Special Notice / Hearing: None__
Vote Required: Majority
To: Honorable Board of Supervisors
From: Supervisor Ray Mueller
Subject: Resolution requesting State action to stabilize California’s property insurance marketplace
RECOMMENDATION:
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Adopt a resolution requesting that:
A) The Governor declare a state of emergency relating to the property insurance market; and
B) The Governor, Insurance Commissioner, and the California State Legislature take immediate action to strengthen and stabilize California’s residential and commercial property insurance market; and
C) The President of the Board of Supervisors be authorized and directed to transmit a letter to appropriate State officials requesting that steps be taken to stabilize the property insurance market.
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BACKGROUND:
In 1988, California voters enacted Proposition 103, which established consumer protections to keep insurance rates fair and affordable and to ensure a competitive marketplace. However, unlike public utilities, which are required to cover all consumers, insurance companies are not required to write insurance policies, especially in high-risk areas, unless they are able to ensure they have the capital and reserves to fully meet all insurance claims submitted by consumers, cover their expenses, and earn a fair return.
The California Fair Access to Insurance Requirements, or FAIR Plan, was established specifically to provide insurance coverage to homeowners in high-risk areas, including, for example, homes in fire zones or along earthquake fault lines. The FAIR Plan is offered through a shared market where licensed insurance companies agree to share the risk of California homeowners who insurers decline to cover outside of the FAIR Plan.
In 2023, two of the State’s largest insurance carriers announced they would stop issuing new homeowners and commercial property insurance policies in California. These carriers represented over 27 percent of the insurance market in California. Several other insurance carriers, representing more than 36 percent of the market, announced plans to limit the issuance of new homeowner insurance policies. Additionally, seven out of the state’s top 12 homeowner insurance carriers reduced coverage, blaming wildfires, the rising costs of such threats, and state regulators’ refusal to approve rate hikes. This reduction of available homeowner insurance coverage from the conventional provider insurance market has caused increasing enrollment in the FAIR Plan, threatening the ongoing stability of this state-established risk pool.
DISCUSSION:
In September 2023, the California Insurance Commissioner announced the Sustainable Insurance Strategy, a comprehensive package of executive actions aimed at improving insurance choices, protecting Californians from increasing climate threats, and addressing the long-term sustainability of the state's insurance market.
As climate change has led to increasingly devastating extreme weather events in California, including in San Mateo County, such as the 2020 CZU Lightening Complex Fire, which consumed 86,509 acres and destroyed 1,490 buildings, and the 2023 winter storms, which destroyed public infrastructure and private property at unparalleled levels, it is becoming increasingly important to have resilient market structures to finance repair and recovery.
Homeowners, along with owners of businesses, farms, and ranches, and whole communities throughout San Mateo County, have worked together with government and non-government entities to increase their resilience against the threat of wildfire. However, under current insurance marketplace regulations, those wildfire mitigation efforts are not recognized by insurance carriers through rate reductions.
State Farm, the largest insurance carrier in California, after reversing its earlier decision to not renew 70,000 policies in the State, including 30,000 home insurance policies, declared that while it would renew those policies, it would not include insurance coverage for fire risk, which is perhaps the most important component of a homeowner’s coverage. Policyholders will be required to obtain fire coverage through the more costly state FAIR Plan, which may deter some homeowners from maintaining comprehensive insurance coverage, potentially leaving them vulnerable to other risks. For those who opt for coverage through the FAIR Plan, it provides significantly less coverage than a typical homeowners policy (fire only). It has been reported to cost 50% more, on average, than a homeowners policy with an admitted insurer, since FAIR Plan rates are based upon actual loss experience and the loss projections of catastrophe risk models in higher risk areas.
The California Insurance Commissioner has released draft regulations to address this immediate crisis. However, at a March 28, 2024, hearing on this topic, The Little Hoover Commission reported that reforms “will not go into effect until at least 2026, and it may take a few years after that for the market to react… this timeline, of course could be delayed further if lawsuits by any party, including insurers or consumers, were to occur.” This delay in implementing changes that will increase insurance availability has implications for San Mateo County’s existing housing affordability crisis, where home buyers required to obtain comprehensive insurance coverage will either be priced out of the real estate market or be left vulnerable to fire risks.
This insurance crisis that threatens lives, private property and the local economy can be addressed through immediate regulatory and legislative action to stabilize the marketplace. The Governor has authority under California law to declare emergencies and the California Insurance Commissioner similarly has broad authority under law to adopt emergency regulations to promote the public welfare, including with respect to processes governing the prior approval process for insurance rate change applications.
The resolution requested by this item requests that the Governor and the Insurance Commissioner exercise their respective authority to declare a state of emergency with respect to the State’s property insurance marketplace and to adopt appropriate regulations to address the crisis. The resolution also calls upon the State Legislature to take appropriate legislative action to stabilize the State’s property insurance marketplace. Moreover, the resolution authorizes and directs the President of the Board of Supervisors to work with staff to draft and transmit correspondence to appropriate State officials requesting steps to be taken to stabilize the State’s property insurance marketplace.
FISCAL IMPACT:
None.