Will Homeowners' Insurance Premiums Go Up Across California?

Will Homeowners' Insurance Premiums Go Up Across California?

New insurance rules mean homeowners across California will likely pay more after wildfires.

A recent rule change could push up insurance premiums for homeowners across California, as the costs of the Los Angeles-area wildfires are passed on to them in a way that hasn't been allowed in the past.

The increases would come from a potential assessment likely imposed by California FAIR, the state's program created as an insurer of last resort for homeowners whose fire insurance has been canceled by companies seeking to reduce their risk.

In the past, assessments to cover claims from major events, such as the costly wildfires of 2017 and 2018, have eaten into the insurance industry's bottom line. Those major events can't be used to justify raising premiums for other policyholders across the state. The industry reported huge losses from wildfires that wiped out a decade's profits in those two years.

But last July, state Insurance Commissioner Ricardo Lara announced a minor change to the state's insurance rates rules that would allow much of that potential cost to be passed on to homeowners across California through higher premiums.

The ultimate cost of insured losses from wildfires, both by California FAIR and private insurers, is not yet known but is estimated to be in the tens of billions of dollars. That rule change, along with another announced in December, appears to allow insurers to raise premiums across California, even for those living in areas with little or no wildfire risk.

The July rule change allows insurers to cover the costs that California FAIR passes to them to recover 50% of the first $1 billion in assessments they incur and 100% of all assessments above that level. The December rule change, announced just days before the fires swept through Southern California, allows insurers to include the cost of reinsurance policies — private insurers' insurance — they buy when calculating homeowners' premiums. None of the costs were allowed when calculating premiums before.

Some of the areas that suffered the worst damage from these wildfires have already seen massive cancellations of private insurance in the past year, leading to huge increases in the percentage of homeowners forced to turn to California FAIR, a pricey program that protects only against fire losses but not against other potential claims that homeowners insurance typically covers, such as theft, flooding from burst pipes or liability claims.

California FAIR has its fifth-largest exposure, at $5.9 billion, in Pacific Palisades, a community nearly destroyed by one of the costliest fires. According to the program's database, the number of policies California FAIR wrote in that ZIP code increased 84% in the 12 months ending in September, and its exposures in that ZIP code more than doubled over the same period.

FAIR exposures also increased 41% and 26% in the 91001 and 91103 ZIP codes in Altadena, another community hard hit by a separate fire. As of September, FAIR had $1.3 billion in exposure in those two ZIP codes.

In March, California FAIR President Victoria Roche testified before the state Legislature that it had about $700 million in cash. The program does not disclose its funds on an ongoing basis, but it issued a statement earlier this week saying it has "payment mechanisms in place, including reinsurance, to ensure that all covered claims are paid." However, part of that mechanism is the ability to seek payments from private insurance companies in the state.

Commissioner Lara praised the July rule change as part of an overdue update to California FAIR.

"Californians must understand that the growing FAIR plan is contributing to our insurance crisis," she said. "By strengthening the FAIR plan while providing financial stability and solvency protection, we are creating long-term security for consumers, homeowners, and businesses across the state, which is long overdue."

However, consumer advocates say it's an unnecessary and illegal bailout of the insurance industry that has left thousands of homeowners with no alternative but to use FAIR to protect themselves from disaster. They have vowed to launch legal challenges once the rate increases are announced.

"This new rule runs counter to the law that enacts the FAIR plan, which requires state-owned insurers to share in FAIR losses," said Carmen Balber, executive director of Consumer Watchdog, a nonprofit, nonpartisan consumer advocacy group focused on California's insurance market. "Nothing in that original law allows these insurers to pass losses on to homeowners."

Lara's office did not respond to a request for comment on the rule change in July. But he told CNN last week when discussing the December rule change that the best way to protect homeowners is to make insurers more willing to write homeowners' policies themselves in areas at high risk for wildfires rather than forcing those homeowners to turn to California FAIR.

"We're realistic about the risks in California," Lara told CNN last week. "We can never get to the point where we can't afford to do that."

"The costs will be carried unless we address availability," she said.

Balber said it's too early to predict how much homeowners' policy costs will increase with insurers being able to pass on any assessment they receive from California FAIR. But she said it could be significant.

"We've estimated that if the FAIR plan needs to assess insurers $10 billion for their costs that are not covered by reinsurance, and there are about 9 million homeowners in the state, that's about $1,100 on each homeowner's bill," she said.

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