Putting out fire in home insurance

You may have read the news story earlier this week in the Sentinel that State Farm will discontinue coverage for 72,000 houses and apartments in California starting this summer, nine months after announcing it wouldn't issue new home policies in the state.

Or far worse, you may have been one of the homeowners who received that notice.

Equally difficult, you might be someone who lost a home or property in 2020's CZU fire, or are hoping to build in the Santa Cruz Mountains, and can't obtain insurance.

You're not alone.

State Farm has been California's largest insurer and the company stated, in the story from our Bay Area News Group, that soaring costs, increasing wildfire risks and onerous state regulations are the reasons it won't be renewing the policies.

Our story went on to report that the announcement came as California's elected Insurance Commissioner Ricardo Lara has been undertaking an overhaul of home insurance regulations aimed at calming the state's imploding market by giving insurers more latitude to raise premiums while extracting commitments from them to extend coverage in fire-risk areas.

Following his proposed requirements last September that insurers cover a certain share of homeowners in wildfireprone areas, Lara has proposed two other changes:

• Streamline rate reviews: Insurance companies have complained that the state's process to approve or deny their requests to raise premiums takes too long. In February, Lara announced steps to ease the process.

• Catastrophe modeling: California has been the only state to bar insurers from using forward-looking catastrophe models, which take into account historical data and projected risks from climate change to set premiums.

Consumer groups are less than excited, pointing out that the regulations have saved millions of dollars for policy holders and that similar reforms to Lara's have done little to stabilize rates in other disasterprone states such as Florida. Environmentalists say a drastic reduction in fossil fuels is the only solution, since the explosion in wildfires is attributable to climate change.

Insurers have had to live within the confines of Proposition 103, the voter-approved state law that requires extensive and costly hearings for any rate increases that go above 7% if even one state resident challenges the request. Insurers, who are in the risk business, thus often keep the increases less than 7%, which, with increased wildfire risk, is why many have pulled out of California.

Homeowners in high-risk areas who have lost insurance have one alternative: the state's Fair Access to Insurance Requirements Plan (FAIR), barebones and costly insurance that offers coverage to people who can't find it anywhere else.

The FAIR Plan was intended to be a temporary safety net but has become the fastestgrowing insurer in California. In February, it added 15,000 new policyholders, for a total of about 375,000 — more than double the number from 2018. That is not a tenable solution as the FAIR Plan is funded by insurers who do business in the state. But since insurers are dwindling, the FAIR Plan's exposure to catastrophic losses is growing — $311 billion at the end of 2023, a sixfold increase since 2018. The growing liability is another reason insurers are leaving California.

The reforms proposed by Lara are one needed step stabilize the market. But there's more that can be done.

Lara also wants to require insurers to offer discounts to homeowners who harden their homes against fires.

And another outcome might be unavoidable: To severely limit development in fire- and flood-prone areas, even though state legislators in 2023 tabled a bill to would require local governments to enact regulations that would ensure this.

Insurance is already expensive and getting harder to find. But, insurers need to be able to charge premiums that cover their expenses and paid losses. No company will stay here if their premium revenue doesn't cover these.

Lara's reforms are needed, quickly, while individuals do even more to reduce fire risk and counties and cities take a much harder look at building in high fire-risk areas.