MOORLACH UPDATE — Homeowners Insurance Crisis — September 6, 2019

As this first year of the 2019-2020 legislative session winds down, it is interesting to reflect on some of the intriguing topics. There were so many critical issues to address, with wildfires and electric utilities being high on the list.

Serving on the Senate’s Energy, Utilities and Communications Committee, Housing Committee, Insurance Committee and Budget and Fiscal Review Committee certainly kept me at the forefront. Add to this, the assignment on the newly created Senate Select Committee on the Governor’s 2019 Report: Wildfires and Climate Change–California’s Energy Future was the icing on the cake.

The culmination of the numerous hearings resulted in AB 1054 (see MOORLACH UPDATE — AB 1054 and Investor-Owned Utilities — July 9, 2019). Sacramento has tried to address the utilities and wildfire victims. It put some funding in the budget for fire suppression efforts, but minimal funding on addressing the root cause of the electrical line causation of the conflagrations (see MOORLACH UPDATE — SB 1463 And The Facts — November 19, 2018 and MOORLACH UPDATE — SB 1463 Epilogue — October 4, 2018).

What is left to resolve? The insurance industry’s reaction was to increase insurance rates, especially after these recent wildfires consumed their reserves, built over the years, to address such major disasters.

The California Globe provides a perspective on the next shoe to drop: the shocking increase of homeowners insurance costs and its impacts on personal budgets and housing values. For an assist on the piece below, WUI stands for Wildland Urban Interface. This means homes near urban centers, but in wildfire zones.

Three decades ago, California’s voters narrowly passed Proposition 103 (see https://en.wikipedia.org/wiki/Proposition_103). This initiative has provided more transparency in the insurance industry, but it may also have been detrimental in attracting more insurance providers to our state. This will only exacerbate the current frustrations of energy, utilities, housing, insurance, budgets, wildfires and climate change.

25th Anniversary Look Back

Although not directly related to the then-upcoming bankruptcy filing for Orange County, I continued to stay involved in the meetings of my city council after the election.

On September 7, 1994, the Daily Pilot covered a concern I addressed that could be the embryo of a theme that follows me to this day. The piece was titled "Costa Mesa police, firefighters to join state benefits program — Safety personnel were previously covered by city plan. Officials say move will save money." Save money? I don’t think so.

As the Finance & Pension Advisory Committee analyzes why its city, Costa Mesa, is in the worst fiscal shape in Orange County, maybe the vote to drop its independent plan to migrate to the California Public Employees Retirement System (CalPERS) 25 years ago may be a component of the current predicament (see MOORLACH UPDATE — State and OC Cities Finances — August 4, 2019 august 4, 2019 john moorlach and MOORLACH UPDATE — Happy 130th Birthday, Orange County! — August 1, 2019).

Here are a couple of selected paragraphs:

Tom Lightvoet, an investment consultant to the city’s Retirement Committee, objected to the move, saying the city would actually lose money over the years.

Lightvoet said PERS has a deficit of $2.9 billion and that the system assumes investments will earn 8.75% annually. Such an elevated return estimate is unrealistic in this economy he said.

PERS earned only 2% last year and has no surplus to cover this drop, Lightvoet said.

Accountant and political activist John Moorlach, meanwhile, warned the council that going to PERS for police and fire employees would mean relinquishing "control" to the state. Moorlach pointed to problems with pension spiking in Huntington Beach as an example of how cities can lose control.

Why is CA Insurance Commish Ricardo Lara Quiet on Hundreds of Thousands of Homeowners Insurance Cancellations?

Insurance Commish toadies for insurance industry while real estate crisis could be looming

By Katy Grimes

https://californiaglobe.com/section-2/why-is-ca-insurance-commish-ricardo-lara-quiet-on-hundreds-of-thousands-of-homeowners-insurance-cancellations/

The number of California’s rural homeowners dropped by insurance companies is up to 350,000 in just four years, California Globe recently reported, but that was just through 2018. Since then, homeowners in Riverside and San Bernardino counties have experienced “a surge in insurance companies declining to renew policies, or hiking premiums, in areas with higher risk of wildfire, like Pine Cove in the San Bernardino National Forest, leaving homeowners with few options,” the Press Enterprise reported.

The only communication from California’s troubled Insurance Commissioner came August 20: “I have heard from many local communities about how not being able to obtain insurance can create a domino effect for the local economy, affecting home sales and property taxes,” Insurance Commissioner Ricardo Lara said in a prepared statement on his website. “This data should be a wake-up call for state and local policymakers that without action to reduce the risk from extreme wildfires and preserve the insurance market we could see communities unraveling.”

There is no breakdown on the current rate of cancellations and non-renewals on the Insurance Commissioner website, other than for 2018. This needs to be immediately updated as thousands more homeowners lose their insurance.

Meanwhile, a real estate crisis could be looming because without the ability to properly insure the home, many homeowners say their homes are rendered worthless because they cannot sell them. All mortgage companies require real estate property owners to carry homeowners insurance.

However, the Insurance Commissioner website says, “new data does not measure the full impact of non-renewals of homeowner policies linked to the devastating 2018 wildfires, including the Camp, Carr and Woolsey/Hill fires.”

Why not? They’ve certainly had enough time to update since 2018.

Perhaps because “State Insurance Commissioner, Ricardo Lara, a former Democrat State Senator and Assemblyman, organized a reelection committee that began accepting tens of thousands of dollars in political contributions from people with ties to companies he regulates,” California Globe recently reported. Following “revelations that Lara took oodles of money from the industry prior to making decisions in their favor, gave critics more ammunition to claim that he is an industry shill,” California Insurance Commissioner Ricardo Lara is under fire for his secretive speech to a convention of industry executives where he expressed support for revamping consumer protection laws in their favor.

Additionally, Politico reported, “Lara has charged taxpayers thousands of dollars since his January inauguration for renting a residence in Sacramento, state records show, in an unusual arrangement watchdogs say constitutes an ethical gray area at best — and at worst another political maelstrom for an official already under scrutiny.”

A 2018 report prepared by California Department of Insurance’s Availability and Affordability of Residential Property Insurance Task Force found:

“Since the Valley and Butte wildfires, the California Department of Insurance (CDI) has received increased complaints, evidence, and feedback from consumers, consumer groups, public officials, and other stakeholders that homeowners’ insurance coverage in the WUI is increasingly difficult to obtain and, if available, is unaffordable to many that need it.”

and

“Many of the currently proposed solutions are based on the expectation that the insurance industry will voluntarily agree to change some of its current business practices and how it uses certain decision-making tools.”

The 2018 report called for a legislative solution:

“The Legislature should create a framework within which insurers will, under certain conditions: (1) offer homeowners’ insurance in the WUI if the insured conducts specific wildfire mitigation, but also permit the insurer to avoid the requirement of offering homeowners’ insurance in the WUI if the insurer instead offers a “difference in conditions” policy or a “premises liability” policy; (2) offer a mitigation premium credit for those property owners that conduct proper mitigation; (3) obtain approval for wildfire-risk models used in rating or underwriting; (4) allow for an appeal process before an adverse decision is finalized; and (5) stabilize the rating structure in order to ensure that homeowners’ insurance rates and premiums are adequate, but not excessive, for the true wildfire risk.”

Gov. Gavin Newsom created a strike force that outlined three major options for handling utilities’ liability costs, but nothing dealing with insurance. The state appeared to be more concerned with its liability, rather than people burned out of their homes. Lawmakers appeared more interested in passing legislation to retrofit homes making for fire safety and prevention.

In July, Sen. John Moorlach (R-Costa Mesa) said in a Sacramento Bee article he was disappointed by what he saw as a limited focus on wildfires in recent budget negotiations. “Where’s the seriousness of it all?” Moorlach said. “I know the governor wants to get something done, but I’m not finding it. … The Democrats aren’t showing a real priority to dealing with wildfires.”

Senate leader Toni Atkins (D-San Diego), told The Sacramento Bee wildfire issues would be “front and center” because “communities are being devastated,” while Assembly Speaker Anthony Rendon cited the state’s housing crisis and wildfires as the two biggest problems lawmakers would focus on going into the legislative session.

Everyone in California is subject to new wildfire underwriting guidelines following the 2018 wildfires under “The Fireline Score.”

The assessment FireLine “is a score from 0-30, and it combines several different risk factors regarding a home, the satellite imagery around the home, and pinpoints it to the property address,” one insurance company explains.

There are three critical factors that affect the risk of wildfire loss:

1. Fuel—Grass, trees, or dense brush can feed a wildfire. FireLine calculates an average of fuels in a 3 radial distance within a mile of the dwelling.

2. Slope—Steeper slopes can increase the speed and intensity of wildfire. They also increase prices of rebuilding if necessary.

3. Access—Identifies whether a dwelling is located where firefighting equipment may have trouble negotiating, such as dead-end roads. FireLine calculates the risk from each of these factors, as well as provides hazard ratings for specific properties. FireLine also identifies properties located in Special Hazard Interface Areas—risks outside fuel areas but exposed to wind-borne embers and high heat from nearby fuels.

According to the Insurance Commissioner: If California residents cannot obtain insurance on the voluntary market, their only options are to find insurance coverage under the FAIR Plan or from surplus lines, often at much higher costs. When looking at the 10 counties with the most homes in high or very high-risk areas, there is a steady rise in new FAIR Plan policies growing 177% between 2015 and 2018. Nearly 57% of the new FAIR Plan policies written are now written in State Responsibility Areas up from 47% in 2015. Between 2015 and 2018, the number of surplus lines policies in the State Responsibility Area increased by 49% (from 10,521 to 15,636).

The 10 counties with the most homes in high or very high-risk areas include Tuolumne, Trinity, Nevada, Mariposa, Plumas, Alpine, Calaveras, Sierra, Amador, and El Dorado. The five counties with the least homes at risk include Yolo, Merced, Sutter, Imperial, and Kings. The 10 counties are being compared to five counties so each set would have roughly the same number of housing units based on Census data. According to the California Department of Finance, in 2018, there were 248,958 housing units in counties with the most high-risk homes and 260,718 housing units in counties with the most low-risk homes.

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