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
