Opinion
Looming insurance crisis set to impact California’s minority-owned homes and businesses
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OPINION – Californians living and working in wildfire-prone areas are familiar with the challenges of finding insurance for their homes and businesses, but all homeowners and businesses could soon feel their pain if the dominos in California’s fragile insurance market continue to fall in an unbalanced way.
The rising insurance risks associated with worsening wildfires in the state have left many insurers without enough money to cover wildfire losses, as rates required to cover these losses continue to be suppressed. The consequence: more insurers are pulling back and have stopped selling coverage in areas at higher risk of wildfires.
On top of that, the California Department of Insurance over the last couple of years has stopped approving new rates to account for the growing risk, creating instability in the insurance market.
I am concerned that this looming insurance crisis will land on minority-owned businesses and homeowners, and disadvantaged communities far outside the state’s wildfire areas.
Let me explain.
It is well-chronicled that traditional insurers have already stopped renewing some policies and begun to withdraw from the California insurance market, especially in communities at risk of wildfire. This has led to more Californians being forced to turn to the California FAIR Plan, a private insurer of last resort, for basic property coverage.
The FAIR Plan is a not-for-profit insurance association covering high-fire risk properties concentrated in pockets throughout the state – properties no other insurer will cover. In the last five years, the FAIR Plan has more than doubled the number of households and businesses it covers.
It is well-chronicled that traditional insurers have already stopped renewing some policies and begun to withdraw from the California insurance market, especially in communities at risk of wildfire.
Yet, some policymakers have called for expanding the FAIR Plan’s coverages and limits, piling more insurance risks on top of a temporary safety net that is already fraying at the seams.
The unintended consequences of such moves are deeply troubling. The FAIR Plan is required by law to have actuarially sound rates, meaning its rates must be high enough to provide sufficient funds to pay the expected cost of claims, as determined by a certified actuary. However, its rates are far from sound, making its growth unsustainable.
In turn, this unsustainable growth increases the likelihood that the FAIR Plan will not have sufficient funds to cover the next major wildfire, which would force the FAIR Plan to “assess” the voluntary insurance market. Assessments require all property insurance companies admitted in California’s voluntary market to pay for losses that the FAIR Plan cannot cover.
Ultimately, insurance consumers who are not covered by the FAIR Plan would end up subsidizing FAIR Plan policies. Businesses and their customers would inevitably feel the impact of these assessments as their insurance companies seek to recover their share of the FAIR Plan’s losses.
To help connect the dots for state legislators and regulators, property owners in California’s metropolitan and suburban areas, including minority-owned businesses and homeowners at little or no risk of wildfire, could be forced to help cover the costs of properties in high-risk wildfire areas, including vacation homes in Malibu, Lake Arrowhead and Lake Tahoe.
This is unacceptable and unfair to these homeowners, businesses and the consumers they serve. It must be avoided. Our communities should not be forced to subsidize insurance in high-risk wildfire areas. It’s time for legislators and regulators to fix the voluntary market by approving the rates necessary to reinvigorate a healthy insurance market in California.
These insurance availability challenges are rising and so is the pressure on policymakers to come up with effective solutions. A balanced, careful approach from the Legislature, the California Department of Insurance and others is critical. If the voluntary market crumbles, property owners statewide will be left holding the bag.
Julian Cañete is the president and CEO of the California Hispanic Chambers of Commerce.
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