Even as California strikes to handle regulatory obstacles to truthful, actuarially sound insurance coverage underwriting and pricing, the state’s danger profile continues to evolve in ways in which underscore the significance of risk-based insurance coverage pricing and funding in mitigation and resilience.
Triple-I’s newest “State of the Risk” Issues Brief discusses this altering danger surroundings and the impression of Proposition 103 – a three-decades-old measure that has made it laborious for insurers to profitably write protection within the state. In a dynamically evolving danger surroundings that features earthquakes, drought, wildfire, landslides, and — lately, attributable to “atmospheric rivers” — damaging floods, Proposition 103 has prevented insurers from utilizing probably the most present information and superior modeling applied sciences. Instead, it has required them to cost protection primarily based on historic information alone.
It additionally has restricted correct underwriting and pricing by not permitting insurers to include the price of reinsurance into their pricing. Insurers use reinsurance to maximise their capability to put in writing protection, and reinsurance charges have been rising for most of the similar causes as major insurance coverage charges. If insurers can’t mirror reinsurance prices of their pricing – notably in catastrophe-prone areas – they have to pay for these prices from policyholder surplus, cut back their market share within the state, or do each.
Proposition 103 additionally has impeded premium price modifications by permitting client advocacy teams to intervene within the rate-approval course of. This makes it laborious to reply shortly to altering market situations, leading to approval delays and charges that don’t precisely mirror present (not to mention future) danger. It additionally drives up authorized and administrative prices.
This has led, in some circumstances, to insurers deciding to restrict or cut back their enterprise within the state. With fewer non-public insurance coverage choices out there, extra Californians are resorting to the state’s FAIR Plan, which presents much less protection for the next premium.
This isn’t a tenable scenario.
In September 2023, California Insurance Commissioner Ricardo Lara introduced a Sustainable Insurance Strategy for the state that features permitting insurers to make use of forward-looking danger fashions that prioritize wildfire security and mitigation and embrace reinsurance prices into their premium pricing. In change, insurers should cowl owners in wildfire-prone elements of the state at 85 p.c of their statewide protection.
Issues round property insurance coverage affordability aren’t confined to California. They’ve been a very long time within the making, and so they received’t be resolved in a single day.
“Any sustainable solutions will have to rest on actuarially sound underwriting and pricing principles,” the Triple-I temporary says. “Unfortunately, too often, the public discourse frames the risk crisis as an `insurance crisis’ – conflating cause with effect. Legislators, spurred by calls from their constituents for lower insurance premiums, often propose measures that would tend to worsen the problem because these proposals generally fail to reflect the importance of accurately valuing risk when pricing coverage.”
California’s Proposition 103 and the federal flood insurance coverage program previous to its Risk Rating 2.0 reforms are simply two examples, in line with Triple-I.
Learn More:
Triple-I Issues Brief: Wildfire
Triple-I Issues Brief: Risk-Based Pricing of Insurance
How Proposition 103 Worsens Risk Crisis in California
Is California Serious About Wildfire Risk?
Dear California: As You Prep for Wildfire, Don’t Neglect Quake Risk