Calif. scared off its biggest insurer. More could follow.  June 2nd 2023

Calif. scared off its biggest insurer. More could follow.

For nearly 35 years, California has been famously protective of insurance policyholders through laws and policies aimed at limiting rate increases.

But the system is coming under scrutiny following the stunning announcement Friday by State Farm — the largest property insurer in California — that it is no longer writing new policies for homeowners or businesses in the state.

Experts say State Farm’s decision highlights a flaw in California policies that effectively blocks insurers from considering climate change in setting premiums and discourages them from seeking rate increases sufficient to cover the state’s growing wildfire risk. In addition, the policies have created insurance premiums that are far too low and are forcing insurers to pull back their coverage in California to remain profitable.

State Farm’s retreat could compel other California insurers to take similar action, said Michael Wara, director of the Climate and Energy Policy Program at Stanford University’s Woods Institute for the Environment.

“The other insurers learned on Friday, and now they are all meeting to decide, how do we respond? Do we follow the lead?” Wara said. “If experience is any guide, probably they will. It’s like they’ve been given permission. If it was some small insurer, maybe no one would care. But this is State Farm.

“For State Farm to take this action, it’s essentially saying we don’t want to grow in the California market, and we would prefer to shrink in the most valuable real estate market in the country,” Wara added. “This is a situation that threatens the broader economic picture of California.”

Many of the restrictions on insurers originated with Proposition 103, a ballot measure California voters approved in 1988 amid soaring automobile insurance rates.

For property insurers, Prop 103 has made it almost impossible to set premiums based on computer models that project future risks including climate impacts, said Mark Sektnan, vice president for state government relations at the American Property Casualty Insurance Association. That’s because Prop 103 requires modeling used by insurers to be made public, which modeling companies want to avoid, Sektnan said.

Instead, insurers are setting rates based on their losses over the preceding 20 years.

“It’s a little bit like driving your car using the rearview mirror when your windshield is right there in front of you,” Sektnan said.

When insurers analyze the past 20 years to set rates, they are not fully capturing recent increases in California’s wildfire risk as climate-driven hotter temperatures have made the state’s forests and grasslands drier and more combustible, experts say.

For example, in the 20 years from 2003 through 2022, wildfires burned an average of 1 million acres a year in California, according to an E&E News analysis of data from the state Department of Forestry and Fire Protection.

But in the six years from 2017 through 2022, California wildfires burned an average of 1.8 million acres a year and destroyed or damaged nearly 51,000 structures in total.

“The problem in California is that the risk is changing pretty quickly, especially if you think over two decades. Two decades is just not fit for the problem,” Wara said.

Nancy Watkins, a California-based principal at Milliman insurance consultants, said the retrospective method “is an extremely simple rate-making model that in practice has totally failed to anticipate the growing risk in California due to factors like housing growth in high-risk areas, vegetation build up, the effect of climate change on longer fire seasons, hotter temperatures, drier air. None of that is factored into a backward-looking formula,” Watkins added.

Michael Soller, a spokesperson for the California Department of Insurance, said State Farm’s announcement “can create uncertainty and anxiety” among people seeking homeowners’ insurance and noted that 115 other companies are writing property coverage in the state.

“Our immediate focus is on helping consumers navigate their options,” Soller said.

California Insurance Commissioner Ricardo Lara is forcing insurers to give discounts to policyholders who make properties more wildfire-resilient, which Soller said encourages insurance companies “to invest in wildfire mitigation measures.”

Unable to account fully for wildfire risk, insurers instead have canceled or declined to renew policies in wildfire-prone areas. In 2019, after two consecutive years of massive wildfires in California, the number of insurer cancellations or nonrenewals shot up to 235,000 from 165,000 in 2018, state figures show.

At the same time, the number of policies written by the California FAIR Plan, which insures property owners who cannot buy coverage from an insurance company, jumped from 140,000 in 2018 to 190,000 in 2019. The number hit 268,000 in 2021, the most recent year for which records are publicly available.

About 33 Million U.S. Homes at Risk of Hurricane-Force Winds

According to an analysis by CoreLogic, about 33 million U.S. homes with a combined reconstruction cost value of $11.6 trillion are at risk of hurricane-force winds.

CoreLogic released its 2023 Hurricane Risk Report to mark the start of the Atlantic Hurricane Season on June 1.

The global property information, analytics, and data-enabled solutions provider, said it identified more than 32 million single-family residences and 1 million multifamily residences are at moderate or more significant risk of sustaining damage from hurricane-force winds. Nearly 8 million homes, with a RCV of $2.6 trillion, have direct or indirect coastal exposure, making them susceptible to storm surge.

Five Sigma: Typical claims organizations widely planning to increase their use of automation and cloud-based systems

Five Sigma commissioned a survey of 100 senior claims and risk leaders at property and casualty (P&C) insurance companies in the U.S.

According to the company, the survey, which was carried out by independent research and survey company Global Surveyz, provides valuable insight into an insurance industry increasingly eager to adopt new technologies for managing claims – even as many of its claims organizations still rely on legacy technologies.

7 steps for improving claims payment accuracy

Assessing and determining the value of items involved can require the expertise of contents valuators and other experts.

The pandemic has led to a loss of legacy knowledge in the insurance industry, as many senior leaders with vast property claims experience have taken early retirement. This has created a skills shortage of experienced claims adjusters, who play a vital role in helping policyholders recover from losses. It is certainly a talent that doesn’t grow on trees.

As with all successful businesses, there is a core of knowledge worth learning, retaining and passing along. New adjusters entering the field can benefit from knowing more about the working process of contents inventory and valuation behind property claims.

Property claims adjusters help policyholders recover from losses due to accidents, wildfires, storms, or other events. They work with a range of vendors including inventory specialists and contents valuators to assess the damage and determine the amount of compensation owed, whether to deny the claim or conduct further investigation.

Here are seven tips for working with vendor partners and a review of some of the basics to follow for a claim:

• Review the policy.
• Understand the coverage.
• Understand who is covered.
• Understand the limits and sub-limit categories and deductibles.
• Decide to allow the insured to create their own contents list or
• Dispatch an experienced contents valuation company to the loss site to assist the insured with their contents inventory creation.

Jane Nelson, vice president of business development, Claimplus