California’s Outdated Insurance Rate-Setting Process Impacts Homeowners

California’s homeowners insurance market is facing significant challenges due to an outdated rate-setting process, according to industry experts. The Department of Insurance’s regulations, which pre-date climate change considerations, have left insurance companies unable to adjust rates to reflect the current higher risks of wildfires and other natural disasters. This has resulted in a decline in new policy offerings, particularly in areas with higher natural disaster risks such as the Santa Cruz Mountains.

The consequences of this broken insurance market are far-reaching. Insurers have been dropping coverage for tens of thousands of customers, while existing policies have seen dramatic increases in costs. As a result, potential home-buyers are being deterred from entering the market, and some buyers have backed out of deals due to unaffordable premiums. Others have resorted to intentionally under-insuring their properties, which poses risks and is unacceptable to mortgage lenders.

The impact of this crisis extends beyond homeownership. The real estate and rental markets, as well as home-building and housing supply sectors, are also experiencing negative effects. A fully functioning insurance market is crucial to support these interconnected industries.

To address this urgent issue, two near-term solutions have been proposed. The first is a budget trailer bill, attached to the state’s final budget, which would require the Department of Insurance to review insurance companies’ rate approval requests within 60 days. Governor Gavin Newsom has expressed support for this proposal, stating that insurance companies have indicated their willingness to resume writing policies if the Department adopts this measure.

The second solution lies in Insurance Commissioner Ricardo Lara’s Sustainable Insurance Strategy, initiated through an executive order in September 2023. While this strategy represents a tangible step towards resolving the issue, its impact is not expected until later this year. Given the magnitude of the crisis, Commissioner Lara and the Department’s personnel must prioritize and expedite the implementation of these reforms.

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