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Catastrophe modeling would drive ‘explosive’ insurance hikes, CA watchdog warns

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(The Center Square) – Consumer advocates decried California’s proposed adoption of catastrophe modeling for insurance, with Consumer Watchdog warning “black box” models could result in the use of “unverifiable secret algorithms to set prices.”

Last week, California Governor Gavin Newsom shared his support for a set of proposals to stabilize California’s property insurance market — mostly by allowing rate increase — as many insurers stop accepting new policies or flee the state entirely.

Rising claims and required government approval of insurance rate increases have left insurers in the red as rate hikes haven’t kept up with insurers’ costs. Insurers that do stay stop accepting new customers, provide coverage in only select areas, and raise rates for their remaining consumers as quickly as possible.

With fewer insurance options, Californians are flooding into FAIR, the state-created insurance plan of last resort. FAIR is facing its own troubles as well, as it can only cover up to a limited amount of property value, and it’s unable to pass on the cost of reinsurance — insurance that insurers buy to cover losses in excess of their capital — to FAIR plan buyers. If FAIR is unable to change to pass on the cost of reinsurance, FAIR warns every plan subscriber may face a $1,000 assessment every time there is a major wildfire anywhere in the state.

California Insurance Commissioner Ricardo Lara’s proposal is to allow insurers to use catastrophe models to set rates in exchange for covering at least 85% of properties in wildfire distressed zip codes where three requirements are met: 15% of policies must be underwritten by FAIR, insurance coverage must cost more than $4 per $1,000 of coverage per year, and per capita income must be 50th percentile or less for the state; distressed counties where more than 20% are high or very high risk of fire also would be subject to the 85% requirement.

To get the areas covered at least 85% by non-FAIR insurers, the proposal would require catastrophe-model-using insurers to cover 85% more of the homes in the area relative to their statewide market share — if a company has 10% market share statewide, it would need to cover 8.5% of properties — within two years. Insurers can avoid this by increasing its coverage of “distressed areas” by 5% per year. Insurers that fail to sell enough policies in distressed areas by the end of two years would be required to submit new rates that don’t make use of catastrophe modeling or make an “alternative commitment,” which Consumer Watchdog — founded by the same individual who authored Proposition 103, which created major California’s insurance laws — says allows insurers to reap premiums from non-public algorithms as consumers are left without information on why their rates are going up.

“After two years, if insurance companies can say they can’t meet their goals the commissioner can just move the goal posts. This was the one consumer benefit in Lara’s proposal but the exceptions swallow the rule,” said Consumer Watchdog executive director Carmen Balber in a statement.

Balber also warned against the use of secret catastrophe modeling and the risk of higher insurance rates for all kinds of insurance.

“Black box catastrophe models are notoriously contradictory and unreliable, which is why public review and transparency are key before insurance companies are allowed to use them to raise rates,” Balber continued. “The rule also proposes expanding the use of catastrophe models far beyond wildfire loss, explicitly expanding them to flood and also allowing the Commissioner, at his discretion, to approve their use in any line of insurance. That could mean auto, non-wildfire residential or commercial, cyber insurance and more. It would also allow insurers to use models to predict all losses, not just catastrophe losses, a dramatic departure from current practice and one that would guarantee an explosion of rates.”

Newsom noted California’s insurance rates are below the national average, and compared California’s insurance rate for a $300,000 home to the national, Texas, and Florida averages; California is $1,405 per year for a $300,000 home, while nationally it’s $2,601, and $3,851 in Texas and $4,419 in Florida.

However, with the state’s cost of living already among the highest in the country, global ratings agencies warn substantial increases in property insurance rates could drive further out-migration of taxpayers out of the state and threaten public finances.

Following a public workshop on June 26, the California Department of Insurance will produce final catastrophic modeling regulations for adoption by the end of the year.

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