IIABCal Members Plead for Regulatory Relief
Two IIABCal members testified at the May 10, 2023, informational and oversight hearing held by the Senate Insurance Committee–articulating the property insurance crisis affecting their agencies and pleading for regulatory or legislative relief.
Appearing at a hearing on May 10 titled, “Is the California Insurance Market Flexible Enough to Respond to Climate Change?,” both Ted Gaines, president of Gaines Insurance Agency, Inc., in El Dorado Hills, and David Capponi, Managing Partner of Mallory, Imrie & Vasconi Insurance Services in St. Helena, described the exodus of independent agency insurers from property insurance markets.
With critical funding from the IIABCal Legal Defense Fund, the Association has developed a four-part plan designed–if implemented by Insurance Commissioner Ricardo Lara or enacted by the Legislature–to incentivize insurers to resume writing and renewing property insurance risks.
The IIABCal Plan to Heal the Property Insurance Market
The IIABCal Plan calls for the Commissioner to include the cost of reinsurance in ratemaking formulas, to increase the cost-of-capital allowance for risks not ceded to reinsurers, to allow insurers to use prospective risk models, and to expedite evaluation of rate increase requests.
Expert witnesses who also testified Wednesday spoke strongly in favor of the elements in the IIABCal Plan, including Dr. Michael Wara, Interim Policy Director, Sustainability Accelerator, Stanford Doerr School of Sustainability; Director, Climate and Energy Policy Program and Senior Research Scholar, Woods Institute for the Environment, and Nancy Watkins, Principal and Consulting Actuary, Milliman Climate Resilience Initiative.
Dr. Wara said California can neither insure its way, nor firefight its way, out of the systemic problems that have created catastrophic wildfire losses in the last several years, citing climate change, forest mismanagement, utility negligence, and significant growth in building and population in the wildland-urban interface.
Experts support risk modeling and credit for reinsurance
Dr. Wara testified that regulators “must” incorporate prospective risk modeling into insurance pricing, and urged political leaders to involve not only insurers, but public utilities, Cal Fire, academics and others in developing those models for use in California.
Watkins, an expert in insurance company rate filings, testified that California is the only state in the country that refuses to recognize reinsurance costs in evaluating insurance company rate adequacy. She said only two other states prohibit rate modeling, and both of them are now moving to allow it.
California is “out of step” with the rest of the nation in regulating catastrophic risks, she said, declaring that the price to transfer risk must at least equal the cost of risk transfer, and that California regulators are failing to recognize that economic reality.
While there was remarkable agreement for the elements of the IIABCal plan from experts, not all witnesses expressed support.
Harvey Thinks Everything is Fine As Is
Harvey Rosenfield, the author of Prop. 103 in 1988, asserted that insurers are more than profitable, that the Department of Insurance is appropriately reviewing rate increase applications, and suggested that the Attorney General should open an investigation to determine whether insurers are engaged in an illegal conspiracy to boycott California.
He said insurers should not receive credit for reinsurance costs because their rates are not regulated, and prices would increase. He claimed risk modeling is too new to be trustworthy, and said software proprietors cannot be permitted to shield proprietary software from public disclosure, because of the importance Prop. 103 placed on complete public transparency.
Rosenfield’s interest in transparency did not appear to extend to questions lawmakers posed regarding the millions of dollars he and his organization have received in “intervenor compensation” in prior approval hearings.
IIABCal Hopes the Commissioner Will Lead
IIABCal continues to hope the California Department of Insurance will take decisive steps to improve the regulatory environment and restore marketplace health, IIABCal General Counsel Steve Young said, although he added it was imperative for the Legislature to continue exerting pressure on the agency to take action.
Here is the agenda of the Wednesday hearing in the Senate Insurance Committee.
Here is the background paper prepared in advance of the hearing by committee staff.