My friends outside of work often ask me about the topics that I cover. People have a real interest in the goings-on in the California Legislature, criminal justice matters, and — at least out west — the reasons for our ongoing water shortages. But I also write about insurance matters, the mention of which instantly causes people to glance at their watches or find an immediate excuse to exit the conversation.
No one gets warm fuzzies about insurance, and this explains why left-leaning insurance commissioners have been so successful in hobbling insurers with regulations that few other industries would tolerate. No one gets elected by defending companies that reliably pay claims, but haranguing “greedy” profiteers often does the trick.
In modern America, insurance regulation has a proper role. State insurance officials should ensure that the companies that cash your premium checks have the wherewithal to pay up in a claim — and then do so in keeping with the terms of the contract.
But consumer activists, often allied with trial attorneys, have secured (through the Legislature and the ballot box) insurance regulations that go far beyond that modest and legitimate authority. In 1988, California voters approved Proposition 103, which gave the insurance commissioner czar-like powers to approve all insurance rate increases and even mandate rollbacks.
The commissioner is an elected position, so every candidate (Democrat and Republican) has the incentive to run on lowering rates and, following natural disasters, on forbidding insurers from canceling or not renewing policies. (In only 12 states are the insurance commissioners elected. They both are elected in the two states referenced in this article, so go figure.)
You might have noticed that California has experienced several years of severe wildfires, destruction that imposes massive costs on insurers. “The Camp Fire alone caused $18 billion in property damage, $9 billion of it insured,” Bloomberg reported in 2020. It continued:
[I]n 2017, the Tubbs Fire and other wine country complex blazes had incinerated more than 6,000 structures, resulting in 22 deaths and more than $12 billion in insurance claims.… [The two seasons wiped out more than a quarter-century of underwriting profits for the California insurance market.
Wildfire activity is lower this year, but it remains a concern — especially in the midst of a particularly severe drought. Insurance is all about risk, so no one should cry into their cornflakes when insurance companies and their investors face a succession of tough wildfire seasons.
Nevertheless, Proposition 103 makes it inordinately difficult for insurance companies to adjust overall rates to reflect insurance companies’ actual risks, reducing their incentive to write policies and discouraging other companies from entering the market. Many Californians are unable to find policies and must opt into the barebones, state-run FAIR Plan.
So, when Democratic insurance commissioner Ricardo Lara recently ordered another moratorium on fire insurance cancellations and nonrenewals in high-risk areas, it only compounded an increasingly dour situation. Basically, the state is forcing insurers to provide coverage in California’s riskiest fire areas yet limiting their ability to charge market rates. Instead of risking insolvency, insurers will likely just exit the California market entirely.
California is in fact facing a “homeowners insurance crisis,” as R.J. Lehmann writes in Insurance Journal. He continues: “That crisis began in 2019, when nonrenewals of residential policies in the state grew by 36% and new policies written by the state’s residual market FAIR Plan surged 225%.” Surging wildfires are the result, he argues, of climate change and the state’s land-use practices. However, Proposition 103 precipitated the looming insurance crisis.
The usual suspects — leftist legislators and consumer activists — typically oppose any reform. They even opposed modest legislation that would have allowed insurers to voluntarily adjust their rates in fire-prone areas in exchange for promising to offer coverage in those areas. It’s not surprising, given that consumer “intervenors” are paid to advocate on behalf of consumers in the rate-setting process. Their adversarial approach is quite lucrative.
Washington state doesn’t have the same insurance system as California, but it does have a consumer-activist insurance commissioner, Mike Kreidler, who is doing his part to screw up that state’s insurance market in the name of social justice. During COVID-19, Kreidler unilaterally banned insurance companies from using credit scores to determine insurance rates.
Insurance scores are somewhat different from those used by credit agencies, but they are remarkably predictive of insurance claims for some obvious reasons. People who are fastidious about their credit tend to be responsible about other things — such as how they maintain their homes and cars. They tend not to be living on the edge and therefore offer lower risks to insurers.
Kreidler made the easily debunked claim that the coronavirus “disrupted the credit reporting process.” In reality, he saw the use of credit scores as discriminatory against poor people even though poor people who manage their meager resources wisely can have far higher scores than wealthy people who are profligate spenders. As I’ve also noted previously, progressives increasingly are taking aim at credit scores in general as part of their egalitarian experiment.
After Kreidler’s emergency rule went into effect, the results were unequivocal: People (especially seniors) with good credit saw their rates jump by about 20 percent while those with poor scores saw their rates drop. Only in a world where insurance is treated as a social justice issue rather than an accurate risk assessment does it make sense to punish those who are the most financially responsible people and reward those who are less so.
Fortunately, the Thurston County Superior Court sided with the insurance companies and, in late August, issued a final order. Insurance companies are free to return to their credit-scoring model — and good-credit consumers might finally experience relief.
Kreidler won’t appeal the decision, so he might be left with additional time to deal with his office’s high-profile controversies. (And you thought insurance regulation was boring?) By protecting investors, corporations, and consumers from risk, insurance creates the foundation for the modern economy. Do we really want to entrust this crucial system to politicians?
Steven Greenhut is Western region director for the R Street Institute. Write to him at firstname.lastname@example.org.