Senate Standing Committee on Insurance

Good afternoon. The Senate Committee and insurance will now come to order. Thank you, everyone that is here in person joining us today. It's been a little while, and happy New Year's to all those that I haven't seen. So today for today's hearing, we are going to be hearing from the Honorable Ricardo Lara, our insurance Commissioner. Prior to taking any public comments, we will hear first from the Commissioner, and then we'll take public comments that really just address the topics that are being discussed today.

Currently, the insurance crisis in California is something that's on the minds of a lot of Californians and a lot of consumers. So today we're here to ensure that we continue the dialogue and make sure that we are in communication with all stakeholders because we know that there's a lot to be done and a lot of discussions to be had. So I'm very thankful that the insurance Commissioner is here today to share some of the updates.

And so once again, we know that California can be a test case considering that climate change has been initial worldwide, we do have a lot of wildfires, floods and other disasters that are creating economic shockwaves across our state and our country for that matter. Though Proposition 103 was intended to protect consumers in the 1980s, many have found it. It's fallen short of its intended goals and we need to address it and we need to do something to change what's happening.

Since we know that a lot of our consumers are being left without insurance and distress, and some of them even losing their homes, homebuyers and homeowners associations have found their insurance rates in the well, interphase have exponentially grown over the course of a few years due to limits in the ability to effectively use available technology in calculating rates, delays and roadblocks in the rate making process and hardening efforts that are not being accounted for in the insurance rate setting process.

Due to these factors, in September 2023, Governor Gavin Newsom issued Executive Order N 139, which urged insurance Commissioner Lata to take immediate action to address this current crises, expend coverage options for consumers, protect consumers, and keep plans affordable. Here in the room with us, we have Lucy Wang from the Insurance Commissioner's office. I see Michael Martinez as well, with the insurance Commissioner sitting out in the audience. And of course, our witness today is going to be appearing via Zoom from Los Angeles.

So I want to thank the honorable Ricardo Lara, who will be joining us in a few moments. Welcome, Insurance Commissioner.

Welcome. It's great to be here.

Thank you so much for taking the time. And so we really want to open this up for you to share with us some of the updates based on that Executive order and some of the conversations we've had throughout last year. And let me just start by saying how thankful I am we spent a lot of year, I'm sorry, a lot of time last year hanging out together, sometimes almost 24 hours a day trying to figure out this insurance crisis. And so only you and I know how much effort went into this, but I'll turn it over to you and whenever you're ready, you may begin. Thank you.

Thank you. Thank you. Good afternoon, Chairwoman Rubio, ¡Feliz Año Nuevo! and it's great to see you, of course, our Vice Chair Wynne and Committee Members. And thank you for inviting me here. Today we have a presentation that will have quick presentation with some slides just so that the Members and the audience can get a better picture of what's happening. And really what you'll see is that our insurance is at a crossroads. Our market, as you well know, California, is at this meaningful crossroads.

And for many Californians, this is an insurance emergency. As you well pointed out, Madam Chair, we are all hearing every day from people who are paying more for home insurance. That's even if they can find a company that will write them a policy. And this is really a direct result of a growing climate threats, as you mentioned, historic inflation and outdated regulations. As the state insurance regulator, my focus, as you know, is really protecting consumers, which includes safeguarding a robust and thriving insurance market.

And our market is under unprecedented stress, unlike anything that we've experienced in the more than 35 years since the voters established our current system of insurance regulation. Last September, I announced my sustainable insurance strategy, which you are very familiar with, Madam Chair, and thank you for working with us and your staff to really getting some of these important reforms in this plan, which, as you know, is the largest insurance reform since the voters passed Proposition 103.

There is no question that the risks that existed when voters passed 103 are not the same risks we are facing today. Decades of global warming are colliding with our state's growing population. To put it directly and really putting people indirectly in harm's way. While we are making massive changes to how we build, building smarter and being proactively to prepare for wildfires, we must also change how we regulate this insurance industry of ours. To put it simply, we need new tools to deal with these new problems.

The insurance market we are dealing with today necessitates urgent measures that, as you well mentioned, Governor Newsom also recognizes as set forth in his Executive order issued on September 21. The governor's order supports swift regulation, regulatory action by my Department to strengthen and stabilize California's insurance marketplace.

Sorry, insurance Commissioner, I'm so sorry. I noticed that our Vice Chair, I think, just arrived and I want to make sure that there's a Member that wanted to make an opening comment before we move forward. So my apologies for interrupting you. Turn it over to. Okay. Do you want to make an opening remarks? My apologies. We'll take a few minutes here.

Thank you so much. I want to thank chair Rubio for all her tireless work in this arena. I've had the pleasure of being able to work with her as well as Commissioner Lara on this issue, representing Senate district four in some of the high wildfire areas of California. Across California, as he mentioned, the cost of homeowners insurance has further fueled the housing unaffordability crisis.

And while many households in California may still enjoy some of the lowest homeowners insurance rates in the nation, the astronomical insurance cost increases for residents, for businesses and public service agencies in fire risk areas has grown potentially, has been growing and has the potential to have a detrimental impact to the well being of our state.

Living through the realities, dangers and impacts that come with extreme weather and wildfire disasters is a top issue of mine, and my constituents share in their concerns with me across the district. I know that these realities are real because I have experienced them firsthand. I am blessed to have my forever home in Amadore County. Something I wasn't prepared for when I found my home was the challenge that I would be facing finding homeowners insurance.

Like many of my constituents, the California Fair Plan is the only insurance option that I have available for my home. And let me tell you that it sure does not feel fair to only have one option and the cost is far from affordable. For most of my constituents who live on fixed incomes and also for those who are middle class or middle income, it is also unaffordable.

Recent reports indicate that the fair plan is receiving over 1000 applications a day, a rapid increase that demonstrates the need for immediate and bold action to change course. There are some areas in my district, such as Truckee and in the Tahoe Basin and Tuoleme County area, that have billions of dollars of fair plan saturation where one fire could devastate the entire program.

The actions taken so far, including the recently announced package of Executive orders issued by Governor and our Commissioner, representing robust reforms supported by a number of stakeholders, are an important starting point. But the work to end this crisis is far from over and I want to thank you for being here today because I know that the conversation is front and center with you, Commissioner, every single day my office is contacted by upwards of a dozen constituents who are fearful of losing their homes.

Threatened due to not having access to property insurance that they can afford. Premiums are jumping from one $200 a year annually to over 12,000 to 14,000 annually for modest middle income homes. This is not a sustainable model. We are at a crisis point and we need that relief right now.

I would like to thank you, Commissioner Lara, for being responsive and accessible to me and my staff as we have reached out for assistance, such as your recent actions in responding to the fair plan application processing delays. My constituents have been facing these and thank you for being responsive. Your actions in issuing guidance on backdated fair plan policy insurance dates is also greatly appreciated.

To sum it up, your Ombudsman office is on speed dial with my team as we work daily to respond to constituents who need that assistance. Today, I am eager to determine the timelines that are more about details of the implementation of the sustainable insurance strategy. Thank you again for your participation and I look forward to your presentation and follow up questions.

Thank you, Senator. We just had our esteemed colleague join us as well. He's going to make brief remarks. You may proceed.

Yeah. Thank you, Madam Chair. Just for time sake, I would just probably be repeating what Senator Alvarado-Gil just said. I concur with her remarks and really appreciate the Commissioner being here today and talking more about how we accelerate this, or at least keep it on the perfect timeline. Thank you.

Thank you. And with that, insurance Commissioner, our apologies and you may continue with your presentation. Thank you.

Thank you. I appreciate both Senator Alvarado Gil and Senator Dodd for their words. So let's get into it. And just to tell you that our strategy is really based on a thorough assessment of today's insurance landscape with actual input from wildfire survivors from our rancher community, our farmers, our supportive housing groups, our realtors, homeowners, condo associations, new home builders, and other insurance consumers that are most effective.

No other Department in the history has done such a robust outreach to really try to get to all the insurance consumers in California to get firsthand information, and nobody else has ever done this work. So kudos to my staff for the work that we've done. On the other side are those who are going to defend this broken status quo at all cost, even to the point where insurance is not just no longer available, as we are hearing from our Senators.

But it's not even not just going to be available, but unaffordable as it is already. And I refuse to be pressured by entrenched groups putting their interest and their financial stability ahead of the public's benefit. So let's get into it. In the coming months, I will be implementing the lasting changes that will make Californians safer and stronger and more sustainable through our insurance market. As we discuss in great detail in my testimony, my strategy really consists of the following components.

We're going to streamline the rate application and approval process. Two, we're going to be introducing a risk management tool that recognizes catastrophic modeling and California only net cost of reinsurance with the commitment from insurance companies to write at least 85% of homes and businesses in distressed areas, essentially in areas prioritizing Senator Alvarado's Gills district and Senator Dodd, and of course, strengthening and modernizing our fair plan. The changes to California's market have been sudden, but are decades in the making.

Over the last past 12 months, seven of the 12 insurance groups in California have either paused or restricted new homeowners business in the past year. These insurance groups roughly represent 85% of the marketplace, so these actions are having a significant impact across our state. At the same time, insurance companies have increased their rates under our existing regulations. So over the past year, major companies, including state Farm, Allstate and Farmers, have applied and received significant rate increases.

As you've seen publicly reported in the media, under existing law, insurance company rates must be adequate to pay future claims while covering expenses and allowing for a reasonable rate of return. My department follows the rate review formula that puts clear limits on profit taking, executive pay and advertising expenses while allowing insurance companies to set justified rate approvals to cover their future losses. Yet even with these rate increases, it's important to say insurance companies are still not writing more policies.

There is no requirement under Proposition 103 for insurance companies to write policies. This is a limitation that was also enforced in court against former insurance Commissioner Garamendi. I say this because many folks are going to say that we can just either force them to write policies or pass legislation to have them write policies. This limitation was already enforced in court against insurance Commissioner Garamendi, essentially looking at our underwriting guidelines. But let me underscore this point.

Under our existing regulations, consumers are paying more with no promise that they will have a competitive market in the years ahead. Insurance companies, interveners and the regulator share this responsibility. In 2023, the Department received over 504 applications for rate increases and approved 158 of these applications. One organization intervened in 18 of these applications, and the Department is meeting its responsibility under the current regulatory structure. But that's not enough to address the current insurance market crisis.

Past decisions that were kicked down the road can no longer wait. We are essentially at the end of the road. So let's talk about this growing fair plan. There is another cost of our shrinking market. The insurance company actions have really pushed more Californians to the fair plan, which has become the only option, as Senator Alvarado-Gil was saying earlier, instead of the last option. So the fair plan has grown 20% this year alone, now at more than 330,000 residential policies.

For most, the fair plan is very limited in coverage at a higher cost. It contributes to our problem of underinsurance, leaving people at a greater risk of paying out of pocket in a disaster. And a growing fair plan poses a problem for all Californians, even if they've never even heard of the fair plan. Simply put, increasing the number of policies in the fair plan threatens the solvency of our entire voluntary insurance market.

By law, if the fair plan experiences a massive loss and cannot pay its claims, insurance companies are on the hook for the unpaid fair plan losses. While this assessment on insurance companies, I have to say, hasn't happened in nearly 30 years, it's the uncertainty of what's going to happen in our ever changing market that really is driving insurance companies to further limit coverage to Californians at a greater. For Californians that are at greater risk to wildfires.

So this animosity that exists, given the uncertainty of the future, is really putting our overall market in peril. This is why my strategy focuses on increasing insurance availability, while at the same time reducing the pressure on a growing fair plan and on California consumers. So we have to reverse this trend of a growing fair plan if we're going to safeguard the state's insurance market as a whole.

So all the components of my strategy are really a result of examining the current regulatory structure and acknowledging that the challenges of addressing the current market crisis is really given present day, given the present day constraints that we've never had before. So the goal of my strategy is to strengthen and improve our current regulations to meet our present needs.

The changes that I'm proposing are really transformative, and the Department is working under an ambitious timeline, as you know, Madam Chair, which allows us for public input and transparency and allows for little room for error. Now, I want to discuss the components of my strategy in more detail, starting with the rate application process, which I'm sure you all have heard from the industry. So California law is clear. Insurance companies are free to propose rates at any level, there is no maximum.

My Department rate reviews is the public check on these rates and we thoroughly review each and every rate filing to make sure they are compliant with our laws, that they're justified, and that consumers get the best value for their money. And yes, the public is granted a role to intervene in the review of these rate filings. The reality is that interventions only take in a handful of cases each year, and primarily by one organization.

Interventions delay the rate review process, and over the years, one organization intervened in 18 rate applications, signing off on the rate hikes while simultaneously receiving fees for doing so. The same organization supports various Department activities and received compensation of over $9 million passed on to consumers and the public over the past 10 years. So it is the department's rate regulation experts who are there day in and day out and lead each of the filings process.

To put it in perspective, we have currently 95 homeowners rate filings on our plate and 75 auto insurance rate filings, just some of the thousands of filings that we review each year. So we are focused on strengthening my department's rate regulation branch so that we can meet the combined growth demands on rate applications submitted to the Department. When the market conditions change rapidly, we must do our part as regulators to protect consumers access to while meeting our statutory deadlines as well.

So we will be introducing new regulations to improve all areas of the rate review process. The process extends beyond the Department. We all expect all participants in the process, including insurance companies and interveners, to work with us towards improving our review and approval rate process, which is an essential part of how we keep insurance available in our state.

So let's talk about for insurance companies, we intend to enforce the requirement that a complete rate application is submitted by the Department before the clock on reviewing the application begins. In the past, this is important to know that in the past we have allowed insurance companies to submit their applications without the complete data that we need. But today we don't have the luxury or time for a lengthy back and forth about incomplete applications.

We expect insurance companies to provide the Department with the complete information upfront that is needed for us to make a determination on the requested date. Our Department will provide rate reconciliation tool to really assist with that which is important. Shortly after announcing the strategy, the Department reviewed its rate application intervention process. We streamlined the intervener process in the rate applications to provide greater clarity, efficiency and most importantly, transparency.

The third party interveners, or intervener, I should say, are only allowed to raise issues that are directly relevant to the specific application, raising, unrelated or irrelevant issues only serves to slow down the process, which has a direct impact on consumers and insurance availability, especially when there are other avenues to raise these issues. So moreover, I should say all intervener petitions, as well as how much compensation they received for intervention are now posted on the department's website.

Overall, the goal is for a more streamlined, efficient and transparent approach will better represent the interest of California consumers and you all, as the Legislature will be able to access that information quickly as opposed to having it buried within the Department website where nobody can find it. Let's get to Catastrophic Models as the Chairwoman said, another component of my strategy is allowing new risk assessment tools that can support greater availability for insurance.

For the past 30 years, the departments only used historical losses as a method for estimating catastrophic catastrophe adjustments in the California rate review process. Put simply, insurance companies look to the past experience to predict future losses. However, historic losses do not account for the growing risk caused by climate change.

What's more, this approach is directly contributing to the growing cost of insurance as record setting losses fuel higher rates with no allowance for the collective effort to reduce the risk through home hardening, prescribed fires and healthy forest projects. Again, there's got to be a better way, and that is through the use of forward looking models that can be thoroughly reviewed and justified.

So my Department is engaged in ongoing conversations and public workshops with the public, academia, insurance companies, consumer groups regarding the use of Catastrophe Models in the rate approval process. The use of these models will be informed by California's goals of fairness, availability and affordability. And I recognize, as Senator Alvarado Gay was saying, time is of the essence, but this is not something that can happen overnight.

Unfortunately, the process of incorporating Catastrophe Models into California's rate approval process is really complicated and involves multiple branches of my Department working together on the solution. In addition to the above work, my Department is examining the use of both private and public models based on conversations and workshops with the public. We recognize the benefits of both private and public models that are pursuing both tracks, so there could be some checks and balances.

I look forward to introducing this regulation for the public input and adaptation throughout 2024. The other component of this deal is reinsurance. Reinsurance is an increasing expense incurred by insurance companies as part of our cost of writing homes and businesses business policies. In California, insured natural disasters losses have increased five to 7% annually over the last 30 years, and insurance companies are taking on more reinsurance costs for these increases.

Our analysis shows that reinsurance is an important component of how insurance companies manage their own risk, enabling them to write policies despite growing threats in our state. Yet California is one of few states in the nation that does not allow insurance companies to recover this expense. This contributes to insurance companies'decisions to reduce new policies or restrict writing to just the lowest risk possible. This is why my department's examining how to allow insurance companies to recover their California only net cost of reinsurance.

Our goal is for consumers to have insurance options. We seek to allow insurance companies to recognize and recover their California only net cost of reinsurance and letting them reflect in their rates. And of course, we'll be transparent so that we all understand that process. This will encourage carriers to re enter and expand their business in California, especially in our property market, with the rates that are more accurately reflect the cost of doing business in California.

Insurance companies will not return to California unless they're able to charge the rates that are justified to cover the risk and provide opportunity of a fair return. I've been very clear that increasing availability of insurance is how we're going to protect affordability. We need to focus on getting insurance companies back to writing new business in California and to a point where they can be competing for California's business and lowering those costs.

As the largest insurance market in the nation, California's insurance rates are far lower on average, than many large states that face growing risk from climate change, particularly hurricanes on the East Coast and on the Gulf Coast. California is already paying more for insurance and not getting much in return.

You simply need to ask people in Asuza, where I joined Senator Rubio when she announced funding for wildfire prevention, or in South Lake Tahoe, where I met with Senator Alvarado-Gil last year, or with Senator Senator Dodd's district, which have experienced some of the worst wildfires in California's history. Those premium increases are happening under the current regulations, which clearly are not working in those areas.

Most importantly, the two risk assessment tools I have just discussed, catastrophic modeling and reinsurance, are significant because to use them to set the rates under our agreement, insurance companies must satisfy two important commitments, and that is very important one. First, part of the commitment is that they must increase their writing in at least 85% of homes and businesses in distressed areas or wildland urban interface. Second is that they must help depopulate the fair plan immediately. These are essential mandates.

These are essentially mandates, but ones that we can monitor over time and enforce when needed through our department's regulation to ensure Californians have access to insurance while insurance companies stay in our state and expand the reach in our communities statewide, insurance companies can if the insurance companies cannot meet this commitment or will not be able. They're not going to be able to use either catastrophic modeling or reinsurance as part of the rate application.

Insurance companies that fail to follow through on their commitment will have the rate reassessed by my Department. So this is how we create the proper checks and balances, and we make sure that insurance companies are following through on their commitment for our sustainable insurance strategy. Let me quickly talk about the fair plan as I wrap up while we focus on shrinking the fair plan.

There are more changes to the FAIR Plan that are needed. Some Californians need more coverage than the FAIR Plan currently provides, particularly our homeowners and condo associations. Thus, we will be working to increase coverage for our large homeowners associations, condo associations, farms and other businesses. In November, a court upheld my order that the FAIR Plan offer a more comprehensive homeowners policy. The FAIR Plan should stop forcing consumers to purchase a separate policy at an additional cost.

It's time that the FAIR Plan ends their challenges of my order and work to implement, in partnership, implement these changes with the partnership with partnership in my Department. It is also essential that the FAIR Plan issue regular reports to my Department, to you, the Legislature, and to the Governor so that we can monitor their progress. The FAIR Plan was established by the Legislature and the Governor, and it must be more accountable and transparent to the public.

My Department has a goal of submitting each of the regulatory efforts associated with the different components of our strategy throughout the year. The goal of this completion, to answer Senator Alvarado-Gil's question, is the goal is to complete all of these regulations by the end of 2024. We hear you. We see you. We know firsthand after talking numerous times to your constituents, that they want these changes as quickly as possible.

So my department's first regulatory effort will be the filing of the complete rate application rulemaking in the next few weeks. The goal of this rulemaking is to amend the current regulations to require insurers to submit all of the information that the Department needs to the rate, that needs to review a rate application before the clock starts on the time that my Department has to review to approve these application rates.

My Department is also, thanks to the budget, are also hiring more analysts and actuaries to strengthen our intake and review process and busily pulling together the rate conciliation tool that we need. Each component requires careful analysis by all the parts of my Department, including my Legal Branch, Climate Branch, Rate Regulation Branch and Special Counsel's Office. I don't want another Insurance Commissioner to be back in front of you in five to 10 years because the regulations did not stand the test of time.

As you know, it will be very complicated if we can't get that done. So how do consumers benefit? Lastly, under the strategy, there's a clear benefit for consumers in the areas where the FAIR Plan has become the only option, consumers get greater insurance availability. More options mean better competition on cost and service.

To utilize the new tools that I have discussed, insurance companies must take policyholders from the FAIR Plan, using the clearinghouse programs created by bills, the bills that we passed in the Legislature and signed by the Governor. The Legislature, again, continued support in these is going to be essential for our ongoing efforts. Your groundbreaking budget investments, along with Governor Newsom's Administration in wildfire safety, are really transforming our existing communities.

My Department is finalizing my Safer from Wildfires regulation discounts which will amplify the benefits of wildfire safety spending. While I understand that this budget year will be very difficult and will require difficult decisions, the investments that you make in wildfire safety will pay a long-term, will pay long-term dividends in the lives and homes saved, and will create a more secure insurance marketplace. I urge you to continue to work with the Governor to safeguard these funds as priorities and investments.

Your support for additional Department staff in the recently enacted budget will be critical. And thank you again for helping us implement these crucial regulatory changes. And again, I'll just say your continued involvement and partnership is going to be essential to support investments in wildfire safety, to work with our federal partners to better manage federal lands and increase funding for home hardening and community grants administered by the State of California. Risk reduction is central to safety and long-term insurance stability, as Senator Dodd's op-ed very, very diligently expressed and was very eloquent. The conversations we've had in the last year's legislative session as we developed the strategy show that we are seeing the problems clearly and you share in the need for urgency.

I just will continue to partner with all of those who want to be constructive in working towards real solutions, and I look forward to continuing to work with all of you to identify additional innovative ways to create a more resilient community to really withstand climate change. Again, thank you for your time and sorry for rambling on, but I know this is of great importance for so many Californians.

Thank you, Insurance Commissioner. That was very in-depth, and I know it's a lot of information coming to everyone and a lot of times it gets kind of lost, but thank you. We've been doing this together for a little while. Last year, we embarked into so many Zoom meetings trying to educate. But there's a lot of important, key elements of your strategy here, and I have to agree with you. I'm not sure I've seen any Insurance Commissioner engage in the way that you have.

There's people on all sides. It's not about picking a winner or loser, but really trying to figure out how do we make sure that insurance is available, it's affordable, and that consumers have what they need. One of the elements I want to share is we embarked last year and we started talking about how do we reform this and conversations and how do we move forward.

I kept saying over and over again, the Insurance Commissioner and I started with the conversations with consumers, and we ended the conversation with consumers because that's why we're here. And now I'm really happy that you mentioned all the people that you've been working with, especially all the stakeholders, from farmers to realtors to fire victims. One of the elements from last year, as I remember our discussions, is that constant sort of mandate to just force the insurance industry just to do it.

And I think you touched on that. It's not as easy as mandating that the insurance companies just insure. I believe you mentioned the challenge that Garamendi had several years back. They're a business and we don't necessarily tell them what to do, but what we do is work with them to ensure that we can find that middle ground and that everyone has what they need as it pertains to insurance. I know in California we have the housing crisis.

This is one of our biggest, I think, crises of the days as well, trying to ensure that we minimize homeless and that we have enough housing stock to put people in homes. Yet last year we found all these developers saying that they're not going to build anymore, stalling their projects because they couldn't get insurance. So even though we don't think one thing has to do with the other, everything is interconnected.

And in particular, we wanted to make sure that there's enough housing stock, and developers were going from planning several either condos or multi-unit housing, to stalling or stopping altogether to transition into single family homes just because of the insurance. And so now that we've been working on this since last year, I just want to thank you because you have brought all the stakeholders together and there's some information that you put out that usually is not easily brought forward to the light.

I think you mentioned that there's one particular company who has been the biggest intervener, and I think it was $9 million that you mentioned that one particular company made just challenging some of these rate-making processes. And so again, people don't realize that the more we stall, the more that falls on our consumers to pay for it. And again, even the FAIR Plan, as we have a real big crisis on our hand. It used to be that it was the insurer of last resort.

Now we're sending everyone to the FAIR Plan. So our goal is to depopulate the FAIR Plan. But what happens if we have a catastrophe right now? We know that we are at the brink of really falling apart. And I think I heard the Insurance Commissioner say that this is it. We're at the end of the road. And so I'm so happy that you've taken charge and really delved deep into all the issues that we're dealing with, in particular streamlining the rate application process.

I know that from the insurer side that's a big deal because they were not writing because there's like a bottleneck. And so hopefully with some of the funding that you were able to get to spruce up your workforce in terms of hiring more actuaries and more analysts. So I want to continue the conversation later on that, how it's working.

I know when we talked last year, it was going to take six months to onboard all the staff that you needed at the time, but I want to see how that's working. How else can we support you in making sure that you have the staff that you need and legislation that you need to continue to move this forward?

I'll continue my discussion, but I want to make sure that I bring it back to the Members, too, and make sure they have an opportunity to ask questions and make comments themselves. So I'm going to start with our Vice Chair. You may proceed.

Thank you, Madam Chair. Thank you, Commissioner. Really appreciate your presentation and all your efforts. Also meeting with our caucus as well and answering a lot of those questions for us.

I've got a few questions, and I'm just going to give you all the questions. And if you need me to come back to any of them, please let me know. So obviously we're concerned with access to insurance coverage. My office, like many of my colleagues here, have received lots of complaints, hundreds if not more, from constituents or agents regarding how hard it's been to consumers to find insurance for both their homes and cars. When will this happen? What will people do in the meantime?

Your slide that you have, "Insurance at a Crossroads," referencing outdated regulations. Can you tell us what you are doing to modernize outdated regulations and how that will help make both homeowners and auto insurance more accessible for my constituents or all of our constituencies? Next one is, in regard to modernizing the outdated regulations, do you believe it will be necessary for the Legislature to enact any statutes, or do you and your Department have enough regulatory authority to make those changes without us?

For example, might you need emergency regulation authority from the Legislator? I don't know. So that's the question. And then news reports suggest the special interest consumer advocates believe our insurance crisis is not real. I can send them to my district and that insurance are walking away from selling insurance in a state with 39 million people in it just to get your Department to approve rate changes.

If your reforms to modernize regulations work, and homeowners and auto insurance become more accessible for California consumers, what effect do you believe this will have on affordability? And can you help explain what steps you are going to be taking to ensure those affordability? And the other part is, I know that a lot of these comments and regulations that you are looking at trying to fix, as we all know, we wish it was done yesterday and not December 2024.

So one other thing that we keep on hearing is the $20 million, let's see, the $20 million policy owner for the FAIR Plan. Is there any way we can get that moving now? Currently, right now it's 20 million per location, and you've talked about 20 million per structure. Any way we can move that now and not wait till the end of the year? Because in the meantime, everybody's sitting idle and not being able to know what to do or there's no plan in place for them. So those are a few of my questions, Madam Chair. Thank you.

Insurance Commissioner, you want to take those questions? Thank you.

Yes, I'll try to remember some of those, Senator Nguyen. And then you can just jump in and ask if I miss it. Around the regulatory timeline, this is a frank conversation that we had with the industry about both of us being real and realistic about making sure that these rates, the rate files, are actually submitted completed.

And it's something that honestly, we both came to the table, that we needed to make sure that these rate filings were complete before we start the clock, because just the back and forth of trying to get the data that we needed and that they were hesitating to give us, and then on top of that, if the intervener came in, which then had another opportunity to essentially hold that rate filing hostage until they were willing to negotiate with us, only exacerbated this problem.

So my Department has the goal of submitting each of these regulatory efforts associated with the different components of the strategy really throughout the year. So our deadline is for a full completion by 2024, but that doesn't mean we're going to submit everything at the same time. We are going to quickly start with the rate review process, which also ensures that the intervener can no longer duplicate issues that the Department has already come up with. They can't simply just cut and paste and say they have issues.

They have to come up with new issues about the actual rate filing and not things that are not associated with the rate filing like they usually do, and then just extends and exacerbates the time. One, we're also in the process of onboarding new staff in our rate regulation branch that is happening real-time.

The efforts around, as you rightfully said, I saw this issue in Orange where we had this beautiful community that was built, fully meets our fire requirements and updated codes, and they still couldn't find insurance. And this is why the FAIR Plan, we're going to move quickly.

And I can have Michael Martinez, that's there, kind of give you the timeline for this important FAIR Plan change, which is, you're absolutely right, moving them from a 20 million per location, which is really helpful that we push for that in the beginning for smaller housing developers, especially for affordable housing developers that have smaller projects.

But it's clear that we need to make this 20 million per building to help our affordable housing developers and our realtors get to building the housing stock that we need to address the housing crisis that we're living in. And like you said, we are at a crossroads here. This is no time to just speak and make bombastic comments. We are really at a crossroads. And we're seeing insurance companies, you seeing the list of insurance companies that have paused new business in California.

They don't want to do that. But at the end of the day, I need to make sure that they have enough revenue to pay out those claims. And if they don't, they're going to contract their business. And that's what we're seeing.

So we're getting them to a point where we're both being honest about the rate review process, hiring the folks we need and making sure that if the intervener is going to intervene, that they're bringing in new issues and that they can no longer hold these rate filings hostage until they feel like they're ready to negotiate.

So I'm going to turn it over to Michael just to give you a few minutes to share on the FAIR Plan. Thank you.

Yes, thank you, Chair Rubio and thank you, Vice Chair Nguyen. And just to add to what Commissioner Lara had stated, is that in regard to the FAIR Plan, we have had, and we will continue to have very constructive meetings with the FAIR Plan staff because it's very important that as the regulator, that we can work in partnership with the FAIR Plan in this case to have the availability and availability of the 20 million per location, which is now in full effect, and then also working with them to ensure the 20 million per building as well.

And the duality here as the per location is, again, in full effect and individuals are able to go to the FAIR Plan and seek that coverage if needed on the structure. Last year, when we were engaging with the Legislature, engaging with a variety of stakeholders as part of the policy discussion, there was an element there of, again, the duality of having the 20 million per structure also timed well with the work that we're doing on the assessment.

In a previous conversation, Vice Chair Nguyen, regarding the assessment, that is a sensitivity that the admitted market does have as the FAIR Plan continues to grow, that as we know under current existing law, that if the FAIR Plan is short on capital cash, essentially, that they will pass the hat around to the admitted market based on market share, that those admitted carriers would need to essentially pony up and make the FAIR Plan hold in order to make claims if there is a catastrophic event.

And so the issues there is that we are having in real-time constructive conversations with the FAIR Plan so that we can, in fact, have both the 20 million per structure and the assessment reform be able to move forward together. Because that, because look, the 20 million per location, again, it's part of the overall negotiated agreement. It will increase liability at the FAIR Plan.

We are all, I would imagine, all on the same page in knowing that that would increase exponentially the potential vulnerability of the FAIR Plan and the solvency. So in order to have it be able to move forward in partnership, that we wanted to be able to also have the assessment reform move forward at that same time period. And again, as what the Commissioner had stated, that is a huge priority for us. We also need to make sure it actually is going to work.

And so that's something that we're working in partnership with the FAIR Plan, having real-time conversations as well as with the stakeholders in the emitted market and the consumer and those who utilize insurance today to ensure that it's workable. So hopefully that answered that particular question that you had. I know that you had several, and I can go on if you would like.

Thank you for that. Any other question?

So is that a yes, we're going to move faster? Okay.

Yes, you bet. Absolutely.

The FAIR Plan has never been there to be the first step, the first policy, right? Like the Chair said, it was always to be the backup. Right now, I think, though, because we're so unstable and the full year that we have right now, we just need to kind of stabilize that market for now until we implement everything else that the Commissioner has mentioned.

So that's why I just want to make sure that we have something in place now and not wait till the end of the year to put it in place.

And just to further just dovetail on staff, Chair Nguyen, we can do all of this. We're doing all of this within my own regulatory authority. So we at this moment, don't see a need for any emergency regs whatsoever.

And we also want you to know that we are moving as quickly as possible and that these regs, again, by, when we say by December 2024, it means that they're all fully implemented through our process by 2024, because you can imagine for a state agency to do that in one year, because it's daunting. But we also understand the sense of urgency.

And as you rightfully said, the FAIR Plan, it has to be the insurer of last resort, has to help us stabilize the market, but it also has to modernize to meet these new needs, just like it did. The FAIR Plan was created after the Watts riots when nobody would insure in Southern California, in those communities. Now it's become the insurer last resort for many of the folks living in the WUI, or now trying to address the global insurance crisis that we find ourselves in.

So we need to help them modernize as quickly as possible. And even just, I have to say, even just the market signals that we're sending, that in California, we're serious about making these reforms, is already ensuring that, "okay, they're serious about making these changes, they're serious to making these much needed reforms and removing these outdated regulations." That in itself is already helping somewhat stabilize some of the aspects of our market. And you can ask industry for those opinions.

But from what we've understood in having conversations, even that alone, and removing some of that red tape, they feel that they're very confident in terms of future investments in our state.

And let me just, wanted to further add to or clarify what the Commissioner had stated, is that the emergency authority versus emergency regulations, we have the existing statutory authority to do what we're doing administratively, meaning emergency regulations and regular regulations. We will promulgate emergency regulations. We do need emergency regulations because it is an emergency. We are in a very urgent situation statewide, and so we will promulgate emergency regulations simultaneously with regular regulations.

We do not need emergency authority because we do have that existing statutory authority to undergo, and just to also point to the Governor's executive order issued on September 21, 2023 is the one major element that we can point to in order to promulgate the emergency regulations. So I wanted a lot of different terms there, but I wanted to clarify that. Thank you.

Thank you, Mr. Martinez. Good. I will turn it over now to Senator Dodd. You may proceed.

Thank you very much. I've got a meeting back in my district, so I'm going to have to get going. But I really appreciate the Insurance Commissioner, I think twice make the commitment that not only would the regs be done, but they'd be implemented by December 24. To me, that is a big deal. I've been telling consumers is we didn't get this problem overnight. We don't have control over all the variables, and we're not going to get out overnight.

But I think this sets a timetable that, personally, I'm satisfied with. But I'd like one more commitment, if we could get it, if you start falling behind on these goals, to let our Insurance Committee chairs or the Insurance Committee members know, so that we're aware of all time what's going on here, because we're appreciative of this movement. But I think it's a trust-but-verify type of situation where we have so many constituents that are in harm's way, we just have to do this.

I don't think it's an insult on the Insurance Commissioner or the Office or anything. It's just doing our due diligence. I appreciate very much what you brought forward today. Thank you. Thank you, Madam Chair, for holding this insurance hearing. I appreciate that.

Thank you, Senator Dodd. Anybody else? I'll turn it over to Senator Marie Alvarado-Gil.

Thank you so much. I'll keep my question brief. Commissioner, you mentioned the WUI or the Wildland Urban Interface area. That was a new term for me coming into the insurance Committee, but not new to the impact. So I'm really looking to understand and further clarify that, what are those parameters that are being established to ensure that those who live within the WUI, those Wildland Urban Interface areas, those are the consumers that are most devastated by the crisis that we all agree we are in a state of emergency. How can we make sure that the focus of relief will hit those in the WUI first?

First of all, Senator, you're absolutely right. Welcome to insurance speak 101. Unfortunately, we all have to become insurance experts now. My goal in promulgating these new regulations is that your district is targeted and prioritized as so many of those Senate districts that have been disproportionately impacted by these wildfires. Now, we've also seen that these insurance crises has expanded beyond the WUI in some other communities. That's what we call those distressed areas.

I'll have Michael Martinez from my team kind of lay out the process by which we are determining those distressed areas. But know that you have my word, after traveling to all the counties, and particularly all the counties around the Sierras, that my goal is to make sure that those counties are the ones that prioritized.

Yes. Hi, Senator. Michael Martinez. So, yes, in regard to what the Commissioner had stated of the distressed areas, and I also, again, would be remiss if I didn't point out my colleague here, Lucy Wang, she is also a Deputy Commissioner and Special Counsel to the Commissioner, and she is also helping take a huge lead in this entire regulatory effort. And so she and I with many others, there are several here at the Department, here in this room.

And then beyond that, we are all hands on deck on this. And so an element of this entire framework is focusing on distressed areas. And the way that it will be generally be looked at, and we have been having conversations, I know your staff, our ombudsman to your earlier point is that the speed dial, speed dial to many folks here at the Department, absolutely for you and your staff, that we would be looking to further crystallize what a distressed area means and looks like.

And so in this overall, again, the framework that we had worked out last fall is that we would be looking at, and this is continued subject to putting together on paper, having it subject to further conversations, public input, because we want to, again, have input from all of you, from interested stakeholders of what the definition, if you will, of what a distressed area is.

The Commissioner had stated that an area, a district such as yours would absolutely be an area that would be primed to be included as a distressed area. Again, we want to look at the fair plan data. We want to be very thoughtful and objective in how we get to what that definition is of a distressed area.

Because, in turn, what comes from, once the methodology, the definition, the creation of the distressed area, from there, then that is essentially the prioritized list, if you will, that the admitted market would be looking at in order to have, as part of that, you heard earlier in the Commissioner's comments, is that no less than 85% of an admitted carrier's footprint in insurance policyholders, their footprint, would be located in these distressed areas. And so it's something where creating that definition, we want to again have it be subject to for public input.

And then once that definition and methodology is created, and we would weave that in as we move forward with rate filings in regard to the conversations with the admitted market, and in turn have it be subject to, as the Commissioner had stated, if an admitted carrier wants to utilize catastrophic modeling and/or the net cost of California-only reinsurance in their rates, then they would be subject to looking at the distressed areas, writing, again, no less than 85% in the distressed areas of the State of California. And then again, we would be, as the regulator, ensuring that they hold their part of the deal.

Yes. Just a quick follow up question. So thank you so much for that information. You talked about FAIR Plan data and the prioritized list, and I just encourage you to make that data available to our Chair and to this Committee as our Chair sees fit as well. And then just in the spirit of partnership, can you just speak briefly on how we are bringing in the voice and the urgency of our insurance carriers to ensure that these goals are attainable for them and the timeline that we are building is also kind of bringing in that partnership and that commitment.

Thank you, Senator Alvarado-Gil, I'll tell you that, after months of dialogue, I don't think there's been another Insurance Commissioner that's brought in all these, not only insurance consumers, but industry leaders and trade associations into these conversations. The last thing that I want to do is work on a deal that then is not going to be implementable or that it's not going to have an impact in terms of insurance companies growing their business once again in California.

And so we've been doing these conversations, we've been having these conversations constructively with all stakeholders, and we're going to continue to do so. And just as Senator Dodd, I know he might have left, but I give you my word that we're going to continue to have these dialogues and keep the Legislature apprised of our progress.

And Senator Rubio can tell you we're on the phone almost every other day and with her team that we're so grateful that we have this partnership so that we can really close this out, hopefully close this out by the end of the year, in December. So you have my word we're going to continue to keep you abreast. We're working with the industry. We're working with all stakeholders.

This all would be in vain if the industry feels that they can't implement any of these things or the things that we're implementing are not going to work to get them to grow their business in California. I know many of them are there and maybe they can express their attitude towards this during public comment.

Any other comments? No? Okay. Thank you. Well, I really just want to take the time to thank the Insurance Commissioner and his staff for coming and everyone that joined us today. I just want to point out a few things. I believe my Vice Chair stated that some people believe that we're not in a real crisis and that this insurance issue has been made up and it's made up by the insurance companies. I mean, I just want to point out that they're a business.

They're in the business of making business. So there's no way that someone would stop writing insurance because that's how they get paid. And so I'm kind of sad that that's kind of out there. But to Insurance Commissioner Lara, I want to thank you. I know it's not a perfect solution and everyone would want to tweak it, but I think this is the best solution for right now.

And I think that at the end of 2024 seems so far away, but we've been dealing with this crisis for a long, long time and this is better than what we had before. But I do want to just encourage you to see we can push a little harder to get us there a little faster, and to piggyback on what Senator Dodd said, if there is a time where you run into a situation where you need the Legislature's help, please come to us.

I know funding for you is going to be key to continue to onboard your staff, the workforce, to make sure that you have what you need and that we don't put out things that are not attainable. So at any time you need our help, please reach out to us. Because we're happy to push on our end because I think that this is something that our consumers are, the chorus is getting louder and louder.

And as I said previously, when you and I have had these conversations, we always start with consumers and we end our conversations with consumers. So I hope that our consumers out there are listening. We're trying to figure out a way that it's sustainable, it's long term, it's not a solution that we can just fix now and then it falls apart later. For me, a big piece of this is the housing industry.

I hear it from realtors who have deals on the table and then they fall apart because they can't get something adequate. But I also hear the insurance industry, they're trying to come to the table. There's also some concerns there. But I know what I know now is that you've done a great job, Insurance Commissioner, in bringing all the stakeholders to the table. And maybe not everyone will agree 100%, but I think it's a good way to start.

I've never seen consumers, industry, the Insurance Commissioner and everyone in between come together at least to have a conversation that's yielded some positive results. So I want to thank you for your time. I want to thank your staff and to everyone for joining us today, and so this meeting is now adjourned. Thank you so much.

At this time, we will now move on to anyone wanting to provide public comment. Public comment is limited to 1 minute. Please state your name and also your affiliation as well. Thank you.

Good afternoon, Vice Chair. Armand Feliciano, representing the FAIR Plan. I just want to give a quick update on the FAIR Plan since it's a topic for this, part of the topic of this hearing. So the FAIR Plan is doing its due diligence. It is all hands on deck for them as well. Some numbers I can share with you on policies: They are now up to 350,000+ policies applications from 2022. There were about 300 applications a day last year.

They were up to about 900 applications a day. As far as the volume of calls, they received about 50,000 calls last month. As far as brokers and new users of the FAIR Plan, they had registered 9000 registered brokers. They're up to 40,000 brokers using the FAIR Plan. Now real quick, what the FAIR Plan is doing to manage the demand. They did change their operating system or application system working with the Department of Insurance. That was a necessity that had to be done to manage the demand.

Unfortunately, when you have new demand and increased demand and new system and new users, it has led to customer issues. And I'm pleased to report today that two thirds of the customer backlog has been reduced for the FAIR Plan. They continue to work with CDI and Consumer Services Division. They've doubled up their staff. I think their staff is at least 200+ now, plus 80 temp to help manage that demand.

I'm going to ask you to wrap it up a little.

So real quick.

I know because the discussion with the FAIR Plan is a big topic today, but just kind of wrap it up please.

In closing, I just want to say that FAIR Plan is prepared to do its part and continue to collaborate with the CDI to move the Sustainable Insurance Strategy forward. Thank you so much.

Thank you. Sorry. So that was just a little extra for the FAIR Plan since they are the main topic, but everybody else, please, if you can help us, stick to the 1 minute.

Got it. Thank you. Thank you. Madam Vice Chair and Members, Seren Taylor, on behalf of the Personal Insurance Federation of California. I really just want to thank the Committee for all the work you guys have done, even over the past few years. I think, you know, what we've seen today is amazing when you think about where we were seven months ago and the market spiraling. We had no solution in sight and now here we sit.

We have really agreement on the problem and the solution with the Governor, the Insurance Commissioner, key consumer groups, the industry. It's really remarkable progress in a short time and that's thanks to all the work that everyone's doing here. Also want to recognize the great collaboration from the Department and the Commissioner and his team. We look forward to continuing to work with them to implement his strategy and we are optimistic that this will result in increased availability and reliability for Californians. And PIF is committed to being a full partner in this process.

Thank you.

Thank you, Madam Vice Chair. Laura Curtis, on behalf of the American Property Casualty Insurance Association, just want to start off by thanking this Committee for holding this hearing and really being committed to providing stability and availability for the insurance market. California's outdated insurance framework is failing families and consumers. We commend Commissioner Lara for his work in taking steps to address this crisis.

But as you know, urgent action is still needed to enact regular reforms to restore the insurance market and safeguard consumers' access to coverage. This includes streamlining the rate making process and eliminating obstacles that have led to this crisis. We remain committed to working with Commissioner Lara, the Governor and legislative leaders to promote comprehensive reforms to ensure all Californians have access to insurance. Thank you.

Thank you.

Good afternoon, Vice Chair and Senators that are still here. Peter Ansel from the California Farm Bureau. Just wanted to say thank you for continuing to lean into this issue. We appreciated the work we did with Senator Rubio last year on Senate Bill 505 and work we're doing with Senator Alvarado-Gil this year in the space. It's an important issue for our members. They're directly impacted by wildfire and by the impacts that come from that, including their insurance availability and their ability to run farming businesses.

So thank you for just continuing to keep a focus on it. And thank you also to Commissioner Lara for the work that he's done. We appreciate the working relationship we have and the access to the Insurance Commissioner's office as a large consumer group and purchaser of insurance policies. It's, after water, the second most important issue for our members. So just here to say keep leaning into it. It matters to our folks. Thank you.

Thank you.

Thank you, Madam Vice Chair. Dan Dunmoyer with the California Building Industry Association. Just want to echo the Chair's comments as well. We represent the companies that build 9 out of the 10 housing units in the state. About 130,000 of our consumers need insurance to buy a home. Today, we still are not building condominiums in most of the state because of this insurance crisis. So for us, it's a very real crisis and real for our consumers. We support the Commissioner's plan 100%.

We have no issues with the strategy he has. The only issue we have at all, if anything, is timing. So we would love for the FAIR Plan 20 million per structure to be done as soon as possible. We could have used it six months ago, and if there's no legislation needed, we're not trying to create it.

But if there is anything we would support and work with the Commissioner on that. Last thing I would say is, just so you understand, when the Commissioner raises rates 30% for pick company's name, let's say the Hartford who left the market yesterday, that is so much better for our customers because they're being offered 6900% more in England. So to take no action is bad for consumers. So again, applaud the Commissioner. Thank you, Madam Vice Chair.

Thank you.

Hello, Committee Members. My name is Carmen Balber. I'm the Executive Director of Consumer Watchdog. And I have to say you abdicated your oversight responsibility today because no one asked the Commissioner the most important question, which is whether the 85% commitment that insurers move back into distressed areas in California will actually mean access to real, affordable, comprehensive home insurance for Californians. And all indications are that it will not, because the Commissioner based his plan on the legislation that was circulating but didn't pass last year in August.

That plan allowed insurers to meet their commitment by selling a FAIR Plan-equivalent policy, which is high cost, low benefit, and not what all of your constituents are clamoring for access for. That's the first question you should have asked him. The second question is whether he intends to waive that commitment for any insurer who can't meet it. Who says they can't meet it? And that's the other loophole that was contained in the legislation.

And we can only assume it's in his plan because he hasn't contradicted it. We urge your Committee to make the Commissioner answer those questions, because otherwise, this is a big bait-and-switch on Californians. They will not have access to the policies they're seeking. Thank you.

Madam Chair and Members. John Norwood, on behalf of the Independent Insurance Agents and Brokers of California. Our members place insurance with the 90 other insurance companies that people generally don't talk about, and also with some of the big 12. I can assure you that those other 90 companies are on the sidelines right now, and have been for well over a year. Some of our biggest members have maybe one market for homeowners insurance in their shops, and these are international brokerage firms.

So our members are desperate for a return to a competitive insurance market where insurance is available to our customers so we can satisfy the needs of those customers. We're very supportive of what the Commissioner is doing and the direction in which these new regulations are going, and we're here to provide any assistance we can. Thank you very much.

Thank you. Any other public comments? Seeing none. I want, again, on behalf of the Chair, thank everyone for your participation and cooperation. We have now concluded the agenda, and the Senate Insurance Committee is now adjourned. Thank you.