Senate Standing Committee on Insurance

The Senate Insurance Committee will come to order. I'm glad to see so many of you here interested in this very important topic. Thank you for joining us here today.

For individuals wishing to provide public comment at the end, the participant number is 877-226-8163 and the access code is 439-8318. And as a reminder, we will maintain decorum during the hearing as is customary, and any individual that is disruptive may be removed from the remote meeting service and their connections will be muted. Some of the panelists here today are joining us remotely as a reminder to them.

Please unmute when you're ready. This will greatly also aid in eliminating acoustic feedback. If you turn off all your computers and phones, our It personnel will put you back on mute when you are done.

Once you are recognized to speak, make sure that you can be seen on screen, state your name clearly, and then you are ready to address the committee for today's hearing. We will be hearing both panels of witnesses on the agenda prior to taking any public comment. Once we have heard all of the witnesses, we will advise those wishing to speak to call in and get in the queue.

So now that we've gotten all the technical information out of the way, thank you once again to all of you here this morning. I know it's a busy day, so thank you. We appreciate your time.

And we know that in recent years, california's growing natural disasters risk has created challenges for its insurance market, as characterized by the rising premiums and deductibles decline of coverage and sometimes nonrenewals. This hearing is intended to provide a broad based, high level update on the current state of California's market, including ongoing availability and affordability challenges, and discuss opportunities to improve consumer access and ensure long term market stability as more catastrophic natural disasters continue to occur. Welcome once again to our Oversight and Informational hearing of the Senate Committee on Insurance.

We are here today to listen to testimony on some of the challenges that our consumers are facing. But also, in this oversized hearing, we'll also provide an opportunity to assess what's working, what's not working, and get input from stakeholders to see how we can improve the availability and affordability for our consumers as well as strengthen the insurance market. Let me begin by thanking all of our panelists who've joined us here today.

Once again, our first group of panelists will be joining us remotely, and we'll have the second panelists join us here in person. Our opening panel consumers will describe their hardships, frustrations and concerns with obtaining and maintaining coverage, and also share what's happening in the current market. Our second panel speakers will share information about the current status of insured, underinsured and nonrenewal policies, and discuss both short and long term trends in the market.

As we will hear, people are moving into risk prone areas broadly referred to as the wildland urban interface, and it's one of the key factors driving some of the state's insurance market challenges. More people, homes, businesses and infrastructures located in the Wui means more costly damage when extreme events occurred. California has roughly 5.1 million homes and a number that is rapidly rising in the Wui areas.

These areas are often on the outskirts of cities where houses and other developments are built near a flammable wild vegetation. While there is no single reason to explain the rights of development in the WUI, those who live there tend to be a social, economic mix of people interested in living closer either to nature or those with families who cannot afford to live in city centers and are residents of little towns that have existed for many, many years. Among other things.

Unfortunately, when disasters strike, they tend to inflict most of their damage in those transitional zones where homes and businesses encroach an otherwise undeveloped wilderness. For Californians living in these areas, insurance can be a critically important tool to aid in post disaster recovery. So today we will kick off with a group of folks who have been experiencing some challenges, and that is we wanted to take a moment to hear from consumers and really understand some of what they're dealing with.

And we hear it all the time as some of my colleagues also bring their stories to me. Our speakers will include Lisa Mayer, a homeowner from the high disaster risk region of Santee, California. We have Janet Hayes, board Member of Horizons Home Association and Anaheim Hills, and Gary Thompson, chair of the Horizons Home Association.

The insurance committee. Also with us today is Irene Subarine, a licensed personal license agent with Hub International Insurance Services. And finally, Peter Neeson of Neeson Vineyards and the President of Napa County Farm Bureau.

Now, let's begin with the first presenter, Lisa Mayer. Is she on board? Lisa, whenever you're ready, you may proceed. Thank you for joining us.

Stating my name first. It's Lisa Meyer. So.

Good morning, Members of the California State Senate Committee on Insurance. My name is Lisa Meyer and I am a resident of the city of Santee, located in San Diego County. My townhome was built in 2006 and is located within a homeowners association of 186 privately owned units.

I am also the current President of our HOA and have been a Member of the board for many years. The property insurance obtained by the HOA is the insurance policy for all buildings, structures and common area of property within the community, including the walls that make up the home I live in. Individual owners are not able to obtain their own individual property insurance except for their personal belongings and finishes within their unit.

Our community has been stressed by what I would consider an insurance crisis in California. I come to you today to speak of the direct impact this has on individual owners. During our HOA's last insurance renewal, we were notified that we would not be renewed due to proximity to high fire risk areas.

Our community is not directly located in a fire risk area per county or city fire maps. After a long search, our current broker, as well as a number of other brokers contacted, were unable to place property insurance for our community at full property limit or a reasonable premium. Our property exposure is approximately $64 million.

But we were left with only one option to purchase 10 million of insurance coverage and an annual premium of $293,000 plus additional state taxes and fees. In comparison, our expiring policy insurance premium was less than $54,000 annually for full coverage. No preferred carrier would even provide a quote and we only received that one quote from the surplus market.

We were left with the only option, which was sky high premiums, a deductible ten times our prior deductible and significant liability exposure. This resulted in an emergency assessment to each unit owner to cover the cost of that new premium amount. The association's monthly assessment was previously $217.

Of that, about $24 was attributed to the cost of all insurance for our community. Now each owner is faced to spend an additional 130 plus per month just for property insurance. Our owners have lost potential home sales and have, in some cases, had to find other means to pay for this additional expense.

In an already tight economy, owners are looking to start petitions, reaching out to local government officials and asking the board to join and explore all options. What makes me most scared is I've had recent discussions with our broker and industry experts and the prediction is that it will be even worse for our next renewal. I'm terrified to see what worse could possibly look like.

What do we do then? I'm asking the Department of Insurance to investigate this market condition that is plaguing our community as well as others in California. I am aware there are a number of industry organizations working to resolve this industry crisis and I implore you to reach out to them for a solution. The current state cannot be sustained without damaging the financial condition of our communities and the daily lives of our residents and their families.

I fear the continued state will affect our community and others like it to the possible point of bankruptcy. Thank you for your time this morning and the opportunity to be here. Thank

you so much for your testimony. Next, we will invite Janet Hayes with Gary Thompson, both with Horizon Home Association of Anaheim Hills, and they will describe some of the challenges that they're facing in obtaining affordable commercial policies for their HOA due to their location. When you're ready, Ms.Hayes, you may begin. Good

morning, ladies and gentlemen of the committee. Thank you for inviting us today and taking the time to listen to what we have to say. Myself and Mr. Gary Thompson are from the city of Anaheim and live in the planned community of Anaheim hills.

Our community within that group is Horizons, and we are within the Anaheim Hill Hills Planned Community Association. Horizons has 125 condo units. Since we live in a hilly area, we are deemed by the insurance companies as high risk fire.

However, it should be noted that neither the 1993 Yorbolinda Wildfire nor the 2017 fire which was east of US. Endangered Horizons. It makes little sense that three years later, after no fires, the Master Policy premiums went up by a factor of four, or 320%.

It's imperative that California work to include HOAs in the Fair Plan for fire and property insurance at an increased benefit level. That will make us eligible for coverage and at the same time monitor insurance companies in such a way that they are not price gouging, refusing coverage at a reasonable rate, or, as in many cases we've just heard, denying coverage completely. As Mr. Thompson will explain, we receive two offers of coverage at exorbitant prices, along with many denials.

This is not atypical. HOA dues cannot cover these fees and still maintain the exteriors of all condos, which often means termite issues, roofing and street repair, as well as paying for landscaping, pool costs and other upkeep. When insurance is so high that maintenance cannot be maintained, then the property values are degraded.

Or if HOAs opt for underinsurers first, lenders may be unwilling to provide mortgages. As a result, HOAs have had to return to special assessments. There's another element to this situation.

HOAs find themselves in a Catch 22 position. The insurance companies want the hardening of the fire hardening in order to provide lower premiums, but they're charging huge amounts for insurance. The HOAs want to fire harden, but have to pay those excessive fees and therefore can't fire harden as they'd like to.

Just in order to pay these high insurance rates, HOAs are having to increase monthly dues and do that along with leveling special assessments. HOA boards are also homeowners, and this is not something they want to do. But they have little choice.

Lower rates and increased fire hardening would benefit everyone across the state. As it stands, this situation is unsustainable. To give you an idea of what we're talking about in our area, in 2020, Horizons paid $39,000 for property and fire insurance.

This year, we are going to pay out $417,000 plus interest. Another community of ours with 225 units paid $46,000 in 2021. And this year they are paying $722,000 for insurance.

Finally, another community with one unit less than ours. They have 124 units in 2021 paid $100,000 for $40 million in benefits. This year they're paying $500,000 half a million dollars for $10 million in benefits.

Please consider opening the Fair Plan to condominium homeowners. Under a master Policy for fire insurance, it's imperative that the state increase benefits to at least $20 million. And at the same time, look at getting the industry to lower rates across the state.

HOAs are desperate. Now, Mr. Gary thompson, our Insurance Committee chair, will share with you what he found out while searching for policies for our community. Thank you.

Thank you very much. Now we will invite Mr. Gary Thompson. You may proceed. Thank you, sir. Thank

you. Good morning. I'd like to start by talking about the fact that the Horizons HOA Board of Directors created an insurance committee in October of 2022 due to the massive property insurance premium increases with the committee's objective being the completion of a detailed and structured due diligence process to determine the best and most appropriate alternatives to meet Horizon's insurance requirements at the lowest possible cost.

This project was completed yesterday, so the timing of this hearing could not be better. Because of my background as a senior level business Executive prior to retiring five years ago, I was appointed Chair of the Committee. I spent approximately 200 hours working on this project and I'm here to tell you that what I learned was significantly disappointing and extremely disturbing relative to how horrible things are for us in the property insurance marketplace.

The first step I took as the Insurance Committee Chair was to obtain a comprehensive understanding of our current property policy, which I quickly learned is a very complex, suboptimal syndicated policy program that has an untold number of HOA participants and 17 different participating pooled insurance providers through a company called Apartment Insurance Consultants. Basically, if the participating HOAs collectively have claims that exceed the program's policy limit of $200 million, any subsequent claims would be denied and the participating HOAs would be required to pay the claims on a prorated basis. Naturally, we would much prefer a policy where we are the only participant so as to avoid any risk or exposure that we have no means of controlling or assessing.

My next step was to canvas the provider market carefully and comprehensively. And the first thing I learned was that with a tiny handful of exceptions, such as State Farm, insurance providers will not talk to insured directly, but rather only through brokers. So I contacted well over a dozen brokers and worked with them with the hopes of securing better insurance at a lower cost.

I extensively worked with all of the following largest brokers in the country, including Brown and Brown, arthur Gallagher, Marshall McLennan, Aon, Lockton, Hub International, Acrosure, willows Towers and Trueist. I also worked with a few smaller brokers, in particular the Berg Insurance in Orange County whom we had our farmers insurance with prior to farmers exiting the market in late 2000 and dropping our coverage. And by the way, State Farm denied coverage for us as they are no longer writing policies for high fire risk communities.

Much to my dismay, as Janet mentioned, we only received two quotes for our new policy period from all the brokers that I just mentioned. The first was a renewal of our current syndicated policy with an increase of 70% over 2022, which was on top of a 54% increase in 2021. And the other quote that we received was from Martian McLennan, which included only $20 million of coverage of the 42 million we need, and it was at a cost of $595,000 per year.

So the board decided last night to go with the suboptimal policy that I just mentioned to expand on what Janet said a few minutes ago regarding the massive premium increases we are dealing with at Horizons. In the year 2000, our total property insurance was $39,000 a year, which represented 6.7% of our total homeowner assessments. The suboptimal syndicated policy we are renewing today is now $417,000 per year, which represents a whopping 60% of our total assessments.

And that is after we increase our assessments by 25% in 2021 in order to pay for our property insurance premium increases. Had we not increased our assessments by that 25%, our property insurance premiums would have represented 72% of our total assessments, which is completely unsustainable. In closing, we desperately need your help, and we applaud everything you are trying to do by expanding the Fair Plan to help HOAs and increasing the maximum from 8.4 million to 20 million.

Hopefully, at some point in the near future, it will be expanded again to a maximum of 40 million, which is what we need at Horizons. So thank you, and please don't hesitate to contact me if I can provide additional information and assistance in the future. Thank

you, Mr. Thompson. Now we will move to our final presenter, peter Nissan with Nissan Vineyards, a President of Napa County Farm Bureau. Mr. Nissan, when you're ready, you have the floor.

Thank you for joining us. Bear

with me, I have some problems with laryngitis, but I'll move forward. Good morning, Chair Rubio and committee Members. My name is Peter Nesson and I'm President of the Napa County Farm Bureau.

Thank you, Chair Rubio, for inviting me to speak and share the experiences that California's farmers are having with the current insurance market. And thank you, Senator, for your previous work on Senate Bill Eleven, allowing farmers to be insured by the Fair Plan if their policies were not renewed. This has proved to be incredibly important to the thousands of farmers in California.

I also want to thank my Senator, Bill Dodd, for his work on SB 11 and his continued support of agriculture in Senate District Three in Napa. Our farmers experience with externs started to change with the admitted mother market pulling away from our areas en masse after the wildfires in 2017 and 2020, where a farmer used to have one consolidated policy that would have covered multiple residential and commercial policies. Non-renewals force farmers to become insurance experts, breaking apart residential and commercial policies for buildings, often on the same parcel.

The sourcing insurance from the Fair Plan and surplus lines, additionally, is one reason that the Members have kept insurance and to maintain their policies because they have financial responsibilities with their lenders. Moreover, simply being in the wrong zip code has meant non renewal for our Members when the property is in an area can consider to be in a high prior risk. Once in the Fair Plan, the cap is set at 8.4 million for commercial buildings and personal property.

And when there are multiple buildings on the same parcel, it all goes into the same cap, not on a per building basis, because that also includes personal property where certain inventories like case goods for wines. And then it comes up far short that many business just self insure the balance of their uninsured property exposure. Other reasons that businesses choose to self insure or farming is because limited coverages omit water damage and omit collapsed buildings.

Caps are forcing consumers to be in a Fair Plan and also in the surplus market lines where they sometimes have three or four additional policies on one parcel where in the past, a traditional insurance policy would cover everything and also certain umbrellas would cover multiple parcels. So the ability to have insurance has increased the stress on individuals to find an alternative, even though the Fair Plan is there. This impacts both large and small farmers.

Some small farmers are just going without insurance because they can't meet the mitigation requirements of certain insurance stipulations. And large operations are carrying enormous risk in finished products and making substantial mitigation investments by clearing trees and spending millions of dollars on areas where we're hit by fires and trying to limit the fuel loads that surround their properties if they can't afford to and they choose to. Self insure businesses invest hundreds and thousands of dollars in farming operations for water pumps, overhead sprinklers and backup generators and are conducting all defensible space measures possible, including the development of their own fire brigades in one particular hillside area in Napa County.

But even with these actions, our formal act, our participations, such as in firewise councils don't seem to guarantee the availability to be eligible for fire insurance policies. And unfortunately, we don't get credit for it. And that is the goal to get back into the emitted market and cover risk on millions of dollars of exposure both in physical property and personal property and commercial and residential situations in farming.

Their Fair Plan is a great backstop right now, but it should be a transition back to a traditional insurance policy. Planning for the future of investments is difficult and next to impossible to plan for with not knowing what insurance coverages you can have for an investment in farming. Rate increases have grown five times what they were in 2017 for many residential properties where farmers have had to have to deal with a situation where they're in the middle of an irrigated vineyard, but they still fall into that zip code situation where the ability to be covered is next to impossible.

California's agricultural business leads the nation in farm production value over $51 billion in direct revenues in 2021. But unfortunately, many farmers are carrying significant risk in order to simply farm, and those risks will certainly discourage new capital investments in the future. While providing the ability for farmers to be fully risk protected inside the Fair Plan, it would be an important goal.

Equally as important is returning policies to the admitted marketplace. Hopefully, these are not mutually exclusive opportunities thank you. The opportunity to be transparent about the state of California's insurance market for farmers.

Thank you. Thank you so much for that testimony. And I'm sorry, I have to apologize to Irene.

I did skip her. So I'm going to invite Irene Sabrin to come and join us. You may proceed when you're ready.

My apologies. That's okay. No problem. Thank you.

Good morning. My name is Irene Sabrin. I'm here to speak on behalf of the Independent Insurance Agents and Brokers of California.

Our association represents thousands of independent insurance agents that serve customers in virtually every community in California. I am a 44 year licensed insurance veteran of the Personal Lines insurance business in Sacramento, currently with Hub International, and also a gubernatorial appointee representing agents and brokers in California, on the board of the California Fair Plan. My comments are my own and do not necessarily reflect the views of my employer across the states.

Our Members report that they are experiencing the worst insurance market, particularly for homeowners and property insurance, and that they've ever seen in their careers. In many cases, the Fair Plan and noninmitted insurers, the two highest price options, are the only available choices to place insurance on behalf of our clients. With the advent of many recent catastrophic wildfires and the inability insurers across the board to obtain approval from the DOI to charge adequate rates for this exposure, regular admitted insurance carriers have been retreating from the California marketplace in the last several years.

But this trend seems to become more pronounced in 2022 and it is continuing today. These companies are non renewing huge numbers of policies, covering properties in many cases that they've insured for many years and telling their agents, don't submit new business. They're taking their company off our comparative rating systems, which has the effect of making it much more difficult to obtain premium quotations.

They're eliminating premium financing options, reducing advertising, eliminating discounts, and otherwise deterring new business and or nonrenewing policies they've had for years. Not only this is undermining the future of our own agency, but is also having a devastating effect on our clients and the insurance buying public. In the absence of a healthy competitive marketplace, admitted insurers consumers have three options.

Number one, they can buy a bare bone policy from the California Fare Plan, which most cases will leave them grossly underinsured. Many forego the additional supplemental difference and condition policies, which provide more protection, including liability coverage protection. Two, they can find.

Try to find a non admitted insurance carrier willing to take their risk, but their policies tend to be astronomically expensive, often include significant coverage limitations and are not covered in the event of insolvency by the California Insurance Guarantee Association or three. They can go without insurance unless they are required by a mortgage lender to provide proof of coverage and let's pray that they don't incur a major loss. It is not unusual for us to hear that lenders have forced place policies to protect their financial interest and force the mortgage holder to pay very expensive premiums for that coverage.

But we also hear of lenders on personal and commercial policies threatening foreclosures, refusing to provide loans, letters to credits, or other financing for the purchase of their property. The crisis in the property insurance availability cannot be allowed to continue. It is severely impacting not only our agency and all the consumers that need insurance protection, but also threatens economic growth and the ability of our community to meet the urgent needs to expand housing stock for most Californians.

You can't buy a house without a loan. You can't get a loan without insurance on that property and far too large of a portion in our state, you can't buy an insurer willing to offer adequate coverage at a reasonable price. Thank goodness for the Fair Plan, because it often is only the only option to place insurance, and even then there's issues with the limits and the amount of coverage and the technical issues relative to multiple policies covering the same rest.

However, the Fare plan at most is just abandoning for agents and their customers. The Fair Plan has major rate increase filed with the insurance commissioner, and the plan itself is evaluating the possibility of issuing significant assessments on Member companies. If that were to occur, we fear that the private market insurers will further restrict the voluntary business because more policies insurers write in the private market, the larger the assessment they would have to pay, and those restrictions would be likely felt statewide.

Even in urban areas where catastrophic wildfires exposure is relatively Low, insurance agents and brokers and their customers are caught squarely between insurers and the Department of Insurance and the regulatory system. We have no involvement or voice facing the insurance environment in this state. Insurers tell us uniformly they cannot get adequate rates approved for California, that it can take years for the DOI to make rate decisions, or both.

Moreover, insurers have little or no confidence that they can obtain rates that are adequate to support the state's catastrophic fire exposure that they are being asked to assume. It is incomprehensible to me that the rating law does not recognize a huge reinsurance cost that insurers must pay and that it does not permit insurance to use widely accepted tools for projecting future losses and it takes so long to act upon rate increases requests. Department of Insurance tells us that insurers are filing only 6.9 rate increases requests, in some case repeatedly, in order to avoid regulatory mandatory hearings or profitering interventors, rather than requesting the rates they actually need.

That appears to be true. The Department also complains that insurers are tying up Department staff and resources by making multiple small, increased requests. Insurance agents and brokers are not in a position to determine fault, but certainly a major factor in contributing to the situation is an outdated and inflexible rating law.

To the extent that such a statute does not allow insurers to achieve adequate rates versus the risk taken, the statute fails to meet the standard of not allowing inadequate rates in the state of property insurance coverage. While no one wants to see substantially higher rates for insurance, we believe consumers would be better off paying more for insurance if it restores a vibrant, highly competitive market where consumers have multiple options for purchasing insurance coverage. As it is now, too many customers are stuck with inadequate coverage, astronomically high premiums, and are unable to find coverage at any price.

Insurance rates are only part of the problem. Last year, the Department of Insurance owned report indicates that 77 more California homes are likely to be subject to extreme wildfire risk due to climate change. And even non admitted insurers who are not subject to rate and propo are not eager to write insurance in California due to the extreme risk of fire.

The state must start budgeting more dollars to prevent wildfires, especially in the urban interface and the brush areas of the state. In conclusion, I find it deeply concerning to witness that brokers and their staff are facing in today's insurance industry. Due to the current state of the market, the amount of time it takes to write one single policy has increased from days to sometimes weeks.

I am frustrated. I spent 8 hours the other day trying to place a home with schedules and umbrella, a clean account, except for the location, all the separate applications, address checks, location checks or time spent is ridiculous and so far, nothing but declines. Along with that, another carrier just reduced our agents commission to 10% and we are working harder forever, harder than ever, for less.

I love this business, I truly do. But I've never seen anything like this in my 44 years and it takes away from all the sun. It truly becomes quite challenging.

And frankly, I'm just tired. Even homes in the city streets and suburbs of Sacramento Placer County are being non renewed for trees. If your home backs up to a bike trail, green belt or golf course beware.

These issues are causing many colleagues to leave the industry or take early retirement, and that is just too much. It is a great loss for consumers who rely on these individuals in their communities to act on their behalf. And I understand the struggle and the pressure my colleagues, clients and your constituents are facing, and I hope my comments today help find a solution for them.

Madam Chair, that concludes my comments. I'm happy to respond to any question you or the committee might have. Thank you.

Thank you very much. I want to thank all of our panelists here today for sharing your personal experiences. I think that it was very important for me and the protem and my colleagues in this oversight hearing to really bring the perspective of our consumers.

They're dealing with some very serious challenges at this point. I'm going to reserve my questions. At the end, I want to give my colleagues the opportunity to ask any questions, Members any questions.

Comments. I want to thank the presenters for bringing the perspective of the consumers, particularly Irene Subarouin. Your words really resonated with me. There isn't a day that goes by that I don't hear from my constituents directly about the impact of the insurance industry and wildfires on their homes.

So represent the eastern part of California Senate district four which covers some of our smallest counties, alpine all the way through the farming belt of the central valley. And so we have been continuously devastated by extreme weather and wildfire and the number one issue is how do we keep our constituents in their homes particularly when the insurance market is so volatile. And we have consistent letters in the mail discontinuing insurance for our people.

Some of the fires that have been very impactful in my district, the Caldor fire which wiped out the entire town of Grizzly Flats, we are still looking at how to help support those people and this is years after the devastating fire, the Electric fire which came years after the devastating Butte fire in Amador and Calaveras as well. And so these are some of the patterns that we're seeing and homeowners are doing the work to harden their homes, they're doing the work to create defensible spaces and yet there's not that connection with the insurance market and the consumers. I will say that I am on the fair plan and have struggled to understand how the coverage overlaps or disconnects.

And every year when I open an envelope from my insurance companies I'm afraid is that the letter that says that I'm going to be canceled. And that is not unique to me. I've seen my neighbors having to evacuate wildfire season after wildfire season, their animals, their property and their homes, their family Members and oftentimes these are some of our most vulnerable folks.

These are our veterans, our seniors, people with disabilities that have been living in their homes for generation, that have been farming their lands for generations. And so we have the responsibility in California to take these stories, to take these real life experiences and create solutions. So I'm very excited that you're all here today experience forward.

I know that we are looking at different solutions in partnership with the insurance commissioner as well as with the Members of this committee. I cannot go through another fire season without having solutions for our businesses, for our homeowners, for our renters, for our farmers. So I implore you to work with us very closely in this year to ensure that we have those solutions.

Thank you. Thank you Senator. Mr. Dodd. Any questions? No

questions. I just did want to thank the panelists for the information. For me the HOA thing is kind of new, the rest of it not so new.

And I think this next panel is going to be the area where we can delve in a little bit more and get more information to really try to see what the art of the possible is in terms of trying to create markets that make these insurance agencies come back. Not agencies, but insurers to come back in the market. So thank you very much.

Thank you, Senator Dodd. I wanted to just once again reiterate our thanks to the panelists for sharing their personal stories. Clearly, we hear their frustration in their voice and some of the numbers we heard are really shocking in terms of the cost.

By way of example, one of the gentlemen mentioned 39,000 was the property insurance and now it's gone up to 417,000. That is quite shocking to hear. But I want to point out too, I believe it was Mr. Thompson, I think it is, who said that in 2000 the rate was 39,000 to cover the insurance, where today is 417,000.

And so I kind of want to point out what we've all been hearing and discussing not only here as a body, but back home. And that is the reality we're facing with climate change and how it's causing a lot more disasters, natural disasters. And it is recorded that the last six most destructive wildfires has occurred in the last six years.

So that's causing a lot of the issues here with the insurance market. I know that the insurance commissioner is aggressively pursuing solutions that incorporate climate change and we're going to hear a little bit later what he's working on. But I know that it's an issue that we need to address and we know that we need solutions for these individuals that are struggling.

It is not sustainable. And so I look forward to the next panel that's going to have a lot more information in those topics. But I want to go back to Irene, and this is only for the public's benefit because I know that we understand insurance a little bit more deeply.

But I want you to reiterate and explain. You talked about the three options that homeowners and businesses have and that is, number one, go with the admitted market. Number two go to the fair plan.

And number three, go to the non-admitted market, which is very expensive. Can you go back to the non admitted market, the reinsurance issue, and explain that a little further? Well,

the non admitted market is you're dealing with companies we like to deal with the A rated companies such as Lloyds of London. The fact is that, as I understand, that they're not allowed to use the get money for their reinsurance and their rate filings to be able to use that against to get adequate rates or excuse me, the admitted market. I apologize, but I have to tell you that I'm probably not the right person to ask on this one, but it's just it's just the right rate for the risk.

And the not admitted market is truly probably writing the rate at the most appropriate risk rate for the risk and get some more information on that though, right? Well,

let me just kind of share a little bit on that regard. The reality is that the non admitted market is a lot more expensive. And what happens when you go to the non admitted market that they don't have reinsurance? That means that they could insure you, but at the end of the day, you may not have the coverage.

And there's been a case, I believe it was Merced, if I remember correctly, that had a difficult time paying out some of the insurance costs for wildfire. So anyhow, we're going to get deeper into this issue. But I wanted to make sure that as our presenters are speaking, especially the next panel, to keep in mind that we have a lot of new Members in this committee as well as we're live streaming at home.

And so we want to make sure that we slow down and be careful with the acronyms because it is a little complex. And so, once again, thank you to all our panelists who shared their personal stories. We hear you, we understand the frustration and we will continue to focus on how we get you what you need.

And all of us are here very committed on that. So thank you very much. I want to invite the next group of panelists to come up now.

We will turn to our second panel. Our second panel will hear from the industry professionals who will describe for us the current status of the insured, underinsured and nonrenewal policies and discuss challenges and opportunities for the market in terms of long term sustainability and advanced preparedness in response to the state's increasing climate related risk. Our panelists will include Michael Martinez, chief Deputy Commissioner and legislative Director at the Department of Insurance.

Also joining him is Mike Peterson, Deputy Commissioner for Climate and Sustainability. After him we will hear from our segment vice President of state government relations for the American property casualty insurance association and Sarah Taylor, senior legislative advocate with the personal insurance federation of California. Our final presenter will be Victoria Roush with the Fair Plan. So if I can invite Michael Mike Peterson to join us here in the front, if you may.

Can he come in? No. Okay. Excuse me.

So go ahead. You may proceed from where you're at. Thank you.

Thank you, Chair Rubio, Michael Martinez here on behalf of Insurance Commissioner Ricardo Lara and the California Department of Insurance. And thank you, Chair Rubio and Senator Alvarado Gill and other Members of the committee for inviting us here today. I'm joined here by Mike Peterson, Deputy Commissioner for Climate Sustainability, and we were asked by the community to provide an overview of the Department's role, current trends we are seeing and updated data pertaining to the current state of the property insurance market led by Commissioner Lada.

The Department of Insurance is focused on insurance protection for all Californians. Commissioner Lara's priorities include reducing the impacts of climate change and thank you to the Chair for certainly identifying that in her comments increasing healthcare access, preventing fraud on small businesses and giving Californians the best value and increased choices for property and auto insurance. My remarks will chiefly focus on the property insurance market and the Department's work to protect consumers from wildfires.

Commissioner Lada's work is aimed at protecting Californians in four important ways one, exercising our authority to protect wildfire survivors and working in partnership with the Legislature and Governor and his Administration to provide and expand benefits and options to and for businesses and residents. Two, making Californians safer from wildfires through a proactive strategy of insurance mitigation, discounts and safety measures developed in partnership with state agencies, fire safety experts and stakeholders. Thirdly, maintaining the Fair Plan as a strong and sustainable safety net giving temporary protection for businesses and residents.

Fourthly, promoting a fair and competitive market under California's system a prior approval of insurance rates established by California voters 35 years ago under Proposition 103. Starting in December 2019, Commissioner Lada triggered a law that he authored as a Member of the California State Senate that prevents homeowners insurance companies from nonrenewing policies for those living adjacent to a declared wildfire emergency rule for one total year. This law, we believe, has been successful in giving consumers breathing room after a wildfire disaster and helping stabilize insurance markets.

To date, since 2019, he has protected more than 4 million residential policies from nonrenewal by their insurance company, including more than 415,000 policies due to fires in 2022 alone. The Department's oversight of complaints and oversight of the conduct of insurance companies following wildfires has resulted in nearly $470,000,000 returned to consumers since 2018, benefits that they would not have recovered without the Department's actions. Commissioner Lada has also worked in partnership with the state Legislature, including Members of this committee, to expand consumer protections, including he was proud to sponsor SB 872 in 2020, authored by Senator Bill Dodd, to cut red tape allowing wildfire survivors and evacuees to better access their insurance benefits and is proud to co sponsor Chair Rubio's Senate Bill 50 Five this session with the California Farm Bureau Federation to establish a commercial clearinghouse at the Fair Plan, among other sponsored and supported bills.

Commissioner Lada has also focused on maintaining the California Fare Plan as a sustainable insurance safety net of last resort. His actions include increasing coverage levels for residential and commercial properties, which have not changed in more than 20 years through his investigative hearing of the Fair Plan last July. He continues to undertake a systematic assessment of further changes that could should be done to help consumers in partnership with the Fair Plan.

This also includes meeting with homeowners associations, agricultural businesses, builders, realtors, recreational youth camps, and many other stakeholders, as well as the Fair Plan and insurance industry. I do want to thank Members of this committee for your continued support and collaboration for further action on this issue of wildfires and insurance availability and affordability and in particular, Chair Rubio for her leadership in authoring Senate Bill Levin. This past session, in which we were able to ensure the Fair Plan covers agricultural risk, which has now been fully implemented by the Department.

In partnership with the Fair Plan, the Department continues our review of insurance rate filings, which is integral to giving Californians the most choices for insurance in the nation. While insurance companies, in many cases are seeking to increase costs for those living in areas with wildfire risk only, allowing insurers to charge more for insurance is not going to solely improve insurance choices for consumers, although under Proposition 103, insurance companies alone decide whether to offer insurance in areas with higher wildfire exposure. Commissioner Lada, myself and the Department continue to urgently negotiate and work with insurance companies so they can continue to write in parts of the state and write a particular business sector where there is continued need.

And that is something that we can continue to talk about in the Q and A section. Section I now pass to my colleague, Mike Peterson, to speak more about our work to make Californians safer from wildfires, including the data trends that we've been seeing. Thank you.

Thank you, Michael. Thank

you. Mike Peterson, Deputy Commissioner for Climate and Sustainability at the California Department of Insurance. As Chief Deputy Martinez said, Commissioner Lara has focused the Department of Insurance on how we can more effectively address wildfire and other climate risks.

Under Commissioner Lara's leadership, the Department has made data collection and analysis a top priority. By analyzing multiple data sets over several years, the Department can identify trends affecting the insurance market. Data and its objective analysis have driven actions by Commissioner Lara focused on preserving available, reliable and affordable insurance options for homeowners and businesses.

The Department collects data from insurance companies and in some cases, directly from California businesses, and makes it available through our public website. This goes directly to the public, the Legislature and Congress, the governor's, Administration, and other stakeholders. I want to direct your attention to the Commissioner's progress report on wildfires and insurance.

California is the number one residential property insurance market in the nation, with more than 8.7 million homes insured. The vast majority, 97%, have private insurance from the admitted marketplace, with fewer than 3% of policies from the California Fare Plan, the state's insurer of last resort. More than 115 insurance companies write homeowners coverage, and more than 200 insurance companies write commercial coverage.

These numbers have remained consistent since Commissioner Lara took office in 2019. In short, most Californians have a strong residential insurance market, with many available options for coverage. However, nonrenewals by insurance companies do continue to happen and affect parts of our state.

In our latest data, which is from 2021, it shows an overall upward trend of non renewals since 2018, but with fluctuations. The earliest Department nonrenewal data is from 2015, when insurance companies nonrenewed 182,059 residential policies. That number decreased until 2018, before then rising again following the deadly fires in 2017 and 2018.

It fell again in 2020 and for 2021 stands at approximately 241,000 policies. At the same time, the total number of policies has also grown by approximately 300 and 7370 thousand policies. So insurance company nonrenewals represent less than 3% of the overall market.

In comparison, the number of policies nonrenewed by consumers, such as when, for example, a home is sold to a new owner, also shows a continued increase. Nonrenewals by consumers outpace those by insurance companies by more than three to one, with approximately 876,000 consumers changing insurance carriers in 2021. We will continue to monitor these numbers through the lens of long term trends, providing an important resource to the public and to policymakers.

In addition, over the past four years, the Department has responded to over 20 Governor declared disasters implementing existing law by issuing a one year moratorium on nonrenewals in the zip codes adjacent to and in the fire perimeter of the disaster declaration, a law authored by Commissioner Lar when he was a Member of the State Senate. In 2021, Commissioner Lar issued the first of its kind report on climate insurance, with recommendations for further action by the Insurance Commissioner, Legislature and the Governor's Administration to protect Californians. Reducing climate risks and clearly communicating to them to the public are important goals of the report.

In early 2022, Commissioner Lara introduced Safer from Wildfires, an insurance framework for home and business safety developed in partnership with Cal Fire, Cal OES, the Governor's Office of Planning and Research, and the California Public Utilities Commission, in consultation with consumers, wildfire safety experts, the insurance industry and other stakeholders. Then in October 2022, Commissioner Laura enacted his regulation requiring insurance discounts based on the Safer from Wildfires framework. Within just a few years, we will have gone from 7% of consumers with wildfire risk having access to limited discounts in 2019% to 100% under the consistent Achievable guidelines of Safer from Wildfires.

The Commissioner's regulation addresses one of the root causes of nonrenewals by reducing wildfire risk through the communication of clear actions that homeowners and communities can take to reduce the risk to their homes and to their entire community. Continued investments in forest health and management by the Legislature, Governor and federal government is important and must continue to be annually funded. In order to help all these efforts, commissioner Lara and the Department of Insurance look forward to continuing to engage with you all to develop more meaningful and lasting solutions for the insurance marketplace while ensuring consumers are protected and have access to affordable and accessible insurance.

We are happy to help with any questions and thank you very much. Thank

you, Mr. Peterson. I will now invite Mr. Mark Seknan to join us. Whenever you're ready, sir.

Thank you for joining us here today. Good

morning, Chair and Members. My name is Mark Seknan, and I'm vice President of state government relations for the American Property Casual Insurance Association. APCIA is a national trade representing companies that write all kinds of property, and casual insurance lead to home, auto and commercial property.

I'd like to thank the staff for the briefing document, which does a good job of laying out many of the challenges. I would also like to thank the presenters and the consumer panel for sharing their stories with us and my colleagues from the Department of Insurance, who we work with all the time to address the issues we face in the insurance market today. The first point I would like to make is that insurance is a competitive business where most companies desire to grow.

When insurer chooses to stop writing new policies or nonrenew existing policies, it's typically because the exposure and cost exceed the capacity to deliver the promise of coverage following a loss. While there are a number of underlying reasons for this, it really comes down to a simple question can a company charge an adequate rate to cover the risk they insure? If the answer is yes, then an insurer can generally provide coverage. If the answer is no, then the insurer cannot.

As the briefing document lays out, there are many insurance companies in the market, and while one company may not provide coverage for one risk, there may be another company that will. To understand the challenges insurers face in California, you also need to understand challenges affecting the property casualty market across the United States. This includes, for example, the role of reinsurance, which has been impacted by global events and global capacity.

Reinsurance is insurance bought by insurance companies and other programs that pay claims, such as the California Fare Plan and the California Earthquake Authority. The trade letter, which has been submitted to the committee, provides a detailed overview of the current challenges in the reinsurance market. In short, the cost of capital has surged to their highest level, with the reinsurance rate specifically hitting their highest level ever.

Reinsurance is a crucial tool for providing coverage in catastrophic regions, as it helps insure companies have enough capital to pay claims when the larger disaster occurs. As insurance costs have surged along with tighter terms and more narrow coverage, this directly impacts insurers ability to write in wildfire prone areas. Inflation is another top insurance industry challenge, as the price of materials and labor have significantly increased needed to rebuild and maintain much higher than broader inflation.

Taken together, these factors exasperate the cost for insurers operating in California, particularly in light of the state's complex rate regulation system, which requires a lengthy approval process for rate increases to adjust to these trends. Separately, California does not allow the net cost of reinsurance to be factored into premium rates, so company must instead pay for the cost of reinsurance from their allowable profits. The condominium market has also presented special challenges.

Builders have expressed similar concerns as those shared by the HOA representatives, noting insurance has been hard to find in the emitted market. And the prices in the surplus lines market are very high. One builder told me that he would much rather pay 100% more in the admitted market than the 1600% mark he is paying in surplus lines market.

However, one of the biggest challenges facing admitted market insurers continues to be getting approval to charge an adequate rate for policies. After the tragic Surfside condo collapse in Florida two years ago, there has been increased intention on condo maintenance. Issues of concern HOA boards often struggle to balance property management and keep HOA fees affordable for residents, especially for older properties.

Many developments were built before the new wildfire codes were adopted, so mitigation also presents unique challenges for these communities. Fortunately, the building industry is spearheading efforts to build new communities that will be wildfire resistant. Another challenge is helping consumers recognize the region they live in is at high risk for wildfires and their value of mitigation.

When Oregon released new fire maps, more than 700 people filed complaints saying their homes were not a wildfire risk. Thus, there is a need and an opportunity to approve consumer education regarding meaningful wildfire mitigation actions. The Department of Forestry recently worked on regulations to implement legislation requiring a non combustible zone within 5ft of the house, which may require moving vegetation.

The Department ultimately refused to adopt the requirement, even though science clearly requires it because they feared a similar backlash. As seen in Oregon, one company told me they lost a policyholder because a company requested the policyholder remove two shrubs right up against a house, which may pose a significant risk of embers in the house. Insurance is simply the cost of claims, and to keep rates affordable, we must focus on reducing losses, which is achieved by reducing the risk.

We can't have communities rebuild and waive the new wildfire building codes. We need communities to follow the example of the City of paradise, which passed an ordinance requiring the community be rebuilt for wildfire resistance. We appreciate the opportunity to work with the committee, the Legislature, the Department of Insurance, and all the stakeholders to work out solutions to the challenges we face today.

Thank you. Thank

you very much for that presentation. I'd like to invite Saran Taylor to come up next. He will be able to join us in front.

Mic's. Okay. Good morning, Madam Chair and Members.

Sarah Taylor, on behalf of the Personal Insurance Federation of California, known as PIF, and the National Association of Mutual Insurance Companies, known as NAMIC, greatly appreciate the opportunity to share perspective. Today we provided the committee with detailed comment letter that you may wish to review. I assure you it's a great read and I'll try to summarize it here for you today in five minutes or so.

In short, it's a challenging time for everybody. Of the 20 most destructive wildfires in California's recorded history, 13 have occurred since 2017, destroying nearly 40,000 structures, taking 148 lives and charring millions of acres. In particular, the 2017 and 2018 wildfire seasons were the most costly in California history.

Insurers lost over $20 billion, which wiped out two times their combined underwriting profits for the prior 26 years. Now, several factors have led to the increase in severe wildfire events over the past few years. Climate change, along with population shifts toward the wildland urban interface, have contributed to an increase in the impacts of wildfires.

Now, fortunately, more focus is being placed on ways that people can prevent or mitigate damage to their homes. And we've seen significant new funding in recent state budgets to increase wildfire resilience, and I know many of you played a role in securing those funds. In addition, Commissioner Laura's team has worked diligently to stabilize the homeowners insurance market, especially with respect to wildfire.

The CDI has been approving homeowners rates that incentivize insurers to recognize the value of mitigation efforts taken by homeowners and communities. Now, however, while the progress is good, it hasn't been enough, and we all recognize that there are too many people still struggling to find the coverage they need. So what should we do? Right? From our perspective, there are some challenges associated with the current state rules, which were developed 35 years ago, long before the advent of climate change impacts and the era of technology that has brought us smartphones, smart cars and smart climate models.

These rules work fine for many decades, but they don't recognize the recent impact climate change poses to California properties. They also include elements that now discourage insurers from increasing availability of coverage for properties in wildfire areas. As a result, the homeowners insurance market has fallen into a capacity crisis, with many carriers who wish to serve California, instead reducing new business capacity and nonrenewing properties because they can't achieve appropriate returns.

Now, let me give you some examples where California rules, they just don't align well with the goal of increased availability. Understanding that these rules long predate the current insurance commissioner, and we're not trying to criticize what he's doing, but the rules right now, they don't allow the net cost of reinsurance and rate making, which my colleague referred to. Now, reinsurance is insurance for insurers.

It's how they spread California wildfire risk around the globe, protect themselves from insolvency, and ensure they can keep the promise to pay claims after a loss. Doing without reinsurance reduces an insurer's ability to spread risk and provide coverage to more wildfire exposed properties. Since the net cost of reinsurance is not a permitted expense, an insurer must either cover the cost out of its own pocket or nonrenew the riskiest properties to reduce and maintain financial strength.

So another rule we should look at is allowing the use of catastrophe models. California regulations make it illegal to include climate change projections and fire insurance rates. Insurers must estimate their future losses by looking backwards at average historic losses for the past 20 years, which does not reflect the climate related risks or the benefit of new mitigation strategies.

So the impacts of climate change in California are readily apparent drought, floods, fires, wildfires, mudslides and it's a constant topic of policy making in the Legislature. Yet insurers are forced to pretend there are no future climate change impacts for purposes of insurance rates. It should be noted that California is the only state that does not allow consideration of reinsurance costs and rate making and requires historical data to determine catastrophe losses.

With the inclusion of wildfire catastrophe models and reinsurance costs, insurers could greatly increase insurance availability and fire risk areas and would be able to help depopulate airplane. However, without these enhancements, insurers will increasingly be forced to evaluate their participation and capacity in the market. We are keenly aware of the challenges our policyholders and your constituents face.

We look forward to working with CDI, the Legislature and all stakeholders to ensure a healthy and competitive market with greater insurance availability. Thank you.

Thank you very much for that presentation. Now we would like to invite over to present Mrs. Rouch and Mr. Feliciano from the Fair Plan. Welcome.

You may take a seat. Thank you. Thank you, Samuel.

I'll call you up if we have any questions. Welcome to all of you. You may proceed when you're ready.

Thank you for joining us today. Am

I on? Yeah. Good morning, Madam Chair, Members of the committee. Armand Fuciano on behalf of the Fair Plan.

Just a quick opening remarks. First of all, thank you for holding this hearing. I think that the timing is really apt at this point, considering what we've been hearing.

The goal of the Fair Plan today is obviously to educate and provide some information. There's some important public policy considerations at stake today, and the goal here is really to connect the dots. You will see after the Fair Plan is done with their presentation.

You'll see it's all connected. It might seem like an HOA issue today, but it's not even a wildfire issue anymore. It could trickle down to other parts of the state.

So with that, the Fair Plan is prepared, provide the important information that you need and then we're prepared to answer questions as well. With that, I want to turn it over to the well introduced Victoria Roach, President of the Fair Plan. Good

morning. Thank you for having us today.

I'm going to start with just a quick background on the Fair Plan, and we'll talk about some of the same issues today. You've heard from everyone else who's testified and how they affect the Fair Plan a little bit different because our statute provides for a different application of these rules for our organization. So the Fair Plan was created in the 1960s by the Legislature in response to the Watts riots and then subsequent brush fires shortly thereafter.

We originally started in only some parts of the states and was later expanded to cover the entire state of California. The purpose of the Fair Plan remains the same since it was established by the Legislature, which is to provide insurance for property owners who cannot get insurance in the admitted or surplus line markets. So the statute actually states that the order the consumer is supposed to go to is one of the 118 admitted carriers in the state or one of the 132 surplus lines carriers in the state.

And if insurance isn't available in either of those two markets, then they come to the Fair Plan for basic property insurance. That's been our mission since the late 1960s, and although we have changed since then, we continue to execute on that mission. So where are we today? You can see by the chart we are definitely in growth mode in the state of California, which is obvious from the comments we heard earlier today.

In the last five years, we've more than doubled in the number of policies that we insure in the state. And at the same time, our exposure in the state has grown almost over four times in that same period. So we are definitely in growth mode, continuing to provide basic property insurance.

We understand the issues today and the fact that this is a balancing act, right? If I could come up here and tell you there's one single answer, I would. There's not one single answer, I don't think, and no easy answer. Our goal here today, as Armand said, is to provide you with the information you need to make those tough decisions.

One of the things I want to point out is that we are not in a good financial position at the California Fair Plan. We are a not for profit organization. We do not carry surplus like a traditional insurance carrier would carry.

We are backed by the Member companies of the state. So what that means is if we don't have adequate rates so we can cover our losses and we don't have reinsurance available, we turn to the private market with an assessment. That means we send a Bill to all the other insurance companies in the state and say, hey, we can't pay this amount of money, and you need to pitch in.

And it's based on market share for each company in terms of how much they have to pay of that Bill. What our concern is, is that as we expand coverages in the Fair Plan, and as we try to fill that need in the market, we're put in a position of becoming an insurer of first resort instead of the insurer of last resort. In the past three years, you can see some of the things we've already done.

We work closely with the legislation, the legislators, with the Department of Insurance, with stakeholders to identify where the needs are and meet those needs as we can. At the fair plan. We've offered extended dwelling coverage.

We've increased our dwelling and commercial limits, we've implemented online credit card payments, we've extended coverage to Farm risks. And we're working with the Department right now on the home hardening, discounts and implementing those. And then finally to do a monthly pay plan to make it easier for consumers to purchase insurance with the Fare plan.

In addition to those things we've done, there are some things now that we are hearing today, and that we've heard from stakeholders and the Department that we need to expand our coverages. So the Department has ordered us to provide basic instead of basic coverage like the statute supply tells us. They have asked us to or ordered us to provide homeowners insurance.

Our concern being that that puts us in direct competition with this standard market. And when that happens, we are not following the statute, which says we should not be in direct competition with the market, but rather providing stability and basic property insurance for those who can't get insurance somewhere else. The other two things that some of which we've heard today is the HOA coverage, right? A real issue, there's no question about it.

And we understand the concerns of the HOAs and the concerns of consumers. And there's also a Bill proposed right now for us to start covering cannabis, which would include homeowners who are growing cannabis and cannabis farms. Our concern, part of our concern about those two issues is that we don't have reinsurance for those.

So we've gone out, we've done our research, we've talked to our brokers, they've talked to reinsurers. Nobody wants to reinsure those risks in the state of California, particularly in wildfire areas. Which means that if the legislation and or the CDI decide this is where we need to go, we will do what we need to do to provide that insurance.

The implications of that, though, without a reinsurance buffer, means that when we run out of money, we turn to the private market. Whereas today, theoretically, if we have enough money, we pay our claims. If it goes beyond what we have, we may need some help from the private market, and then reinsurance kicks in.

So there's a buffer between when we have these big losses, between what we can pay and when we have to start assessing the market, and when we start assessing the market, then they have to pay our claims in addition to the claims they have in those same areas. So we're going to talk a little bit more about that as we get into this. But if you look at the next slide, these are some of the potential consequences of such actions, right? And you've heard some of them are already taking place today.

As the consumers were talking about, there's no availability of coverage. They're having a hard time finding coverage and that coverage is very expensive. This will exasperate those problems, we think, as we continue to look at looming assessments to the industry.

Your smaller and mid sized carriers may determine that they can't afford that and they'll start continuing to pull back in the industry. So there'll be fewer options for consumers, not just in the wildfire areas, but throughout the state. All of the constituents were going to be part of this.

And I think we tend to think of the Fair Plan as just a wildfire issue and it's not anymore. It's across the state. Right.

And then if we do assess who's going to pay, these insurance companies don't have a bucket of money they can just pull from and absorb. Eventually that money is going to trickle down to the policyholders in higher premiums. And really the decision not an easy decision.

The decision ends up being who's going to pay the people who are living in those areas or the people who are in the state who are not living in those areas. And they're going to subsidize that insurance because somewhere the money has to come. And when there's no reinsurance for certain types of risks, that assessment becomes more real and it's going to hit sooner.

Right. We're trying to do what we can do and work with the Department and the legislators to make sure that we do everything we can not to have to assess the industry. But if we start insuring places that we can't get reinsurance from, it's going to be imminent.

So to talk a little bit about that increased cost and what the legislation has done in the past about that, I'm going to turn it over to Armand. Thank

you, Victoria. So the solvency of the Fair Plan and assessment issue is actually not new. In the mid 1990s, the Assembly passed AB 1754.

And based on that history, you will see at the time what they were looking at is $260,000,000 assessments on the industry. And so I'm not going to read the quote, but even then the Legislature was concerned about socializing this cost to everyone else. So in response to that, AB 1754 says that the Fair Plan should have adequate rates or actual e sound rates.

In plain English, that means allowing them to include the expenses they need to cover this high risk place. So that's what happened in mid 1990s. The law is still intact.

What's different today? Well, the concern is still there right now with the HOA issues and Victoria will touch upon sort of their wildfire exposure in 23. We're not talking billions at this point as far as the potential assessment. So the concern has not changed.

The analysis is still there. The only difference now is you got a fragile market and what's at stake financial is even greater. Thank

you. So just to give you a sense of the exposure we already have in California, and again, it's greater than a wildfire issue, but that's where we kind of focus our attention here, because that's where the concentration of risk is. These are the five highest concentration of risk areas in Northern California and in Southern California, not necessarily the ten highest in the state, because we've kind of divided it to show you north and south.

If you look at a place like Lake Arrowhead, we're talking about $7.7 billion in exposure in a seven mile quarter circle. Not even a full circle. It's a quarter circle, 7 miles from here to here.

7.7 billion. To give you an idea of the growth right. In the last 15 months, that's grown by $2 billion, and it continues to grow.

Every quarter we run these numbers, it continues to grow. If you look at real fires, right? And it's hard to think, right? I mean, to know how devastating it would be for a fire to go through Lake Arrowhead for the people who live there. But then to think, are we going to have enough money to cover their losses? Who's going to pay for all those losses so they can rebuild and they can start rebuilding their lives? So a real example is paradise.

If you take the same fire map from paradise today and you move that about 40 miles south, so kind of between Yucca Valley and Grass Valley, you can see if you put that same fire map there, we're talking about $5 billion in loss. That's a fire that already happened. That's a real thing, right? $5 billion.

If you had that same fire burned today right outside of Grass Valley, these are real issues, and the Fair Plan is not in the financial position to address those. We don't have the funds on hand. We don't have enough reinsurance, and we're at a breaking point.

The good news is we can't break because the industry is there to catch us. The bad news is the industry is there to catch us. And that means that every policyholder in the state of California is going to have to pick up some of that cost.

This is kind of our depiction of what it looks like. So you've heard a lot today about reinsurance and the net cost of reinsurance. I'd like to remind the committee that the Fare plan is under a different regulation than the admitted market.

So in our bridge, reinsurance and rates are a big component, and there are lots of cracks already in that bridge. We are authorized by statute created by the Legislature to purchase reinsurance, unlike the admitted market. It's in our statute, as Armand talked about.

Our statute also says we must have actuarially sound rates. Actuarially sound rates can only be achieved if you include all of your expenses in that rate making. That's not what's happening today.

We're not allowed to take the net cost of reinsurance and include it in our rate making. Now, I'm going to go say there definitely is a balance here, right? You heard people complain about the cost of insurance, and it will raise the cost of our insurance, but it also protects the consumers who have insurance with us. It provides stability for the market because it lessens our need to do assessments and Bill the industry.

In the event of a wildfire, if we don't have adequate rates, then in essence, our bank becomes the industry and we start sending bills out for them to help us pay. When we have wildfires, the way our reinsurance is set up is we have to pay part of our claims in the event of a wildfire. Then the reinsurance kicks in, then the reinsurance and the private market kick in together, and then it goes to the private market in an area like Lake Arrowhead.

At $7.7 billion of exposure, we're talking about five to $6 billion in assessment to the industry. Those companies are not going to be able to survive with that. We have to look for other solutions.

We have $220,000,000,000 across the state in exposure. When you look at options for the HOAs, which again, completely understand the need there, but when you look at options for the HOA and increasing our limits, and you look at cannabis coverage, you're looking at areas where that buffer of reinsurance is not there. And we will collapse in those areas and rely heavily on the admitted market to help us when those wildfires happen.

So here's a list. I'm not going to go through these because we've kind of covered them all for things we can do for fair plan sustainability. I just want to reiterate that there are no easy answers.

I'm not advocating one way or the other. I'm trying to provide everybody with facts so they can make informed decisions. My job is easier.

I just have to do it right and execute on it. Your job is to figure out how to do it a lot harder. So we're here today to say we are committed to continuing our mission.

We're committed to working with the legislators, the stakeholders, the California Department of Insurance, and to move these issues forward and find solutions. We're here for meetings and we're happy to answer any questions. Thank

you very much. I'm going to ask you to stay there for a couple of seconds before we move over to Member questions. I want to encourage Members of the public wanting to make comments to please dial now.

The number that you can dial is 877-226-8163. When prompted, please use the access code 439-8318 and you will be allowed to comment at the end of this presentation. But before we go to the Members of the public, we're going to also invite those Members here in the audience to speak.

But I will turn it over to Members of this committee. Any questions? Senator Dodd. Yeah.

This is obviously a lot. You think about all the issues we have with gas prices and the like of the hearings we have there. I think this is way more complicated than any of that, and yet far less time is being paid to this very incredibly important issue. And the dollars at stake here are way more for people exponentially.

Not a dollar or $2 a gallon or whatever, three, whatever it is. These are hundreds of thousands of dollars in some cases that we heard from the testimony. So I guess I'm going to start with a fair plan, because they're sitting there.

You talked about the statute, and the statute doesn't, or at least the way it reads it does, allow you, in essence, to compete with the admitted market, correct? Correct.

Should we change the statute? I'm going to be asking Mr. Peter, either Mr. Peterson or Mr. Martinez what they think about this. But at the end of the day, is that something that would make the insurers want to come back to the market in light of all the other things that are going on hardening homes, fire wise programs, reducing fuels and all those things? Because it's not just one issue. That's question number one.

And question number two, would these assessments, what impacts on the market? I'm going to ask the others, too. What impacts on the markets do these assessments really have? Or at the end of the day, if you had the assessments and we change it so, in essence, you're competing against the market that's not willing to come into the market and serve the market. Now, what does that mean, in your opinion.

Senator? I can answer the first question. I think on 1754, at least from the Fair Plans perspective, it's a clear statute. Right.

You have to have actual sound rates. And another part of the code I don't have this direct citation, but they are authorized to get reinsurance, unlike the private market. Now, the question at hand is, can they include the net cost of reinsurance as part of their filing? That's where the confusion, or maybe a different interpretation lies.

As far as my client is concerned, they are supposed to be including that. But again, I won't speak for the other stakeholders. But as far as the legislation is concerned yeah.

In answer to your other question, should we be competing with the standard market? I don't believe we should. Right. Our role is really to be there when the other markets can't be there.

So when you look at a place like Lake Arrowhead and we're talking about almost $8 billion in exposure, we insure about half of the risks there. The other half are in the voluntary market or the surplus lines market somewhere, or they're self insured. So we only insure about half.

The difference is we have a full half. Everybody else gets to pick and choose, right? And that's the way we're set up, and that's the way we should be set up. We shouldn't be concerned about, well, we have enough exposure here, so we're not going to write anymore.

We need to be there for the people who can't find insurance. I believe I agree with you. We need to look to incentivize the other markets to write more in those areas so it's not all on the Fair plan.

I think our concern is that it really is the voluntary market because they're going to have to pick up some of those costs because we're not in a financial position to have adequate rates to cover costs if that wildfire goes through an area like that. I

respect that and I appreciate your perspective here. But at the same time, you're modeling this catastrophe based on paradise is what your words were. And we are doing more in the area of home hardening.

We're doing more and more in the area of fire breaks and reducing fuels. That's got to factor in on that 7 billion. I mean, look, it's not going to be a pretty picture whether it's 7 billion or it's 3 billion.

It's still catastrophic, but maybe not as catastrophic on the other insurance companies. I'm just saying I think that's a factor. So, Madam Chair, if it's okay, I'd like to hear what the Insurance Commissioner's office thinks about that.

I will recollect many. First of all, regarding just the competition with the admitted market, I do concur with the representatives of the Fair Plan. The Fair Plan is best for and as the insurer of last resort.

It has been that it was established as such, statutorily speaking several decades ago. And it is therefore and right in those places and those policyholders for when and where the private admitted market is not able to at that time. And so as an extension of that, in partnership with the Legislature, we have been able to we created the homeowners clearinghouse.

We have a Bill this year for creating a commercial clearinghouse to be able to have the sort of fast track of those policies within the Fair Plan to go back into the admitted market. To further underscore how important it is that the Fair Plan and those individuals, businesses and homeowners that are on the fare plan go back into the admitted market, which is what everyone believe feel that consumers are best served in the admitted market. In regard to actually and I also wanted to add to that the history of the Fair Plan does reflect ability to adapt and modernize.

We've seen it that it has grown because of the need whether through legislation, through the commissioners and departments order or a joint stipulation that the fair pallet has grown where there has been temporary need, where the admitted market has been where there's been a bit of a challenge to cover. Like, for example, the increase of the private personal dwelling coverage limits the increase of the commercial limits the increase actually to go into the commercial market. And then we've seen the expansion through Chair Rubio Senate Bill eleven of going into AG.

And so there has been need for, when needed to expand out there more and modernize the Fair Plan. In regard to then the reinsurance costs, we have talked, as several of us have, may recollect quite a few years about the reinsurance issue. And reinsurance as the insurers insurance company, as some individuals think of the reinsurance market is a very global dynamic marketplace.

And under Proposition 103 it is important that when a rate comes to the Department for prior approval that we are able to as the Department, as the regulator, with actuarial and analytical experts are able to see where and what the factors that get to that rate, how it all meshes out. And they were able to actually determine in a very transparent and open way where all of those costs come from. And so reinsurance largely we have consistently said that that system is beyond the California insurance regulation because we cannot regulate, we do not regulate we cannot regulate reinsurance because it is beyond the California borders.

And so that's something that has been a bit of a challenge and what there's been some intimation of reinsurance costs that it will have an impact on ultimately rates and premiums that are charged to consumers. So that's another consideration that we do need to be ayes wide open. Another element that we need to ensure is under Proposition 103 that all rates are transparent.

And we want to ensure that that is indeed the case, that we know that all costs that we were again able to in a transparent way, be able to pinpoint where exactly those costs came from. Let me put it this way too, is that over the past few years I have posed this question to the insurance industry to be able to answer for us. And to date it is something that I feel that we are still waiting for an answer, which is this is for reinsurance costs.

You have a California homeowner that as I've said before, that a lot of times reinsurance could be cobbled together multiple lines, multiple states, all in one lump sum. Can an insurance company be able to parse out the California homeowners reinsurance costs so that they're not paying for a floridian homeowner's reinsurance cost or Louisiana reinsurance costs? And that to date I have not heard an answer for that. I know it'll be different for Fair Plan, but since we're talking about all about reinsurance, because my understanding is that Fair Plant only covers California risk.

But for the overall larger reinsurance discussion, policy discussion that we've been having, that's in a very layperson question term, because then everything else that I stated before dovetails into that about transparency and fairness and adequacy. That's the reinsurance. And then cat modeling that cat models are it's very important that under Proposition 103, the decades long proposition in which the Department of Insurance points to for a lot of our statutory authority, is that we want to ensure that these models are transparent, that they are something where we are able to point to and be able to understand.

And that is something that we are very much open to continuing that conversation around cat models and providing tools to the insurance industry to utilize again such as cat modelings. But what's important is that as we go and continue down that road, that it also needs to be hand in hand to ensure that there is a clear mandate to ensure that insurance companies are actually writing in areas that are in need of insurance coverage. In other words, if we provide further tools such as cap modeling, that we are able to get a firm mandatory commitment from the voluntary insurance market that they are there where there is need and to provide and maintain homeowners and commercial insurance.

And so that's very important that again, that we're open to providing and looking at more tools such as cat modeling. But again, we need to ensure that with additional tools such as that, that there's also an important mandate there where insurers are also going to be able to write in those areas that are in need. Hopefully they answered all that it did.

And that issue that you brought up, that you'd had discussion with the industry on is something you brought up to my office more than once in the last couple of years. So you're at least consistent. So thank you very much.

I appreciate it. Thank you, Senator. I try to so either for Mr. Sektnan or Mr. Taylor, I'm kind of interested in this issue because if we put this burden on the Fair Plan at some point in time, this issue about assessment coming back to the companies and how those companies may react to that. Okay.

Thank you. Senator Seren Taylor for the Personal Insurance Federation. With regard to the assessment, I get your intention there.

I think it's a fair question. But really, I think the thing to understand here is we're talking about having the Fair Plan expand and be in competition with the admitted market, using the admitted market, an assessment on the admitted market as a free form of reinsurance for them. At the same time, we're being told under California rules that we can't even get the cost for our reinsurance included in our rates.

So you could see the perverse sort of way that would work out. Your competitor is now using your capital to keep their rates Low while your rates go up, but you can't even recover the costs of your rates. So I think our clients would be very concerned about a system like that because you can see how that could just spiral into more admitted insurers.

Having the it would have the opposite impact where more admitted insurers, knowing that their assessment is actually based on market share, I got to decrease my market share because the more market share I have, the more my assessment is going to be. And the more business they take on, the more my assessment is going to be. So I think it would really have the opposite effect of the intent I think you're seeking on that.

Mr. Second, instead of answering that, I'm sure you concur with that statement. I'd ask, but of course, address Prop 103 because you spent a lot of time on Prop 103 and the impacts of that and rate increases. In your testimony, do you see that it is in the realm of political possibility to run a surgical ballot initiative, which is what you would need to have for wildfire only rates and some stability, working with the legislator, working with the insurance commissioner, or does the industry just think that's a bridge too far through the industry? I mean, we always talk about doing initiatives and stuff, but as you know, they're very expensive propositions.

One of the challenges of Prop 103 is not only is how it can be changed, it is a statutory initiative, but it requires a two thirds vote of the Legislature and it also requires that it be in furtherance of. So what has happened, I think the last time we passed a Bill to change Prop 103 was when Don Parada was President pro TEM of the Senate. So it's been a while.

Two thirds of Legislature was not a problem and this was dealing with persistency so that people could, long term people could take their discounts to insurance companies. But the group that funded Prop 103 and wrote Prop 103 in place, the intervener provision and Prop 103 challenged it and the court said it wasn't in furtherance of. So that would be a tough ballot.

I also want to say on the reinsurance question, because we did have this conversation during a Bill a couple of years ago, there are ways and my Member companies said they could actually break out California risk. But we also have to remember there are a lot of companies in California that only right in California. Both APCIA and Paddock represent a lot of domestic insurers.

So their reinsurance is only California. Thank you. Thank you, Madam Chair.

Thank you, Mr. Dodd. Any other Members have questions? Thank

you, Madam Chair. I'm sorry I've been running from here into EQ so I might have missed some of the comments already that's already made. But I guess a question for the Department and I know that there were discussions already in regards to the proposition.

How long does it take for the Department to approve or not approve a rate increase? Is there an average time frame that the Department of Insurance does or doesn't approve these notices and how long it takes? Michael, you want to take that one? Thank you. Vice

Chair Nguyen. Thank you. Michael Martinez, Department of Insurance.

I appreciate the question. I don't have actual the data and we can follow up on the data because I also want to ensure that we have the most updated data on this. I think the crux, if I can, on the intent is because we've heard a lot today and up to today is rate filings, that rate sufficiency, as others have stated.

And that is something that especially in the last few years we have been working very closely, I believe with industry on homeowners and commercial filings. And that is something that hopefully others can attest to in this room that I personally have been working very closely with trade associations to flag those particular filings that can help be able to move the ball forward and ensure that they can continue to write in some of these more challenged areas in which there is need for more homeowners and commercial insurance. And so I know at times that irrespective of who the commissioner is, there always will be, I believe, a desire for the Department to move faster and just know that we have worked very closely.

We continue to staff up. I think for any employer it's been a bit challenging right during this pandemic of ensuring that we are able to have as many staff as possible, so we continue to staff and hire up. Secondly, we heard something in this hearing of insurers going at the bare minimum of 6.9%, which is 6.9% rate increase is essentially gets right below where there's a potential for a mandatory hearing which could elongate the timeline and period of review.

And so we've had this opportunity and dialogue with industry is if there is a need for a higher rate and largely the industry has stated that there is definitely a desire for more than a 6.9. We've said, and the Commissioner has been very clear from day one of being in commissioner of then file for what you need. And that is something that we've been able to and continue to work on with the industry is if it's north of north of a six nine.

And we've had quite a bit now under this Administration, the Latt Administration, of getting double digit increases. If the actuarial and the analytical data is there, then we move forward and we work to get it across the finish line in partnership with the individual filer. I would also say that in partnership with the Fair plan, we have also been working with them on a couple of their filings.

Because also to piggyback on some of the comments of the previous questions is that ideally we do want to get the Fair plan filings across the finish line as well because we are then able to get the rate that they need in order to then have more distance towards adequate rate and more distance between that assessment that we all feel is not optimal. And so beyond the data, And I would say that as another is that there are definitely times where it could be the Department and that's where I can come in and where I have other colleagues that are able to lean on and be able to work and triage filings. There's also times when the insurance company can provide more information, more ability to help move their filing forward.

And so I do want to say that there is this duality on both sides that it's the Department and the filer working together to get as much information objectively as possible in order to move the ball forward on their filing. What

about reinsurance for insurer that only writes in California? How long does those usually take? Well

presently, right now, the Department of Insurance is a long standing policy that we do not allow reinsurance costs to be included in their filings. So there is not a timeline that I can provide you because essentially there are no filings that are allowed in that regard. Is that a Department policy or is that a statue? It's

been a long standing Department, I guess, policy in part of our long standing interpretation of Proposition 103 and existing law. And so in a previous dialogue with Senator Dodd's question on this issue of reinsurance is that the reinsurance market from California's perspective is a very global market and that it is at times hard to parse out individual costs that go beyond and extend beyond the California border. Now to your point, Vice Chair Wynn, is that for those California only specifics, that's something that we can continue to have that dialogue with the industry that we have on reinsurance and cap modeling.

But again, as we continue to explore these continue in these conversations and providing more tools, it has to be very important that we also hand in hand to ensure that there is a firm, clear commitment by the voluntary. Insurance market to write that we don't just give as we explore and provide additional tools that there needs to also be a commitment from the voluntary insurance market to provide insurance in the commercial and homeowners if provided these additional tools. And that's a very important component that is needed here in this conversation.

Sure. Thank you, Madam Chair. So to the Fair Plan, what I'm hearing is that you're the last resort for folks. You shouldn't be competing with the market.

You should just be the last one where people go, okay, I need you right then. What is the solution for us to making and allowing that market to do better? Because the better they do, the less we have to be using the Fair Plan and the less we have to use that type of I mean, that's a huge cost and liability to us or to the Fair Plan. So what is the solution out there? I know you might not have that answer because you did say that we're the one who should tell you what to do and that you just get to implement what we tell you.

But I think we're right now at the point we're at the point where I'm getting calls. I might not be in the High Fire Wildlife Area, but anything that happens northern part of us, especially in Orange County, in our canyon areas, will come down toward those slides. I mean, everything's going to come down toward my area of my district.

And so it's like we keep on hearing either HOA or homeowners. I mean, you name it, they're not able to find insurance company to buy. So

I think there's a couple of things that we could do right away. I guess one is I do want to clarify and you know, in deference to what everybody's talking about, California Fair Plan is not subject to Prop 103. So when they're talking about the regulations and how they apply them, they're different for the California Fair Plan.

So I think one of the things that we keep talking about is we need actuarially sound rates. There are in fact pockets in the state of California and we've gotten examples where we're actually lower priced than the voluntary market. If you take our policy plus a differences in conditions policy which they need in order to get a full homeowner's policy.

We're actually cheaper than if they go to try to place that homeowner's policy with an invented carrier. That should never be the case. You can't be the insurer last resort if you're cheaper.

Yeah. And because you don't have any regulations on you, they do. Right,

exactly. So that's one of the things I think we could look at right away because at least if we're not cheaper, people won't be enticed to come to us or to stay with us once they're with us. We have seen more people staying with us longer than we have ever in.

The past because your goal is really to help folks now and then once the market is available, they move out of you. Right.

As Mr. Martinez commented, that's why we passed the clearinghouse, right, was to give the Member companies access to our book of business so they could try to pull that business back into the voluntary market. It's definitely a step in the right direction. We need to figure out how to stop the business from coming in on the front end.

I think overall, the way I think we on the committee or at least I would appreciate that if the CDI could work with the insurance industry just to fix some of these regulations, then so that the market is open up and that more insurance company wants to do business in California, wants to actually insure our residents, whether it's their business, their homes, their association, whatever it is, and really allowing that cost of reinsurance. I think it's pretty reasonable. And so I think I know this is not going to end today and there's going to be a lot more conversation.

It's just that we need to figure out how to stabilize this market or none of us are going to be able to buy insurance in the state of California anymore. And so looking at how the fare plan is able to be so much lower when you shouldn't be and what is capping and forcing the General market so much higher and greater, we need to look at that. And it's pretty simple to me to just say, hey, regulation heavily, none at all manufacturers.

Let me just clarify there are some. Rules

that apply to that. I know the other vigorous one, right? I mean, I'm not talking that you don't have any please don't misunderstand me. But I'm just saying that I think we should look at what's the difference and how we can help stabilize the market and actually allow people to buy into the market.

Right? And I think you hear from the consumers and the people who talk today about the high rates of insurance too when they try to go to the surplus lines which are not regulated but they're much closer although they're looking for profit. I'm not right. So there's a little bit difference but they're much closer to where we need to be in terms of costs.

I think what people lose sight of is the Fair Plan is a high risk pool across the state. It's only 279 or 280,000 policies, but we are the highest risk of the highest risk in the state. Because of that, we're going to have high prices.

I mean, there's just no way around it. And I know the Department really tries to balance that, right, because nobody wants insurance that they can't afford either, right? So there's a balance there. But if we're not getting the price for our risk, we're compounding the problem that are happening in the industry.

And I'm the first to tell you the solutions have to happen with the voluntary market, not with us. But we can't compound that problem by offering lower cost insurance or being at the ready to do an assessment anytime we have a wildfire because we don't have the funds to cover that. So it's definitely a balancing act.

Thank you for that. Well, thank you so much for all the questions. I know Mr. Dodd had a lot of questions and he covered a lot.

But I just want to add a little bit to that. I mean, as we've already heard, this topic is very complex, very convoluted. And by way of example, we keep saying that you're not subject to Prop 103 but yet it is connected in so many ways because what's happening right now is that we're pushing all these consumers to the Fair Plan and it is not sustainable.

I saw your last graph where it talks about the exposure and it's true that you have a smaller market, but yet you take all the risk that the meta market won't. And so we have to figure that out. And I've heard several issues here that have been sort of reiterated and I want to address those as well.

So first of all, we talked about how expensive it is currently, correct? And let me just go back to that gentleman that said that in the 2000 it was $39,000 and now the cost of insurance is $417,000. But then we have to take into consideration all these other issues that are sort of compounding the issues. So for example, we talked about climate change.

All the wildfires that are currently happening and the most deadliest, devastating wildfires have happened in the last six years. The most structures destroyed, lives lost, and on and on and on. So clearly times are changing so dramatically.

And I know that I believe it was Sarah who keeps talking about the rules and rules. So I just want to reiterate what those rules are, where they come from. And I believe he was talking about Prop 103, which was passed in 1988.

So here we are, we're dealing with today's crisis that we didn't have in 1988, but yet we can't go back and fix it. So I know that when it was passed clearly it was well intended we have and I think it worked as it was intended at the time. But now we're seeing all these other issues that we didn't have in 1988.

And so when we think of climate change, it's not a conversation we used to have back in the day, I think we could all agree and we're seeing more destruction because of it. I mean, I'm from Los Angeles County. Now for the first time we saw snow and that's something we haven't seen before.

So I know that these are the top issues that we need to discuss. And I want to say that this is not the last hearing we're going to have. There's so much to go deep into.

So I know climate change is an issue, but I want to take the time to thank Commissioner a lot. I spent a lot of time with him in December just talking about climate change and the issues. And again, he's aggressively trying to tackle these issues in the lens of climate change.

We also heard that we have capacity, a capacity crisis. That's a real issue that we have to contend with and reinsurance costs. Like I said, I know that the Fair plan is not subject to Prop 103.

But when I hear that eventually the cost that you incur is going to be passed on to the insurance market and then we wonder why these rates are going up because someone's going to have to pay for it. But I don't think we see the connection. We see the insurance market in isolation, then we see the Fair Plan in isolation, but yet they're related in so many ways because what happens in the insurance market affects the Fair Plan.

And I have to admit as a legislator that it's us that are also causing a lot of the strain with some of the policies that we're passing. I did see that we have cannabis, another Bill that is going to be pushed on to you in terms of coverage. And so the more you cover, it just keeps putting a lot more stress on the system.

And so for me, I'm really fearful that if we don't tackle these issues right now, the market will break at some point and we have to consider all the stories that we heard from our consumers. These are issues that are important to us. We need to listen to what they're experiencing, the challenges.

But at the same time we need a market that's sustainable or else everyone's going to be in the same situation where we can get coverage. So there's so many layers to this. But I want to ask a question right now to Michael Martinez, if you don't mind, just because you talked about the 6.9 several times.

Can you share for public knowledge where the 6.9 number comes in terms of the rate increase? You keep saying everyone stays below 6.9. Give us a little bit of history on that particular number. Thank

you, Chair Rubio. Michael Martinez, Department of Insurance the 6.9% figure, it's essentially under proposition actually of the history. So Proposition 103 passed by voters in 1988.

It created a prior approval rate regulation system as well as an elected insurance commissioner statewide, among many other, but the big crux being a prior approval system. So in other words, when an insurance company is in California or enters California and wants to charge a certain premium, then they come to the Department of Insurance and file a rate filing. To.

Be able to charge again a certain premium that rate, whether again it could be a decrease or increase. But if we're talking in this context for an increase, it's really that 7% is generally considered to be if it's north of 7% and and up, that it could be subject to a hearing, a public hearing by if. So if a if an intervening group wishes for a hearing to occur on that rate filing back up too.

Because I apologize with new committee Members is that we have the regulator, the California Department of Insurance, which oversees and regulates and prior approves rate filings. We also have the insurance company that serves as the filer would file an insurance rate increase, in this case for homeowners insurance, for car insurance, for commercial insurance, all of these subject under Proposition 103 and prior approval. And then we would have if at times there is ability under Proposition 103 for an intervener group, which is an outside group that could be able to petition the Department to intervene in a filing in a rate increase filing.

And again, we're all talking about rate increases here to intervene, petition to the Department to intervene. If the Department grants that group ability to intervene in a filing, then they are party, an interested party to be able to represent and provide their views on a pending filing. The issue here now is for the 6.9 threshold, is that under Proposition 103, then there is under the if there if the filing and generally we are we have been seeing 6.9% rate increases, that up to the 6.9.

That it essentially could be the Department with the insurance company who filed the rate increase and the intervener, that we would have conversations around the 6.9 up to 6.9. Again, it could be 1% 2% up to 6.9% rate increase. There'll be conversations and if there's a meeting, the mine's great, it moves forward towards approval.

If not, then again we try to resolve and work out any differences and move it forward still. But if there isn't, then the Department can still move forward and approve the rate filing with or without there being a consensus by all the parties. If a filing is north of let's just get like 7.5% or 21% rate increase, then it does if that filing and not all filings north of like 7.0 and up or double digit get intervened.

But just. For those filings that end up being intervened that are north of a 6.9%, if the intervening group if there is an intervener, if the intervening group believes that they want to have more public discourse around it, around that filing, then they can request and be granted a mandatory public hearing on that filing. And then that will go the Department of Insurance has administrative law judges.

We do serve as, in essence, an administrative overseer, I guess in a court like setting where we would have an ALJ administrative law judge be able to be a part of that process, of determining whether then that rate is not excessive, not discriminatory, again in that sort of proceeding. And so that at times will be a very robust conversation. It could take at times some time to get it across the finish line.

We haven't had, though, a hearing. It's been incredibly long, at least on the homeowner side, when we've had, again, an intervener requesting to go to a hearing.

Michael, we have, like, 50 more seconds. Okay.

Apologies. I trying to find the balance. Right.

But you know what? I think you provided us a lot of information. I'm sorry I put you in the spot. But the reason I needed you to kind of explain the process.

Yes, we do have new members of the committee, and we know that we're live streaming, and we want the members of the public to kind of hear this because one of the biggest issues that I keep hearing is the rate filing and how long it takes and how cumbersome it is. And here we are. You're trying to explain to me why getting past 6.9, the process, and we all just kind of hear how lengthy and how we have outside groups come in and you have to go to court.

And so what I'm hearing right now is, like, we're struggling with rate filings. Right. And it's already taking a long time.

And then if you I think I heard you say earlier that they keep asking for 6.9, and sometimes they don't ask for what you perceive to be the adequate rate. Right. But then when you explain the process of what they have to go through so the way I see it, it just takes that much longer to get people the other coverage that they need.

Again, this is my own perception, but I just kind of wanted to understand it a little bit for our new Members to understand that it's not an easy process. It's long. Can you just share one answer? What's the longest a process like that has taken or any case that you remember? Because I've heard to two years, three? I've heard lengthy process.

Yes. And I do want to follow up with more info on data. Yes.

I'd say that outliers there are outliers where it can take multiple years, and it could take two, three years. I do want to there is an asterisk there because I'm sorry, Michael, I'm. Going

to have to cut you off because I know we're passing our time, but really appreciate the information you've provided. I'm sorry, but we'll have another hearing where we'll get deeper into this subject matter. But thank you for the information you've already provided.

Thank you. But I'll just reiterate that part. It could be two years, three years.

And when we're talking about people having immediate need to get coverage, this is an issue. And I'm not saying it's right or wrong, it's not up to me to decide that. But I just wanted to just highlight the process.

And again, when this passed Prop 103 in 1988, it was the right thing to do at the right time. But now we're finding all these other factors that were not part of the discussion, that are now playing into why insurance is going higher, why people are not being non renewed, why the Fair Plan now is having to be, as you put it now, the insurer of first resort. And that was meant to just capture people, a few people that were getting dropped off.

And now you're taking on this high risk. And let's face it, the people that are being non renewed are the ones that are in the highest risk. And therefore now you have all those billions of dollars in exposure.

At some point the system is going to break. And so we clearly as a Legislature, we understand why we need to have these oversight hearings, why we need to go deeper into the subject matter, why we need to bring all the stakeholders to the table, and why it was important for me to bring some of the consumers. Because they're the ones that are paying the price.

They're the ones that are at risk of being non renewed. And at some point their homes or structures are going to fall or burn and they're going to find themselves in really dire situations. So I don't want to go further.

I have a million questions, but unfortunately I have to conclude this meeting and I need to give the public the opportunity to speak. I want to say thank you so much to their Fair Plan. We'll circle back in another hearing.

I think California needs to understand how important the issue is where we are currently. And it's not looking really good here because we have so many issues that we need to deal with. And to the insurance CDI, the Department, I want to say I think maybe it's time for us to revisit the interpretation of Prop 103 as it pertains to the reinsurance, because that also has been highlighted here multiple times by many stakeholders, including our first panel.

So it's an issue that we have to really understand, tackle and deal with. If we don't, then we're going to continue to have these high rates. And it's all about making sure that our consumers are taking care of that is our number one priority, the protem's number one priority.

And we'll continue to have these discussions. So I want to thank you, but at this point I'm going to invite Members of the public wishing to speak that are currently here presence that want to make comments. I'm going to have to put time checks on you.

If you can keep it under a minute, that would be great. So please line up and state your name and your comments. Thank you.

Well, good morning, Chair Rubio and senators. My name is Mike Balsamo. I'm with Rancho Mission Viejo.

We're a 23,000 acre planned community in south Orange County. Coastal south Orange County. Not like Lake Arrowhead.

Over the next 15 to 20 years, we'll be developing about 14,000 homes, and we're going to conserve about 75% of the land in a natural state. Our entire project is within the Wui, and we've been an early adapter for wildfire prevention and mitigation. We're an NFPA firewise community.

And to be brief here, I'll skip all of the mitigation, but we're covering all the checkboxes of chapter seven A of the state codes, doing all the right things, including fuel modification, et cetera. About a year ago, we started having challenges with insurance related to commercial property insurance, our ownership, attached ownership, housing, condos, townhomes, first time home buyer product, and then around 500,000 price point, and our HOA common area facilities. We could not get coverage from admitted carriers.

That's tight. Okay,

sorry. Costs have skyrocketed, and we're talking about $1,000 a month in dues increase for the home buyers. And we're going to have to put these projects on hold until there's a. I'm sorry, I'm going to have to move on to the next speaker to. Get

the admitted carriers back. I'm so sorry, but we have a time constraint here. Please, let's make sure we stay under a minute. I'm going to have to cut you off.

Thank you. Thanks.

Chairman Rubio, Dan Dunmoyer President CEO of the California Building Industry Association. So here's our recommendation. Give the Fair Plan the ability to move commercial capacity to 20 million.

We would even suggest 40 million for residential habitational risks only. Forget about pot for right now. Let's solve the consumer problem.

Our rates in Northern California phone number Members went 6900%. You will have homeowners and condos who will foreclose in their homes in the next twelve months if we don't get the Fair Plan in the market immediately. Second part, get the admitted market.

Individual companies call the Commissioner with what it takes to get back in the market. They have to do that privately, individually, under antitrust laws. But have the CEOs call Commissioner Lara who's really working hard on this, and give the solutions what it takes to enter the market that Mr. Martinez suggested.

And if four or five of those companies come in, the market can work. That will take about 18 months to two years. But that's how you fix the problem.

Thanks. Thank

you. Next. Speaker okay, seeing no interest, I'm going to go now to the line operator.

Can you share how many people are waiting in the queue? Thank

you. Madam Chair, for those in the public on the phone lines who wish to make a comment, please press one, then zero. At this time, please press one, then zero.

One moment.

Madam Chair, we have at least one person who signaled that they wish to speak. Just another moment, please. Absolutely.

We're going to go to line 21. Speaker you may go.

Good afternoon, Senator Rubio. Good afternoon. My name is David Schaefer.

I'm an independent agent in Lafayette, California. Thank you for holding these hearings today. I appreciate the comments that my colleague Irene Sabaroon talked about earlier today about the availability of homeowners insurance in my insurance practice, which I opened up in 1983 in Oakland.

I have never seen the marketplace as difficult and challenging as it is today. So we do need to address this issue and find solutions. So, speaking of solutions, we spoke today about the insurance companies being able to charge for reinsurance and to look at future modeling, which prop 103 does not apparently allow.

My question would be, if we do allow that, what's the guarantee of the insurance industry? That now tells me, as an agent, I can't sell policies because of the house location, the wildfire risk that if they can charge higher premiums, they will guarantee to allow me to now offer coverage at a higher premium, whereas today they won't offer coverage. So let them charge higher rates, but also mandate potentially they have to now let us sell policies. 10 seconds, sir. That

issue. 10 seconds. There needs to be more involvement in reducing the wildfire risk, because until we as individual homeowners and communities, mitigate the risk and eliminate it if we can, this insurance crisis I don't see going away.

So it's not just what the insurance industry will do. Thank you for your comment. I'm sorry, sir. Your time is up.

Thank you for calling in. Anybody else in the queue? Madam

Chair, no one else has signaled that they wish to speak. Thank

you, moderator. To everyone here, thank you so much for your patience staying with us until the end. As previously stated, this is an issue that's really important to all of us.

I'm encouraged by the fact that we work really well with the Department of insurance, our insurance commissioner. We're on constant communication, and like I said, we spend quite a bit of time in December just trying to tackle these issues. We know that they're in communication with the insurance market.

So I know that together we'll figure out a solution and we'll circle back with other oversight hearings so that we can continue the conversation. So thank you to all of you here today, and this meeting is adjourned. Have a good day.