California needs a functioning property insurance market NOW

OPINION – California’s process for regulating homeowners insurance rates is outdated. The result is our current crisis, in which insurance companies — unable to update rates to keep pace with higher risks of wildfires and other natural disasters — are writing fewer new policies or, in some places, none altogether.

State Farm in April announced that it would end coverage for tens of thousands of San Diego customers. Elaine Hagen, a homeowner in Tuolumne County, reported her policy had been canceled five times since 2014. Michael Monagan, a real estate agent in Northern California, pointed out how policies costing $10,000 per year are especially burdensome on new home-buyers who must cover that amount all at once, along with closing costs.

The market is uncompetitive and the state Department of Insurance’s solution, the Sustainable Insurance Strategy, isn’t expected to deliver change until the fall or end of the year. That timeline is unacceptable given that, with each day, the size of the issue, and the number of Californians affected, grows larger.

An uncompetitive insurance market harms not just homeowners, but everything else that homeownership supports, like renters and the rental market, the real estate market, home-building and the housing supply, and so much more. With a broken insurance market, property owners are stuck with few or no good options.  This creates a frozen real estate market which is bad for everyone—buyers, sellers, whole communities, and the overall economy.

Moreover, commercial businesses in parts of the state, unable to secure reasonable insurance, are also being impacted. This raises prices for tenants, and for consumers. Small businesses are of course those most vulnerable to such large financial challenges.

The Department of Insurance and its Commissioner, Ricardo Lara, are working on a series of reforms, but it is taking too long. Their Sustainable Insurance Strategy stems from a Sept. 2023 executive order to issue emergency regulations. Then last month, as part of the May revision to his budget proposal, Governor Newsom said he intended to add a trailer bill — a bill that would go into effect along with the budget — requiring the Department to review insurance companies’ rate approval requests within 60 days—expediting a process that currently can take many months.

Asked whether insurance companies have assured him that, if the Department follows through, companies will resume writing policies fully, Governor Newsom said, “Yes and yes and yes. That’s why I’m moving forward with this trailer bill. Let’s go. Let’s move this along.”

At present without a well-functioning insurance market, many homeowners are being pushed into the state’s Fair Plan, which provides only basic fire insurance, or force-placed insurance. Both options cost more and cover less. In other words, they are last resorts—which should tell us that we’ve reached the end of the old road.

The state Legislature must adopt the language in the Governor’s proposed trailer bill in order for it to become effective. Changes through the Sustainable Insurance Strategy are still scheduled, but not at appropriate urgency.

New regulations should streamline the rate approval process to reduce delays and restore a competitive market for insurance. An updated rate-setting process is necessary to restore a functioning insurance market in California, and we need that NOW for more reliable rates, greater policy availability, and safer communities.

Susan Milazzo is the CEO of the California Mortgage Bankers Association, which represents the residential and commercial real estate finance industry.