California's insurance department will soon allow carriers to use catastrophe modeling when making rate filing requests, but additional regulatory changes will likely be needed to entice insurers to write more business in the Golden State.
When announcing regulatory reforms in September, Insurance Commissioner Ricardo Lara said the state's Sustainable Insurance Strategy includes introducing rules surrounding catastrophe modeling that will allow forward-looking methods, as well as a proposal to explore the inclusion of "California-only" reinsurance expenses, in new rate filings.
Allowing underwriters to use forward-looking modeling for catastrophes, particularly for wildfires, is a 180-degree departure from the Insurance Rate Reduction and Reform Act, also known as Proposition 103, which requires insurers to take the average of actual losses for the previous 20 years to set their rates.
"You can't look to the past to see the benefit of future wildfire safety," Deputy Commissioner Michael Soller said in an interview.
However, the catastrophe models will also have to take into account efforts toward improved fire safety and mitigation spelled out in the regulator's Safer From Wildfires strategy.
"California is spending record amounts of funds on reducing risks, fuel management and making people safer," Soller said. "We need insurance companies to recognize that and reward it."
The proposed changes come as insurers continue to either limit their exposure or leave the Golden State market altogether, with many citing the difficulty in achieving adequate rate.
Kemper Corp. and CSE Insurance Services Inc. were the latest companies to add their names to a list that already included State Farm Mutual Auto Insurance Co., The Allstate Corp., Chubb Ltd., American International Group Inc., Farmers Insurance Group of Cos. and United Services Automobile Association.
Fixes needed for rate filing process
But those changes will still not address California's lengthy rate-approval process, said Denni Ritter, vice president for state government relations for the American Property Casualty Insurance Association.
"Even if insurers get access to tools like cat modeling and reinsurance, if those filings that reflect those tools are taking a year or a year-and-a-half to get approval, that's not going to solve the situation we're in," Ritter said in an interview.
Rather than risk the intervenor process, insurers have instead chosen to submit multiple requests for 6.9% increases that have failed to keep pace with sharply rising claims costs. Ritter said many carriers were able to operate within the "6.9% system," but that has changed because of the "high inflationary environment" over the last several years.
"I think that really laid bare the inadequacies in the current system," Ritter said. "It is just not a system that is sustainable for a modern market."
The new rules introduced by Lara include steps designed to address those issues, such as requiring insurance companies to submit complete rate filings. The department also plans to hire additional personnel to review rate applications and publish regulatory changes, as well as reforming the intervenor process to increase transparency and public participation in the process.
Lara acknowledged during a press conference announcing the reforms that rate filings have gotten "more complex" and can take longer than six months to approve.
"It has become clear that California's current regulatory framework does not meet our current needs," Lara said. "We need to update regulations and have them be more focused and on current market conditions in order to effectively protect consumers."
The proposed rules are a good start to making the changes needed to return the state insurance market to a "healthy state," said Janet Ruiz of the Insurance Information Institute.
"We have had so many challenges with Prop 103, and the intervenor process has slowed down the ratemaking process in California for so many years and cost everyone quite a bit of money, especially the insurers," Ruiz said in an interview.
California is no Florida
The movement toward adopting forward-looking models has spawned opposition from Consumer Watchdog, an advocacy group founded by Harvey Rosenfeld, the author of Proposition 103, as well as comparisons to the insurance-related problems being seen in Florida.
Jamie Court, the organization's president, said in a post on its website that the use of catastrophe modeling and adding reinsurance costs to premiums "has pushed Florida premiums up two to three times higher than California's," adding that the Golden State would suffer the same fate should it choose to "mimic the failed strategies in Florida."
But that comparison may not be apt as California does not face the threat of hurricanes or abuse of the legal system seen in the Sunshine State.
"Some groups have said: 'We don't want to be like Florida' by undertaking catastrophe modeling or reinsurance," the American Property Casualty Insurance Association's Ritter said. "That really doesn't make sense because 48 other states also have catastrophe modeling and reinsurance."