RED VS. BLUE GOVERNANCE: A Tale of Two State Insurance Markets: Florida fixed its market with reforms. California didn’t. See the results.
The 1945 McCarran-Ferguson Act enshrines state regulatory authority over insurance. This system has worked relatively well over 80 years. But some states have done a better job of managing their markets than others. California and Florida provide an illustrative contrast.
Democratic insurance commissioners in the Golden State have for years suppressed rates. Until recently, California was the only state that prohibited carriers from using catastrophe models to project disaster risk and pricing reinsurance costs into their premiums.
Wildfires—exacerbated by the state’s poor land mismanagement—have swelled insurer claims and liabilities. Insurers are paying out $1.09 in expenses and claims for every $1 they collect in premiums. They’ve curbed their exposure in part by dropping policy holders in high-risk areas and leaving the market.
The liabilities of the state’s insurer of last resort, FAIR, have exploded to $458 billion from $153 billion in 2020, with $5.9 billion in exposure in the Pacific Palisades. Yet Insurance Commissioner Ricardo Lara rejected FAIR’s proposed rate increases while requiring it to cover homes worth up to $3 million.
FAIR President Victoria Roach told the state Assembly last year that the insurer in 2021 requested a 48.8% rate increase—less than the 70% it needed—but was approved for 15.7%. FAIR is under-capitalized and had only $700 million in cash on hand as of last year to pay claims.
To prevent more insurers from leaving the state, Mr. Lara last month finally let carriers price in their reinsurance costs and use catastrophe models. But he also capped the reinsurance costs that carriers can pass along. Rates are set to rise 20% to 40% this year, though this still may not be enough to cover insurer liabilities.
Unable to raise rates, many insurers have increased deductibles and capped maximum payments. That means insurers might not cover all of the fire damage, and some homeowners will face hefty rebuilding costs. Lucky for them the Federal Emergency Management Agency covers losses if homeowners are “under-insured.”
This means taxpayers in Houston and Little Rock may pay for rebuilding multi-million-dollar homes in California. If FAIR becomes insolvent, all insurers in California—meaning their customers—are on the hook for its claims. Homeowners could see rates rise by thousands of dollars a year.
Typical.