California has published its new regulations governing property insurance in that state. The devil is, as always, in the details.
The new rules, released Monday by the California Department of Insurance, allow providers to pass the cost of reinsurance on to policyholders.
Reinsurance is effectively the insurance taken out by insurers. It transfers some of the risk so that no company has too much exposure to a potential catastrophe.
The cost of reinsurance has boomed in recent years, due to the increased risk of natural disasters in the state.
This, in part, is why insurers have been pulling out of the state, and regulators hope the reform will make the market more attractive to home insurers.
Earlier this year, State Farm gave the state an ultimatum - threatening to ax cover if it did not allow the insurer to raise home insurance rates for millions.
. . .
Doug Heller, director of insurance for the Consumer Federation of America, speculated that consumers could see price increases of 30 percent to 40 percent, the San Francisco Chronicle reported.
. . .
To make up for the price rises imposed on customers, regulators have attached a condition to the reform.
This is that insurance companies that pass on their reinsurance costs must also commit to writing more policies in wildfire-prone parts of the state, or pledge to maintain their presence there.
. . .
Insurers will have to start increasing their coverage by 5 percent every two years until they hit the equivalent of 85 percent of their market share.
That means if an insurer writes 20 out of every 100 state policies, they would need to write 17 in a high-risk area, Lara's office said.
There's more at the link.
How many people can afford premium increases of that magnitude? And how much will premiums go up in future years? This is just the start. How many people will end up not being able to afford to insure their homes? How many will be forced to sell them? And, if existing owners can't afford to insure them, how will buyers - at California real estate prices, mind you - be able to afford to insure their new homes?
This might lead to a large-scale collapse of the entire housing market in many high-risk areas of California, because the combination of high prices and high insurance rates will make almost everything unaffordable.
Also, put those conditions together:
- People in high-risk areas face the greatest premium increases, due to the risk factor. They may pay 30-40% more this year than they did last year, with more increases to come.
- Insurance companies must adjust their coverage until they issue 85% of their policies to people living in high-risk areas.
- Those 85% of policies, given such drastic premium increases, are going to bring in billions upon billions of dollars to the insurance companies.
- How much will they have to kick back to California's politicians and bureaucrats for the privilege of doing business there?
If you think there won't be kickbacks involved, there's this bridge in Brooklyn, NYC that I'd like to sell you. Cheap at half the price! Cash only, please, and in small bills.
From where I sit, this has corruption, cronyism and political correctness written all over it. Am I too cynical? Or am I a realist? What say you, readers? Please let us know in Comments.
Peter
28 comments:
Too cynical? Or Two cynical? Maybe should be five cynical. I.E. you are not cynical enough. And not realistic enough.
You can never underestimate the thinking behind politicians' brains. Yes, I know, but a few politicians do have them.
Most homeowners policies are already up 25-30% in the last four years (I wonder why?). Everyone I know has already done the shopping around and raising deductible dance. "Luckily" I live in a moderate threat zone. My friends in Florida are getting murdered.
Please name a state where the regulators have lowered costs for anything for consumers by trying to control any marketable item or service. Do they factor in inflation or the weakening dollar? I just got a 2.5 percent raise in Social Security payments, due to their calculated "cost of living". I am not sure whether to laugh or cry. This is another compelling reason to keep my day job....forever, I guess.
Many people are coming to the realization that putting away $$ for 'Just In Case Something Happens' is a better policy then giving $$ each year (which adds up to unused $$$$ over many years) to an insurance agent. A thousand a year to insurance becomes ten thousand 10 years later - GONE! A personal account at least keeps the value of what is saved.
This does require discipline to use account when ABSOLUTELY needed.
I think you are spot on. This smacks of Califruitopia liberal politics. And the one's living in most of the high risk areas are the under represented conservatives.
My sympathy for californians is limited.
The place is mostly a high fire risk zone even before the idiotic government imposed land use regulations that make sane brush management impossible
Given that it seems pretty clear to me that many californians ought to be paying maybe 5% of the rebuild cost of their property a year for insurance given that the chances of a devastating fire burning them out is probably about one year in 20 ish. If they can't afford those premiums then they've been mooching of other suckers and ought to sell out now and move. And if they can't afford the loss well tough, they've had in many cases years of house insurance subsidized by others.(yes that does mean that Hollywood stars with mansions in the canyons would be payingctens of millions in premiums each year, as would Bay Area tech bros and so on).
Now of course the state government is adding dysfunctional regulation on top of dysfunctional regulation but there's no way to fix that except for the place to become so bad that the politicians that passed these rules are tossed from office (and if that's a Czech style defenestration that's probably good "pour encourager les autres")
California is a beautiful place that has been completely wrecked by bad governance, the sooner thins crash the quicker things can be rebuilt from the rubble and (possibly literally) ashes
Perhaps I'm misinterpreting your point.
Why shouldn't people who live in "high risk areas" pay more for insurance? If they don't pay more, then the risk associated with their choice of home location has to be covered by people who made safer choices.
So I choose to build my house in a safer area, but I must share the costs of your risky choices? Why is that exactly?
People want to live in beautiful places...seashores, beaches, riverbanks, forests, mountainsides...but those places pose higher risks than "plain" areas. There's nothing wrong with that...my retirement home is going to be built on an 18 acre property on the side of a mountain in a forested area...but if you decide to build in a risky area like that, you are accepting those risks and the associated costs of them. That is a conscious decision that people make and they are responsible for the consequences of their decisions, not anyone else.
So, in order to continue to make a profit (which is the goal and responsibility of any business in existence), and because of the penchant for Californians to support environmental regulations that increase the risks and ferocity of wildfires in the state, the choice is either insurance companies raise rates or just close up shop.
Which is worse, having high insurance costs, or no insurance? If someone owns a home in a risky enough location that they can't afford to pay for the insurance, I'd say moving to a safer locale is the right decision to make; after all, if they can't afford the insurance costs, they surely can't afford to have their house burn down with no insurance at all.
So California is allowing insurance companies to raise rates in order to prevent them from leaving the state altogether. Seems like a good move to me. And in the process are setting conditions that prevent the insurance companies from just refusing to insure people who life in risky areas...again, a good idea to protect your citizens from unscrupulous companies that would simply refuse to cover high risk properties.
The fact that the owners of those high risk properties will have to pay more is not an injustice...in fact it's the exact opposite. No one else has the responsibility to pay for the risks those people chose to take.
Risk will always impact rates. Insurance companies are driven to make a certain amount of profit unlike the state of California that burns thru money as fast as any wildfire.
One idea that "works" on beach front homes is that the insurance only covers 50% of the value of the property. Your house get washed away, you still own the land it was on. In many places the land price is much more than the house that was built on it. The owner then accepts more risk to reduce premium costs.
The risk in California is because of the insane California regulations that prohibit counties, municipalities and businesses from keeping the population safe.
-Power companies are not allowed to keep the right of way clear of dangerous materials. That was the cause of the Paradise fire and other similar fires.
-Municipalities are not allowed to clear alongside roadways to make a clear way so that small fires don't turn into large ones. That was the cause of the Carr fire near Redding.
-California does not allow building of new dams or salt water purification plants which would store the vast amount of water lost to environmental excuses. Water would allow fire resistant plants in higher risk areas and ground cover to hold some of the mud slides back.
-California is way over regulated.
-Florida makes insurers pay for additional costs that were not covered by the homeowner's policy. Think about that.
Insurance companies rely on the US taxpayer to bail them out every day. If you look at your long term disability insurance policy, you should find a clause that if you are disabled for X amount of months, your insurance will pay for an attorney to petition Social Security to pick up your tab from the time of the disability till you return to work.
There is lots more to the insurance and government regulation than meets the eye.
Going to agree with Sailorcurt above. Why should I subsidize your insurance because you choose to live somewhere that is routinely devastated by fire, flood, etc? I choose to live somewhere that isn't and my rates are relatively low.
Unless we are missing some important detail regarding the issue here...
Florida has figured out you have to burn the forest every few years to mimic lightning fire starts, to reduce the fuel load and keep unplanned fires manageable. This also produces the right habitat. California is pretending the Florida experience is not relevant.
The state is going to compell insurance companies to write high risk coverage as an increasing percentage of their total business? No insurance company negotiator will be concerned about a future contingency like that, it won't be enforceable when the company holds the whip hand of a threatened entire-market exit, and will be quietly discarded. The high risk insurance customers still will have to resort to very expensive alternatives just like now, but pass-thru reinsurance premiums will raise the costs of home ownership everywhere, no reason California will be the only state to do this.
Rick m
Betting against the come line. You presume that you will have 10 years to accumulate funds. Pay attentions to 'caps on benefits' clauses. Those caps can factor heavily in any decision to self insure.
Blackrock.
When 85% of your insurance is issued in 'high risk's areas you are a high risk company. I can see setting up dummy companies with no real assets and running a reinsurance scam thru them. Pulling huge money out of the market until some big fire and Surprise! there's no money to pay back with. Sort of sounds like health insurance.
I'm not sure if this is being interpreted correctly.
I do know that the State of California took over Earthquake insurance, increased the deductible, raised rates, excluded necessary functions like clearing the land of a destroyed structure, and apparently has no re-insurance since they also notify people that they may not get their full coverage if they run out of money first. Fortunately, earthquakes are localized to individual houses and don't result in massive claims on their funds...
That prescribed burns thingy was because too many leftists and snowbirds complained about... prescribed burns and then in 1998 the state pretty much burned all year long. Some places, especially along SR40 in the Ocala National Forest, got so hot the ground was sterilized and not even weeds or palmetto would grow for years. So prescribed fires are a big yes and people can suck it.
Florida learns. The ever-stiffening of building regulations started after Hurricane Andrew, requiring things like powerline clearing, better roof requirements, tie-downs for mobile homes, better windows and such.
It is not just California. I am paying $6,000 in property insurance for my 3,300 ft2 one story home in South central Texas. I am paying $20,000 in property insurance for my 5,300 ft2 office building and 3,750 ft2 warehouse on 14 acres. Both are outside cities in Fort Bend County.
Another way of looking at things from the Politicians point of view ...
https://www.youtube.com/shorts/r5FlfNoTtCA
It's all grift, all the way down but cunningly disguised.
Phil B
Absolutely. One chooses to live in a high risk area, one SHOULD pay higher premiums.
Same same in hurricane areas. But nope, the Feds help keep that cost down and force the insurers to keep the rates the same for everyone.
If most people who live in high risk (I.E: Fire or flood) areas were forced to pay a real, market driven price, based on real risks, then they'd pay more than even the price they are looking at for next year.
If you live in the midwest where the risk of fire and flood is low, then you SHOULD pay less.
Please factor in Joe Biden's inflaion which is way far higher than what the gov reports
to give a good example of inflation just look at the cost of a nickel candy bar
I was born and lived in California my entire life. Right around 2000 I looked at all power being in the hands of one party and all the great things they were going to achieve to make life better for residents. By 2015 it was very clear it was getting worse and headed over a cliff. I left in 2020. Don’t miss it a bit.
Will the last person out get the lights?
Oh, wait…………
Old guy at the gun club stopped buying home owners insurance after his wife died. “i don’t give a shit if it burns down. I am in the process of giving my son all my guns except the lever action and hunting rifles.” Sort of a freedom is nothing left to lose statement. I sort of envy him.Tom
Anywhere there's money there is generally an opportunity for graft and corruption. Insurance...all types of insurance...is no exception.
I wonder how high my earthquake insurance will be this year? It was 156.00 last year. I wonder how much I have to help pay for others insurance this year?
Heltau
Waitwaitwait....
You're hyperventilating because the prmiums to build houses in brushfire-prone hillsides and storm-prone beachfront property will become so outrageous that the Jackholes who build there will have to self-insure, or else suck it up when their homes burn or wash away, and maybe even stop building in such asinine locations forever?!?
BOO FRICKIN" HOO!!!!!!!
Be still, my beating heart.
They should have told people decades ago that they were ineligible for any public funds, and would have to self-insure from the get-go.
Then there wouldn't be any bank loans there either, removing the Stupidity Tax of granting permits from harming people in the rest of the state who didn't build in such jack@$$ical locations from eating a share of the cost.
You want to build stupid houses in stupid places?
Fine.
You pay.
Welcome to capitalism and consequences for egregious stupidity in public.
QED
Watched for decades as folks on a certain bayou north of Lake Pontchartrain turned fall-down camps into beautiful primary homes gradually as each "devastating" storm fed them insurance money to rebuild/improve on the very same storm-damage-prone spots.
The other marriage from hell is between bureaucrats and utilities companies.
What about flood insurance? You have to buy that through the government because insurance companies won't insure you if you live on a flood plane. So why would an insurance company that won't sell fire insurance in areas prone to burning every year be considered unscrupulous? And to address the author's point about massive profits, let's not forget that the insurance companies will be paying a boatload of money from those profits in claims payments.
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