The fault lines running through California's widening homeowners insurance crisis were on display Tuesday at a state hearing, where consumer advocates clashed with industry companies over a plan to allow insurers to use complex computer models to to set premiums – a move that government officials say will push insurers into the market.
State Insurance Commissioner Ricardo Lara has proposed allowing insurers to use so-called catastrophe modeling, which uses algorithms that predict the future risks properties face from wildfires when pricing policies. Currently, rates are based on an insurance company's past losses, which insurers are increasingly dismissing as insufficient in light of widespread acceptance that climate change has pushed California into a more dangerous future by causing more wildfires.
The models, used in other states, are a key element of Lara's strategy to moderate price increases by allowing more accurate calculation of risks and convincing insurers to do business in neighborhoods prone to wildfires. The move comes amid a recent wave of insurers exiting the California market with announcements that they are not renewing their policies or have stopped writing new ones.
Consumer groups raised concerns at the hearing that the draft regulations would not allow for sufficient control over the designs, while several consultancy firms that developed them expressed concerns about the protection of their intellectual property.
“The algorithms and artificial intelligence used by private 'black box' catastrophe models will simply be tools for driving up insurance companies' prices unless California mandates real transparency about how they affect prices and imposes real rules of the road regarding to their design and use,” says Carmen. Balber, executive director of Consumer Watchdog, an L.A.-based advocacy group that led the campaign for passage of Proposition 103, the 1988 measure that requires homeowners and auto insurers to get state approval for interest rate increases.
The group, like other consumer advocates who spoke at the hearing, called on Lara to work with the state's academic and insurance experts to develop a “public model,” which would include all the factors involved in the computer simulations for everyone is available to review. . Such a model could be used to set rates or benchmark privately developed models.
The draft regulations require those wishing to review the models to sign non-disclosure agreements, which Consumer Watchdog claims will prevent its staff from discussing the models among themselves.
Julia Borman, director at Verisk, a company that builds computer models used by insurers, expressed concern that Lara's draft proposal would allow for review by “countless participants” and create the potential for an infinite timeline while the companies avoid that their models are being ripped off by others
Michael Soller, deputy commissioner for communications at the Insurance Ministry, said Lara has publicly stated that the draft rules will allow for the development of public catastrophe models, which the ministry could then use to evaluate insurers' proprietary models.
The proposal to allow catastrophe models is part of Lara's larger proposal Sustainable insurance strategy announced last fall. Other elements include fixing the finances of the state's Fair Access to Insurance Needs plan, an insurer of last resort that has been flooded with new policyholders since insurers pulled out of the market. He also wants to allow insurers to include the cost of reinsurance, which they buy to protect themselves against disasters, in their premiums.
Catastrophe models are already allowed in California for pricing policies related to earthquakes and fires caused by earthquakes. In addition to forest fires, the proposed regulations would also allow use of the models for insurance covering terrorism, floods and other forms of coverage.
Gerald Zimmerman, senior vice president of government and industry relations at Allstate, which stopped selling insurance policies to new homeowners in the state in 2022, said adopting Lara's strategy would be a game changer. “Allstate will begin writing new homeowners insurance policies in almost every corner of California,” he said.
Other speakers at the three-hour hearing included insurance agents and local officials, as well as homeowners groups, who want to ensure that disaster modeling takes into account the steps homeowners and government agencies have taken to reduce fire risk, such as by making homes more fire-prone to make. -resistant and reducing brush in a community. Although the draft regulations call for this, several speakers complained that such mitigation efforts had not been reflected in the recent premium increases.
The Insurance Department plans to review Tuesday's comments in preparation for issuing a new set of proposed regulations. Lara has the support of Governor Gavin Newsom, who issued a letter He calls on the Commissioner to take swift action to resolve the crisis. The regulations do not require legislative approval or the governor's signature.
“We will review all public comments while staying on track to implement all changes this year so that insurance companies write more policies in all areas,” Soller said.
