By Marty Allred
California’s market for homeowners insurance is broken. Across the state, but especially in areas with higher natural disaster risks (such as the Santa Cruz Mountains and other forested areas in our county), insurance companies are writing fewer new policies, if any at all.
Why? The Department of Insurance’s process for setting insurance rates is seriously outdated. In basic terms, regulations pre-dating climate change have left insurance companies unable to update rates to reflect current, higher risks of wildfires and other natural disasters. An updated rate-setting process that accounts for these factors is necessary to restore a competitive market for coverage.
Instead, the status quo has been the disintegration of the insurance market. In the last six months, insurers have announced dropping coverage for tens of thousands of customers, while other policies that are dramatically increasing in cost have kept would-be new home-buyers out of the market. Premiums are so unaffordable that many buyers have backed out of deals in escrow; others have asked that their properties be intentionally under-insured — a dangerous proposition, and a non-starter for mortgage lenders.
The kicker to this crisis? Its ripple effects on the rest of the economy. Everything else that homeownership supports, from the real estate and rental markets to home-building and the housing supply, also suffers. A fully functioning insurance market is essential.
There is a special urgency to this issue. In practical terms, each day without a remedy forces more Californians into the state’s Fair Plan, which provides only basic fire insurance, or force-placed insurance, in which the mortgage lender secures insurance, then charges the homeowner. Both options cost more and cover less. Each day that passes is lost time.
The way forward is to continue to stress the urgency of the issue – with legislators and regulators – with an eye toward two near-term solutions.
One solution comes in the form of a budget trailer bill – language attached to the state’s final budget – requiring the Department of Insurance to review insurance companies’ rate approval requests within 60 days. This proposal, announced by Gov. Gavin Newsom as part of his May Revise, would expedite a process that currently can take many months.
Have insurance companies told Gov. Newsom they would resume writing policies if the Department adopts this proposal? “Yes and yes and yes,” Newsom said in May. “That’s why I’m moving forward with this trailer bill. Let’s go. Let’s move this thing along.” I agree that we need to move forward now.
Another solution rests in Insurance Commissioner Ricardo Lara’s Sustainable Insurance Strategy — a package of reforms initiated by a September 2023 executive order for emergency regulations. It marks a tangible first step to relieving the issue, but it isn’t expected to affect change until the fall or the end of the year — lengthy timeliness given the size and nature of the crisis. Commissioner Lara and the Department’s personnel must prioritize this important work and expedite its progress, and fulfill the spirit of “emergency” regulations.
Our communities and economies benefit from stable homeownership. On this particular issue, the Legislature and the Insurance Department must engage to support the availability of insurance, on which homeownership – and so much else – rests.
Marty Allred is chief compliance officer of American Pacific Mortgage, a mortgage lender licensed in 49 states with a workforce of more than 3,000 employees. She is also a board member of the California Mortgage Bankers Association, which represents the residential and commercial finance industry.