Assembly gives market-based insurance reforms a try

Steven Greenhut and Ray Lehmann
Greenhut is the Sacramento-based Western region director for the R Street Institute, a free-market think tank. Lehmann is R Street’s director of Finance, Insurance and Trade Policy.

California’s Legislature is hardly a bastion of free-market thinking and the state’s insurance markets are the most tightly regulated ones in the nation. So it was as encouraging as it was surprising to see the Assembly last Monday approve, on an overwhelming 56-3 vote, a bill that would give insurance companies more latitude to set prices based on market conditions.

Insurance Commissioner Ricardo Lara depicted Assembly Bill 2167, by Assemblyman Tom Daly, D-Anaheim, as something that will harm consumers and undermine Proposition 103 – the 1988 ballot measure that gave the commissioner the power to pre-approve any rate adjustments proposed by insurers. Lara depicted the new bill as “an insurance industry wish list.”

The legislation is no such thing. It will not deprive the Department of Insurance of any powers to reject insurance companies’ proposed rate increases, but could help assure that Californians living in fire-prone areas will have access to the fire insurance they desperately need.

In the wake of devastating wildfires that led to $24 billion in wildfire claims between 2017 and 2018, many California insurers have stopped writing policies for consumers living in areas with a high fire risk. That is an understandable response by insurance companies, but it has left roughly 1 million homeowners struggling to find coverage, which can create a devastating problem given the obvious need to protect such a major investment.

State officials have tried to address the problem by placing a one-year moratorium on renewals in fire-prone areas and by expanding the coverages offered by the state’s insurer of last resort, the California FAIR Plan. These, however, are nothing more than stopgap measures – and ones that insert government even more deeply into California’s highly regulated insurance markets.

The coverage problem stems from a simple source: price controls. Whenever the government caps the prices that private companies can charge, it leads to prolonged shortages. Because of its prior-approval regulations, California has made it inordinately difficult for insurers to charge higher prices to those living in higher-risk areas.

If prices could adjust to reflect supply and demand, we’d see a more competitive market emerge – one that will eventually lower prices as more companies offer coverage. For that to happen, however, property insurance companies need to be able to adjust prices quickly and efficiently. But under Prop. 103’s regulatory system, it’s not so simple for insurers to do what all other businesses do routinely.

The rate-filing process is lengthy and contentious, calling not only for prior approval by regulators of all rates but also an “intervenor process” that allows third parties to object. This system discourages competition. That process, by the way, is dominated by trial-lawyer-allied “consumer” groups that are compensated for intervening, supposedly on behalf of the state’s consumers.

A.B. 2167 understands the need to create market mechanisms that encourage insurance companies to participate in these high-risk markets, while still operating under Prop. 103’s restrictions. It creates the Insurance Market Action Plan, which would enable insurance companies to cut through the Department of Insurance’s red tape and voluntarily offer policies in high-risk regions.

This could quickly offer relief to homeowners by encouraging more companies to enter – rather than flee – this market. Its companion bill, Senate Bill 292, creates the formulas to determine which counties are eligible to offer such programs. The commissioner could still veto any of these proposals, but it would give insurance companies an incentive to at least try to stay in these tough markets.

These bills are, of course, just a first step toward moving California toward a more market-based insurance system. We don’t expect California lawmakers to approve them for that reason, of course – but markets will indeed help the state achieve its climate goals, given that market-based insurance rates will send more accurate price signals to consumers.

Fewer people, for instance, would live in fire-prone areas if they had to pay the full cost of doing so. Pushing people into a state-run insurance fund, or imposing renewal moratoriums on insurers, ends up subsidizing them to live in these places.

A.B. 2167 now heads to the Senate Insurance Committee. Given the gravity of the situation as California heads into another wildfire season, we hope senators are as willing as Assembly members to consider freer markets – a concept that might be considered novel in our Legislature, but has worked pretty well everywhere else.

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