September 17, 2021

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California taking wrong tack on fire insurance

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As wildfires rage across northern California, homeowners are rightly worried about losing their fire insurance and being forced to rely on policies from the state’s insurer of last resort, known as the California FAIR Plan. In those situations, they face dramatic increases in their premiums from a state-created system that offers barebones coverage.

To ameliorate their problems, Insurance Commissioner Ricardo Lara last week banned insurance companies from non-renewing fire-insurance policies for homeowners living around the state’s two largest wildfires. This policy is understandable as a stopgap measure, but the commissioner increasingly relies on this emergency approach.

“It’s the third straight year that Lara has imposed the one-year ban on non-renewals,” the Sacramento Bee reported, noting that “last year he issued a moratorium covering 2.4 million policymakers.” This is a politically popular decision, but undermines the long-term health of the insurance industry – and discourages insurers from writing new policies.

Insurers need to manage their risks and major wildfires can threaten the solvency of these companies. The right policy is to encourage insurers to write more policies, yet Lara opposed legislation (Assembly Bill 2167) by Assemblyman Tom Daly, D-Anaheim, that would have encouraged insurers to voluntarily offer policies in high-risk areas by proposing higher rates in exchange for guaranteeing coverage.

That legislation died last year, but supporters recognized the need to create market incentives within the confines of Proposition 103. Approved by voters in 1988, it gives the commissioner the power to approve rate increases and mandate rate decreases. That discourages companies from offering riskier policies by limiting their ability to price them to reflect their risk.

Fortunately, the Legislature this year shelved Assembly Bill 1522, which would have prohibited “an insurer from canceling or refusing to renew a policy of residential property insurance or commercial insurance based solely on the fact that the insured property is located in a high-risk wildfire area.” Yet the commissioner is implementing this idea by fiat.

The state’s wildfire-related insurance crisis has worsened, but the solution remains the same. The Legislature needs to embrace market incentives that boost competition.

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