums. And many of these investments you’re making for the life of the home for 20 or 30 years. So there’s only so much an annual premium can tell you about the risk profile of your home and the lifetime returns on an investment in wildfire risk reduction. So I’ll stop there.

LS: Speaking of trying to do everything you can to protect your home or your property. Yeah. Let’s talk about mitigation. I want to I want to ask Rex, do you think that these regulations that the commissioner has put in place, you know, which are just now starting to be implemented and, you know, for example, like the cat models are now going through a process where they’re going to be approved. So can you talk about whether the industry is going to be able to more accurately take mitigation into consideration when pricing policies.

RF: Let’s see. To try to I’m trying to understand the question. I mean, what’s causing problems in the marketplace is not related to mitigation. And it’s not related to the segmentation models that the professor mentioned. So it’s important for you to realize when we talk about what’s causing the problem, it’s the Department of Insurance rate regulations specify a formula for what is the maximum permitted earned premium that a company can make on a statewide basis. Okay.

You do that with if you use models, it produces something called an average annual loss, which is the prediction of what a company would pay out on average in a given year. That type of model is presently illegal in California. Right? Now, the second type of model that bears in no way on how much a company is allowed to earn on a statewide basis, this type of model, she was just talking about where you start to figure out what type of premium will someone pay above or below the average? Those have long been legal. There’s no problem with that. That’s not what’s causing our problem.

What’s causing our problem is that if a company has to make a certain amount of money on a statewide basis in order to pay their claims and to pay their employees or pay their agents a commission, or do the other elements of running their business, if they’re not allowed to charge enough money to meet their obligations, what are they supposed to do? That’s when they start having to non-renew people. And so it’s a self-inflicted wound, the position that we are in right now.

“There’s a lot of discussions at the community level that city councils and supervisors don’t want to have, because it’s going to change what the community looks like.” – Rex Frazier

So when we get questions about mitigation and someone says, well, when are you going to start allowing a discount for this or that? It’s like, let me get this straight. A company is not allowed to earn enough money to pay their claims, and you’re asking when they’re going to discount their premiums when they’re already losing? Why are we having that conversation? What’s causing the problem is the current regulations, which are not mandated by Proposition 103. And as much as people, you know, we don’t love Proposition 103 because it’s more regulation, but that’s not what [ audio cuts out] … regulations the Department of Insurance put in place in the early 1990s and have refused to change. It’s a state public policy choice unilaterally made by the Department of Insurance, and they can unilaterally fix it. And we look forward to them fixing it.

LS:  I do want to ask, I mean, you know, I’m I sort of am coming at this question from a consumer’s perspective. I, too, am a homeowner in California. I’m with State Farm and my husband on my way here texted me to say that our insurance agent has already been in touch because of what happened yesterday. So my question is because the new regulations will allow for cat modeling, I’m just asking a question that I’ve been asked by many of the readers who have written to me, asking about mitigation and whether that’s going to help them with their insurance, whether it’s overpriced or with availability, because, you know, the insurance industry has been asking for these new regulations. And, you know, I think I’ve talked with you and you have said, okay, yes, I’m cautiously optimistic about cat modeling and being able to factor in reinsurance. I guess what I’m asking is sort of, you know, what other people have asked me, like, if I try to protect, you know, my home, my property against fire, will the insurance companies sort of give me a discount because I am having a hard time affording these insurance premiums?

RF: Well, so of course, there’s already regulations in place that mandate a discount regime by the Department of Insurance. That’s already that’s already required by law. And every rate filing has to outline very specific rules for the for the mitigation discounts they provide.

Now, unfortunately, the Department of Insurance chose to do it in a way that was not particularly helpful because what the fire research shows is that there are six areas of improvement on a home, and they each must be done. So just because you do one or two or even five, each one is an independent vulnerability to an ember that lands on your property. So just because you put mesh on your attic vents and you cover your eaves, well, if you don’t have the proper roof or if you don’t have dual pane window, or if you don’t have six inch exterior siding gap above the ground, or you don’t have a five foot ember resistant zone around your house. Each one of those is an independent source of ignition from an ember.

And so the Department of Insurance, we said, hey, have regulations that that acknowledge these… all six things have to be done. And they said no, we’d prefer an a la carte approach to if someone does one thing but not the other five, they deserve a discount. And we say, okay, but that doesn’t merit very much because you haven’t functionally done anything. And so the Department of Insurance regulations say you have to give a non-zero discount for each individual mitigation. “Non-zero.” Well, as we predicted, guess what companies did for each individual mitigation? They did a tiny tiny discount that isn’t worth it, right? But if you do all six things, you get substantial discounts. So that’s already the law now.

But the important message is you have to do all of them. But even if you do all of them, there’s a limit to parcel level mitigation. If anyone tells you that you on your parcel can stop a 100 foot high wall of flame from consuming your home, that’s not a realistic expectation. Because in these wind events, When you can know if it’s over 50-55 miles an hour. You can’t even assault the fire from the air because planes and other and helicopters have to be grounded. So now what are you going to do?

If you haven’t perfectly pre-positioned assets like they did for the fire in Windsor a couple years ago, which was an excellent response, and they saved that town. But that was just … that was great. But they didn’t have pre-positioned of assets and for for the LA fires, because you can’t always predict exactly where the fire is going to take off.

And so what do you do?  A fire of that magnitude with that wind and without prepositioning of resources, a parcel of of mitigation effort is not going to stop homes from burning. So of course, the insurance industry believes heavily in mitigation. We’re one of the largest funders in the United States of mitigation research, but we have to be clear about what that mitigation can do at the parcel level and what needs to happen at the community level, and there’s a lot of discussions at the community level that city councils and supervisors don’t want to have, because it’s going to change what the community looks like. And neighbors are going to be angry when there is substantial efforts to reduce vegetation. And those are much harder discussions than we’re having here today.

LS: Amy, do you want to weigh in? I think you do.

AB: I do, I do. Well, I want to talk a little bit about what’s actually happening on the ground because you know, Rex lives in Sacramento and very steeped in the policy and, and many years of frustration, I think, with Prop. 103. Understand. But really, it’s kind of it’s fascinating to hear his perspective because, of course, on the consumer side, there’s been a lot of criticism that the sustainable insurance strategy was a giveaway to insurers, and now they got everything they wanted. You know, they get to use cat models. Which, by the way, they do get to use in almost every single other state, so it did kind of disadvantage us in that way to not… that they were not allowed to use them. But we have the it’s working. It’s working its way through….

LS: It’s on its way.

AB: The print process is happening. But I want to, you know, I want to go back.

So my organization are we try to be problem solvers. We try to be. We’re very pragmatic. We’re not ideologues. Right. So when we saw the markets start deteriorating back in 2017, actually, even before the Atlas Tubbs fires, we had started this as the Governor’s Tree Mortality Task Force sprung an insurance subgroup. We all started meeting. A lot of the people that were in this group with me were regional rural firefighting agencies that would recount these organic programs they had built when somebody would get non-renewed.

“On the non-renewals, that’s where we really haven’t brought I don’t think a solution that that is viable. Because every time, when my organization has brought a proposed piece of legislation that says, well, if this these conditions are in place, then the insurer must offer a renewal. It dies” – Amy Bach

And by the way, I think we’re talking about discounts. I think the biggest impediment we face right now is that people are not getting rewarded with renewals when they invest time and money. So it’s in home hardening, defensible space, you know, community wide efforts. That’s a bigger problem to me than the discounts. I’m not trying to, you know, underemphasize the pain of the premium increases, but I think what, what we really need first is some sort of a scenario where insurers feel a lot more confident about coming back into areas, and not just because they’re getting the rate that they need, but because they feel that the risk has been meaningfully reduced.

So to that end, we know that, for example, USAA has been giving a discount for years to people who just because they live in a Firewise community. We have been my organization has a we have a working group.

Stephen Hawks, you’re going to be hearing from IBHS, is one of the people that regularly participates in independent agent Karl Sussman. Also.Lots of folks… we’ve had CSEA address us. We’ve had Mercuryaddress us because what we’re what we’re trying to do is find those points of restoring insurers confidence in areas as one palliative. Right?

Rex Frazier, Photo by Ellie Appleby, Capitol Weekly

While we do the regulatory work, while we do the consumer education, while we we are looking for entrepreneurial activity in the space that’s not just non-admitted less regulated insurers coming in. But anyway, so at the end of the day, I would say one of the biggest heartbreaks I’ve had recently was to have Mark Brown, who’s with the Marin Wildfire Authority, exemplary entity…Right? They floated a bond measure. They got to finance matching grants for their homeowners to do the work. They have all kinds of events that they do that are very helpful for property owners to do their part, and then for the community as a whole to try to reach that…. not just get the Wildfire Prepared Home designation from IBHS, or meet the Safer From Wildfire standards that the DOI and CalFire put together. You know, but to do but to also get that sort of saturation of take-up that makes it a wildfire prepared community.

“People understand that they’re willing to pay more to keep their assets protected. But the problem is like, how much more?” – Amy Bach

But going back to the original…. all that work is happening, it’s happening. Some of the carriers are really stepping up as best they can. But I think a lot of others are still standing on the sidelines going, well, we need to see a lot more risk reduction.

And we know because we pushed very hard for the development of the official six steps. Before they were even in place, we said, well, let’s make sure everybody knows what they can do now. What? What now? Let’s do everything we can to help them do those things, which often means grant funding. But the biggest heartbreak with the Marin Wildfire Authority is, here’s an entity, here’s a community that is investing a lot of money, a lot of time, a lot of work into helping their residents reduce risk. And Mark Brown is everywhere speaking on panels. And he’ll tell you that he can’t give me a single example of one of his homeowners who was able to get a renewal reversed on the basis of the work they did. Which of course kills me.

Because that’s sort of, wow, Okay. Well, if he isn’t having that success, then maybe…. And that we know their regulations on mitigation, but maybe we do discounts…. but, on the non-renewals, that’s where we really haven’t brought I don’t think a solution that that is viable. Because every time, when my organization has brought a proposed piece of legislation that says, well, if this these conditions are in place, then the insurer must offer a renewal. It dies, you know, DOA here in Sac

RF: As it should.

LS: Amy, just real quick – do you think California consumers are aware that as the state tries to fix this problem, that they’re most likely going to be facing higher and higher rates? And then I want to pose that same question to Rex and sort of ask him, you know, will the higher rates that are sure to come help with the availability of insurance in California?

AB: So I would say there’s no one consumer, right? There’s a spectrum of people’s views on, you know, lots of people who live in rural areas or if anybody who lives in an area where there’s been a wildfire… is a little more pragmatic and recognizes that that, you know, the days of paying $1,000 a year for your home insurance is long behind us, people understand that they’re willing to pay more to keep their assets protected. But the problem is like, how much more? Right?

So people were hearing insane premium quotes from Nonadmitted and also FAIR plan. And so, you know, that’s that’s been a challenge. But I think that at the end of the day, we’re on the road. We’re on the road to fixing what insurers didn’t like about the regulatory system. We’re on the road to helping people understand that if they want to live in these beautiful places, now that the risk has… we know is higher, they’re going to have to pay a little more. But, you know, again, the challenge is that people are frustrated that they that they don’t have a remedy, that they don’t have a hook when they have invested time and money to do these hard things.

And, you know, I talk about the good Karens, like, those are the like a lot of the people that come to my working group meetings are volunteering with their local fire safe council, and they are trying to talk their neighbors into doing the right thing. And so I think almost everybody is on the same page about the importance of supporting mitigation, supporting home hardening, supporting defensible space. Everyone agrees, you know, the only maybe, possibly the current administration that just cut off the BRIC grants doesn’t agree. But everybody else agrees that that is critical, including the insurers.

“This is a situation that developed over a long period of time, we should have been having an orderly rate increase process over an extended period of time, but we chose not to do that. That’s not climate change’s fault.” – Rex Frazier

The insurance industry is they want to buy in. They just need a little bit more confidence, I think at the magnitude of risk reduction. Because just to… this is to reinforce a point that really can’t be reinforced enough. You heard Meredith isolate climate change. We all know that’s a factor. But you also heard her talk about the tools that insurers are now using that allow them to see things a lot more granularly. And the reason that this crisis and the reason I know that this crisis is not just about climate change, is that people in urban areas are also losing their insurance because of AI and other tools that insurers are now using that identify galvanized pipes instead of copper. Knob and tube wiring instead of fuse boxes. And those type of and condos with water damage histories and all that. So it really… technology… the explosion in insurer tech is a huge driver as well to what’s going on. In addition to the frustration with the regulatory system, inflation and the fires and climate change.

RF: I can say certainly we, as you can imagine, have have been involved in plenty of public opinion research activities just to understand where the population is. And I think it’s fair to say the average resident in California knows that rates are going to be higher. They don’t love that, but they accept it. They’re very adult about it. They just want to know that whatever that price is going to be, it doesn’t break the bank for them. And they’re with a company that they understand and have trust in and they can not worry.

Now, that doesn’t mean there’s going to be endless patience for rate increase after rate increase, but I’ve been pleasantly surprised by the outlook of people who just understand the serious situation that we’re in. And remember, this is a situation that developed over a long period of time, we should have been having an orderly rate increase process over an extended period of time, but we chose not to do that. That’s not climate change’s fault. That’s not inflation’s fault. That is the state of California chose over an extended period of time to not allow rates to go up. Not even to match the national average increase in rates.

So we still, relative to the rest of the United States, are an average premium state that is not anywhere near the top. And while that may not be pleasant news, that is just the fact we have chosen to, when we’re having fires like we’ve never had before, which are even worsened by electrical fires, we’ve chosen to continue to have an environment where we make it difficult for companies to raise prices.

And so why do we think that’s going to be a system that works? It doesn’t work. And we’re seeing that. You know, the average resting point, traditional resting point of the FAIR plan is about 125,000 policies at any one time, and now we’re certainly going to be above 600,000 by the end of the year. It’s growing, what, 20,000 a month?

So because of what we’ve done in the regular market to hold prices down and made it so that companies cannot continue to bring in enough money to have a funding system to fund the fires all across the state. Well, what do we do? We create a situation where they can’t do business everywhere, and we’re somehow self satisfied that we drive people to the FAIR plan or the Non-admitted market. It’s a total bad policy decision that we’ve made that we have to correct. So it does mean that we have to get to a real price. And remember, under Proposition 103, as much as people like me whine about Proposition 103, remember the language of Prop One03 no rate shall be inadequate, excessive, or unfairly discriminatory. It’s the state’s responsibility to make sure that there are rate levels that do not jeopardize the company’s solvency.

And here we are with the state’s largest company. They had to make a rate filing saying we need higher rates than the state’s formula will allow because of our financial position. They had to use a special process which made it way more complicated. And then the judge’s decision yesterday, he noted that at the end of 2022, State Farm’s surplus was $2.2 billion. And at the last count, it was $620 million. And then we expect that company that writes one fifth of all the policies in this state… we’re getting into the nitty gritty of should they provide a discount or should they, you know, be forced to do business in a community when the the big picture is there’s not enough money for them to do that?

We have chosen this system and it’s getting the predictable result. Now we can’t have rate increases forever, but I’d love to be in a position where companies have enough rate increases so that they can start doing business again in more communities, and then we can start talking about what are we going to do to bend that cost curve down and what are going to be the expectations for communities well beyond parcel level mitigation? What are going to be the expectations for communities to start figuring out a way to stop these huge urban conflagrations, which drive these unimaginable losses?

LS: With the time that we have I want to turn to the other effects of California’s insurance problems on housing, on people’s finances, on people’s ability to buy a home or invest in a property as a landlord. And I talk to a lot of readers who write me on retirees’ ability to stay in California.

Meredith. This is, you know, it’s all connected. How does ….can you talk about how this crisis sort of compares to other, you know, going back to climate change, you know, to other effects of climate change and sort of that intersection of climate change and policy and the fact that we live here in California.

MF: I’ll give it a shot. But I also want to make sure I leave time for others. I mean, I when I think about this, I see tremendous similarities between this conversation about insurance regulation and regulatory reform and the other industry I spent a lot of time thinking about which is electricity and utility regulation. And the similarities I see is if you look at your utility bill, unless you’re a SMUD customer, but I’m a PG&E customer, rates have been rising. And the key driver of rate increases is wildfire risk reduction, mitigation investments by utilities. And the regulation that was designed to set rates for utility customers and recover costs was not designed with climate change in mind. Not even close.

And now you have PUC regulators who are having to think about, you know, undergrounding lines when they’re used to thinking about transmission generation. So in that industry, there’s tremendous pressure to do something, and there’s a reevaluation of how we think about regulation and how we can redesign it with the climate change challenges top of mind. Similar issues happening here.

I hear Rex’s frustration, but also we are you know, there is a process that’s trying to address some of those factors. And I think it’s really important. So thinking carefully about what’s causing the problems and how we redesign regulation. I also would love to hear from this room what other challenges might we be creating as we try and address and mitigate these problems? So here’s a “for example” that I’m worried about, but there’s experts in the room who can either tell me not to worry or to worry a lot…

So historically, my sense is, is that because multiperil, insurance is required to hold a mortgage and most of us need a mortgage to buy a home, we buy insurance when we buy the house, and we kind of set it and forget it. You know, we set it at a level. But I’ve heard anecdata you know, like by the baseball, watching my kid play baseball, two families saying, yeah, when I saw how much my insurance was going to go up, I said I couldn’t pay that. And I realized, I don’t have to pay that. I’ve paid off half my mortgage. I can reduce my insurance costs by reducing my coverage.

So we’re sort of… that creates a new problem when the big fires come that maybe under insurance rates are going to be much higher than we anticipated. And let’s think about that. So, I mean, we live in California, which is on the front lines of climate change. And the cost of adapting to climate change are really high. It’s showing up in your insurance bill, showing up in your electricity bill. The good news is that we can do something about the regulations that determine how we recover costs and how we price these things. And I’m really encouraged, cautiously optimistic, that some of the changes we’re talking about will be good changes and important.

LS: So thanks, Meredith. Amy, are you similarly cautiously optimistic or what is your take?

AB: Well, look, there’s a lot of people paying attention to this problem. I addressed the Fannie Mae Risk Advisory Board a couple of weeks ago. And, you know, they’ve been struggling. They buy, you know, a lot of the mortgages and they hold them. And there is a requirement that on a home that has a loan backed by a federally backed bank, that there’s supposed to be replacement cost coverage in place. And there’s been a lot of tension because in in some of the other states, not California, where we have a standard form fire policy baked in to our statute, and it kind of it’s incredibly helpful.

But in other states where we look at you know, what’s happening with their markets you know, we can see that there’s a huge impact on real estate. There’s a huge impact on property values even property tax revenues for localities. And we’re trying to find this right balance, right, of making people…. like in Florida, the legislature undid a law that had been on the books for a long time that said that if more than, I think it was 25% of a roof was damaged in a hurricane, that the whole roof had to be replaced.

Insurers lobbied to change that law, and they did so, de facto in California. I’m sorry. In Florida, there are many, many mortgages that are out of compliance or many, many mortgaged home owners that are out of compliance because the coverage they have on their homes is not replacement value. It will not restore the collateral. So these issues are very big. You know, here again…. So with the lending community we’re looking at ideas right. Like could there be. That’s really where we are right now. Right. We’ve got the regs. And you know try to try to keep the admitted insurers, restore their confidence, so we get them back in. So the FAIR plan stays strong.

At the same time we are looking at innovation because we have to. And whether it be the concept that’s in one of the bills that’s pending here to allow the FAIR plan to issue cat bonds through the ibank. That’s an innovative approach that that we, you know, and again, looking at other states, what have they done? Florida’s the one that you can look to. They’ve done the most experimenting.

They have a public hurricane model. We’re trying to develop a public wildfire model. They have a public reinsurance facility, the Florida Hurricane Cap Fund. We need something like that here.

Amy Bach, Photo by Ellie Appleby, Capitol Weekly

On the utility side, you know it’s so interesting that tension of ratepayer advocates saying they need to stop spending so much money on reducing risk, and the utilities are saying we’re outspending the state of California by like a factor of seven, I think. Like every year you know, how much they’re spending. So we are, you know, because of these impacts on, on real estate and property taxes, local governments and the lending sector, I think we’re going to see some more innovation, both in terms of products, but also some alternatives to reinsurance to give entities like the fair plan the financial strength they need without being completely at the mercy of an unregulated, you know, retail reinsurance marketplace.

CAPITOL WEEKLY: Do we have any questions in the audience here? I see someone.

AUDIENCE MEMBER: Hi. Thank you. This is for Rex. You mentioned that there are other issues, legislative issues and policy issues other than Prop. 103 that passed around the 2010s or in that area that are creating the bulk of the problems that you’re still seeing today. Can you speak in a little bit more detail about what those policies are that are impacting us?

RF: Sure. The three things that we believe and have believed for many years and said consistently that have to happen is, One we have to have a system that actually allows companies to price to the risks they face. And so if we want them to be in higher hazard areas, in riskier situations, we have to have a system that recognizes that. Right now, if a company goes into a high risk area, your rate formula does not acknowledge that you cannot make a decision under current rules and say, I choose to go into a high risk area and therefore that justifies me charging a higher rate. The regulations do not allow that, so we have to fix that.

Two. Prop. 103. As much as again, you know, some in my world want to make it the villain. Prop. 103 actually says we’re going to have price controls. No rate shall be inadequate or excessive. But it also says any rate filing not approved within 60 days shall be deemed approved. The original deal with Prop. 103 is we’re going to have price controls, but don’t worry, we’ll get you quick decisions. Now the average rate approval time is a year. Now I don’t know what business can do effective business on terms like that, where you can’t change your prices for a year. And at the end of that year you might get half of what you requested, and immediately you’re asking for more, and you’re in this endless cycle. We have to fix that.

The third thing is the FAIR plan. For those of you that don’t know, the FAIR plan is not a state program. The FAIR plan in statute is a non-voluntary association of insurance companies. So when you get your license to do business in California, you must join the fair plan. The FAIR plan is not capitalized like a regular insurance company. In fact, if they were regulated like a regular insurance company, they would have to be conserved by the state – taken over – because they don’t have enough independent capital. The FAIR plan is 100% backed up by guess who: the insurance companies.

So, after the LA wildfires, the FAIR plan said, hey, we’re $1 billion short, insurance industry. How about topping us up? And so the insurance companies had to provide $1 billion when they’re already paying their claims.

So if we want a system where we drive the regular market into the ditch, we make people go to the FAIR plan. The FAIR plan doesn’t have enough money to cover it. So then guess what we do. The FAIR plan takes money from the regular industry that’s already struggling. And the commissioner, to his credit, said, well, we’re going to allow some of those FAIR plan payments that the companies have to give to be recouped across their policyholders so that you can get some money back. That’s what has to happen to make sure the regular industry is solvent. But then you have non- FAIR plan customers who are now subsidizing FAIR plan policies. Right. We’ve chosen all the worst options, and we have to fix pricing to risk reasonable approval times and have a FAIR plan that doesn’t bankrupt the insurance industry.

AUDIENCE MEMBER: Thank you.

RF: Other than that, everything’s great.

ABNER OLIVARES: Thank you all for being here. It’s a really productive conversation and really enjoy it. My name is Abner Olivares. I’m with the Business, Consumer Services and Housing Agency. So we’re not in charge of your insurance rates, but it’s an issue we’re actively monitoring. One thing that I am curious to hear more about from you all something that hasn’t been mentioned here today is, you know, what role does the renter community have to play in this issue? And how might this issue affect them either in a secondary or tertiary effect? And I’m curious just to hear what perspective you might have on that.

AB: You know, in disaster areas, it’s always heartbreaking how few renters have renters insurance. And my organization does do a lot of proactive consumer education outreach. And, you know, we have all kinds of partners around the state. We give out these rack cards saying renter’s insurance is a bargain. It’s not as much of a bargain as it used to be. So I think renter’s insurance is getting impacted by the same factors that are making home insurance go up. It’s definitely not as affordable, but it is a really critical tool for disaster recovery. And I do think we have to put more effort wherever we can into helping renters know that there is such a thing and they should buy it.

There’s some competing kind of policy ideas about, you know, should you subsidize people’s renter’s insurance premiums? You know, for maybe even for the first year, just to get them on the road to having that protection in place? People like me, I have a hard time with the idea of taxpayer dollars going right to an insurance company. I would kind of like to see something a little bit more kind of public-focused in that way, but it is currently a very, very important protection that we’d like to see more people have.

LS: I wanted to quickly add that, you know, I’ve talked, I don’t know, several months ago, I did a story about how the insurance crisis is affecting renters and landlords. And, you know, it’s going to affect our housing stock, right? So we have small landlords who are saying they can’t afford to keep paying the rising premiums. And then I also spoke with some renters who said they were starting to see the increased costs of the landlords passed on to them in the form of rent. So, you know, I just I just wanted to add that real quick.

CAPITOL WEEKLY: And I think we are at time. So thank you so much to our panelists. And stick around 15 minutes. We will start panel two, which will be on the Los Angeles fires. Thank you so much for coming. Thank you to our panel.

Thanks to our sponsors:

THE TRIBAL ALLIANCE OF SOVEREIGN INDIAN NATIONS, WESTERN STATES PETROLEUM ASSOCIATION, KP PUBLIC AFFAIRS, PERRY COMMUNICATIONS GROUP, CAPITOL ADVOCACY, THE WEIDEMAN GROUP, CALKIN PUBLIC AFFAIRS and CALIFORNIA PROFESSIONAL FIREFIGHTERS