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Imagine that, several months from now, your insurance company doubles what you must pay to protect your home.
Imagine that, at this very moment, a small group of people know this might happen, but they have little intention of making sure you know.
That’s actually how it works in California – the state with the most highly regulated insurance market in the country.
Following a series of catastrophic fires, insurance companies are beginning to dump customers who live in fire-prone areas, including rural San Diego. For those customers who aren’t losing their insurance, rates are expected to rise, often dramatically.
The state’s Department of Insurance has to approve any of those changes before they take effect. That’s thanks to a 1988 ballot measure meant to protect consumers from unjustified rate spikes.
But the measure, known as Proposition 103, has loopholes that insurers are exploiting and regulators aren’t doing much to plug the holes, according to interviews with consumer watchdogs, industry experts and a review of regulatory filings by Voice of San Diego.
The result is that California homeowners have no meaningful way of knowing about – or potentially fighting – proposed hikes to their insurance rates.
For instance, if an insurer asks for more than a 7 percent increase, the public can force the state’s elected insurance commissioner to hold a public hearing.
Insurers have a way around that requirement.
In the past two years, over two dozen home insurance companies requested a rate increase of exactly 6.9 percent.
“When the voters passed Proposition 103, they expected there to be a lot of hearings, and there aren’t,” said Harvey Rosenfield, the author of Proposition 103.
Sometimes, companies ask for such increases back to back, so they could get double-digit rate increase and still not trigger a mandatory public hearing.
Even the 6.9 percent requests mask the true effect of rate increases on homeowners. That’s because insurers are using the average rate hike across the entire company.
In March, for example, the Northern California AAA auto club asked for a 6.9 percent rate increase.
Buried in CSAA’s filings was another document showing that over a fifth of the company’s customers – some 96,000 households – will see double-digit increases, an increase that the company says is partly driven by wildfire risk. A small portion, 5,300 customers, would see their rates double.
Of course, this is how averages work: The ups and the downs equal something in between.
But Rosenfield argues that Proposition 103 should be interpreted to apply to increases for the consumer, not the average across a company. That’s not the way the state insurance department sees things, though.
“The agency has allowed that to go on, and it’s frustrating,” Rosenfield said.
This spring, Joel Laucher, a senior official at the state’s insurance department, explained to the governor’s wildfire commission how companies charge more to insure homes perceived likelier to burn.
Of course, this is how insurance should work: People with more risk should pay more to get insurance. Otherwise, people in urban areas will end up subsidizing people who live in fire-prone parts of the state. Right now, that is likely happening because most insurers have not been charging enough to insure homes in risky areas.
To figure out what homes are likely to burn, the state’s largest insurers rely heavily on proprietary wildfire risk models that assign risk scores to homes. For instance, CSAA proposed to charge two to three times more to provide fire insurance to risky homes, and it only insures one home in the whole state that has the highest risk score.
“Companies come in for something like a 7 percent rate increase, but that rate is falling very heavily on people in those high scores,” Laucher said.
Paul Araquistain, a spokesman for CSAA, didn’t address specifics in the company’s rate filings but said the company has provided insurance for more than 40 years.
“Over that time, we’ve helped thousands of members successfully recover from wildfires and other disasters,” he said in a statement. “As is standard practice in the insurance industry, CSAA Insurance Group uses a variety of factors in determining an insured’s premium, including where a home is located, details about the home, cost to rebuild and loss experience.”
Officials from the Insurance Department agreed to discuss issues related to wildfire risk with Voice of San Diego on the condition they not be quoted by name. They declined to speak about the CSAA request because it’s a pending case but said all rate changes are a big deal and big rate changes are a big concern.
It’s clear, though, that insurance companies work hard to avoid public hearings in California, not that there’s much risk of them.
Just a small handful of groups have the wherewithal to get involved in the ratemaking process enough to force a public hearing. Of those, Consumer Watchdog, which Rosenfield founded, and United Policyholders, are the most prominent.
Even though public hearings are rare, California’s regulatory process is still believed to keep down rates.
“Rate increases are tempered in California because companies have to open their books and justify what they are charging,” said Consumer Watchdog’s current executive director, Carmen Balber.
A study of the state’s car insurance market found consumers saved tens of billions of dollars since the late 1980s.
It’s clear, though, that companies don’t want to end up in a situation where they have a public hearing, because those hearings can drag on for months.
Rex Frazier, the head of the Personal Insurance Federation of California, an industry trade group, said that process takes an average of 14 months in California. In other states, insurers are free to adjust their rates several times a year.
“We can either have a nimble pricing mechanism or not,” Frazier said.
Some companies’ filings suggest they are suppressing rates in order to get in under the 7 percent line.
In its recent filing, CSAA said its own internal modeling shows it could justify an 18.5 percent rate increase, but it’s only asking for the 6.9 percent increase. Similarly, in a recent rate increase request, United Services Automobile Association, known as USAA, said its modeling indicated it could ask for a 25 percent increase but was only requesting a 6.9 increase. State Farm, the state’s largest insurer, said in one filing it could justify an 18 percent increase but was only asking for 6.7 percent.
There’s a few ways to view this. The industry argues too much rate suppression comes with its own perils by forcing insurers to exit the market or, worst-case scenario, leaving companies unable to pay claims.
Insurers might also be trying to make regulators think they are getting a good deal.
“They exaggerate the statistics to make it look like they need a lot more,” said Tammy Nichols Schwartz, an insurance industry consultant who used to work for the California FAIR Plan, the state’s industry-backed fire insurer of last resort.
On a call, one Insurance Department official said being able to justify a large increase but asking for a smaller one could help rate increases move through the department. Another official on the call, attempting to amend that statement, said the department doesn’t take any shortcuts.
There’s pretty clear evidence that suppressing rates in one filing causes spikes later down the road. In one recent filing, a FAIR plan official said that the insurer had agreed to a 6.8 percent rate reduction last year “on the condition that the FAIR Plan immediately submit a subsequent rate filing that reviewed and addressed wildfire and overall rate soundness.” It then applied for and received a 20 percent average rate increase.
All of this is happening largely behind the scenes. The Department of Insurance rarely receives as much scrutiny as, say, the California Public Utilities Commission, which regulates water and power companies.
Industry representatives bristled at comparing public utilities and insurers. Utilities are, for the most part, monopolies, so customers can’t up and leave San Diego Gas & Electric. Customers get to pick and choose which insurance company they use.
“The mechanism for customers to register dissatisfaction is to change insurance companies,” said Frazier. “They can’t do that with a utility, they can’t do that with government, you can’t change your water district.”
But, of course, most people still must pay for insurance – it’s mandatory for drivers and for people with a mortgage.
Ken Klein, a professor at California Western School of Law who studies the insurance industry, said insurance is a public necessity that is fairly heavily regulated in California, but there’s still a question about how regulated it should be.
“Where does it reside on this spectrum of how much regulation is needed for this public product?” he said. “I don’t really think there is a clear answer. More importantly, I don’t even think a lot of people have put a lot of thought into it.”
Proposition 103 requires the department to notify the public any time an insurer requests a rate change. That notification process is cumbersome at best. The commission sends people an email, if they sign up to receive it, and it posts an Excel spreadsheet on its website that shows what companies have requested rate increases.
As a result, few people know their insurance company may be looking to raise their rates. That means the first they may have heard of an increase is a notice from the company after it has already been approved by the state.
By contrast, when the state’s power companies want to raise rates, they have to send each customer a notice in advance, giving them a chance to protest the proposed rate increase.
Those protests may be futile sometimes, but CPUC commissioners have traveled the state to get yelled at by consumers and, sometimes, they craft consumer-friendly compromises as a result.
Rosenfield said that the public notice in Proposition 103 wasn’t intended to work like that, in part because insurance is a different animal. As complex as electricity rates are, insurance rates are even more complicated because they take into account all kinds of things about a property and even its owner.
But technology has also changed since the 1980s, when mail was the only real means of communicating about insurance policies.
Rosenfield said the insurance commissioner could probably do more to make sure consumers know about proposed rate changes, including requiring emails to go out to each customer. Insurance companies, though, would not like that.
“It would be very frightful for them to confront people demanding a hearing,” Rosenfield said.