On June 12, 2024, the California Department of Insurance (CDI) released its latest step in what they are calling their Sustainable Insurance Strategy (Strategy). Keep in mind that a large portion of the target for the Strategy is residential/individual insurance. Community association insurance is a commercial policy, and therefore is subject to the sections below that impact the commercial side, while individual homeowners may also see their residential carriers impacted if they are in a planned community.
The metrics in this Strategy rely on how much property is insured in “distressed areas.” These areas are defined as:
- Undermarketed zip codes that are at least partially in a high or very high fire hazard severity zone (according to Cal Fire) AND
- At least 15% of residential properties are insured under the FAIR Plan OR
- The average premium per $1,000 of property insurance is $4 or more in areas where the per-capita income is no higher than the 50th percentile for California.
- Distressed Counties where 20% of dwellings are “high or very high risk.” Dwellings here do NOT include condominium associations but DO include condominium units.
- Properties insured by the FAIR Plan that are exposed to moderate to very high wildfire risk. In other words, they are NOT in the FAIR Plan because they’ve had too many water leaks, or the wrong kind of electrical panel.
The CDI is relying on Cal Fire maps to determine what level of risk each area of the state is in when determining distressed areas. These maps take mitigation needs and efforts into account and will be updated annually.
Last year, the CDI announced an agreement with CA admitted insurance companies to cover 85% of properties in distressed areas for residential (or personal lines) policies. For commercial carriers there needs to be a 5% increase in the amount of property covered in distressed areas (based on Total Insurable Value). Now this will be required for those carriers to use catastrophe modeling in their rate making.
Catastrophe modeling allows carriers to use forward-looking models that project what losses will cost in the future, as opposed to only relying on historical data. When we budget for our communities, we understand that line items like water might need to be extrapolated upward for the next year’s costs, because water costs are on a steady increase. It would be silly to only use historical data…. Costs are going UP. Only looking at previous water bills will not accurately reflect the cost of water next year. That is using “forward-looking” modeling.
While this seems to be common sense, and most other states allow for catastrophe modeling to be used as part of ratemaking, this Strategy will only allow catastrophe modeling to be used if carriers increase how much business they write in distressed areas.
The premise of insurance is to create a big pool of money that is created by the premiums of those being insured. When there is a covered claim for any of these folks, it is taken from the pool. It is important, therefore, to have more money coming in from premiums than going out in claims, or the insurance pool wouldn’t be able to pay for the adjusters, the customer service representatives, and all of the employees that administer that insurance product. Carriers handle this by carefully choosing which risks they allow to participate in their pool. Diversity of risk is important, as is avoiding an over concentration in any one area. And there are many more factors that go into a carrier’s determination of who pays to play in their pool.
The moment we begin to force certain risks to be a part of a carrier’s pool, we increase the risk of that pool becoming completely drained, and that carrier becoming insolvent. If we are going to do that, we have to come up with some way of financially supporting the carrier if (or when) that happens. With the CA FAIR Plan, there is an assessment process that allows the FAIR Plan to assess member carriers in proportion to the percentage of business they represent in the state if the pool runs dry. The carriers themselves, however, have no such backup system in place.
Let’s add to the difficulty carriers are facing in that they aren’t allowed to model as accurately when determining appropriate rates to use in creating premiums, and we have made it even harder for them to charge the rate needed to keep their pool from draining.
Now, catastrophe modeling is only allowed if they take on risks that might cause them to go insolvent. One carrier that we reached out to said that they would simply not use the catastrophe modeling, even though it would make them more accurate, in order to keep control over who participates in the pool so they can keep the company and the other folks insured by them safe and solvent.
That response is an indicator this Strategy may not reach its goals, and meanwhile carriers are being forced to use less accurate modeling to stay solvent. It certainly feels like a catch-22.
Stay tuned, because in July the CDI says there will be new regulations announced regarding what carriers will need to do to incorporate reinsurance costs as a component in their ratemaking, and we will be hearing more about the CA FAIR Plan allowing their $20 million limit to be applied per structure (instead of to the community as a whole).
If you haven’t already done so, we urge you to take a moment to sign up for CAI-CLAC email updates to stay informed. You can also follow us on LinkedIn, Facebook, Twitter and YouTube for real-time updates on legislative news, resources, event updates, or legislative action. You can also continue to share your story on our Current Campaigns page.
Kimberly Lilley, CIRMS, CMCA, is the Director of Advocacy, PR & Marketing for Berg Insurance Agency in partnership with LaBarre/Oksnee and can be reached at kimberly@berginsurance.com.