Assembly Standing Committee on Insurance

Welcome to the Assembly Insurance Committee informational hearing on the California Fair Plan. Although the fair plan has existed since the late 1960, the Association did not garner much attention until the Northridge earthquake in 1994 and once again following the historic wildfires almost five years ago. These catastrophes produced major losses and highlighted weaknesses in the voluntary insurance market. After the Northridge earthquake, the Legislature responded with the creation of the California Earthquake Authority. And after the wildfires, it seems like we're still feeling the effects and impacts.

On one end we have constituents unable to secure property insurance, and on the other we have insurers stating that the risk outweighs the reward. When the voluntary market isn't working as intended, the number of fair plan policyholders go up, and the length of time these policyholders stay in the fair plan increases. The fair plan was created as a temporary safety net, not a long term solution for our constituents.

I convene this hearing today because I believe we still have too many Californians seeking refuge in the fair plan. Why is this and what can we do? What is working? What isn't working? How much more can the fair plan take on? These are all questions I'd like answered today. More importantly, I would like to walk away from this hearing with information on what Members can tell constituents when they come to us asking for help on where they can get insurance.

As the insurer of last resort, the fair plan should not be the answer. Our constituents need property insurance, and insurers want to provide insurance. So we have to come together to find a solution. I'd like to frame issues as simply as possible as we dig deeper into one component of property insurance, the fair plan. I'd like to welcome my Committee Members and provide my Vice Chair, Assemblyman Essayli, an opportunity to make a few opening remarks.

Thank you. Hello, can you hear me? All right. Good afternoon, everyone. Thank you, Madam Chair. I appreciate the opportunity to speak, and I am new to the Committee, and I look forward to working with you on this issue. I believe this will be a bipartisan issue. The effects of the policies we're discussing in this Committee affect Californians up and down the state. We want people to be insured, but we also don't want them to be bankrupt in the process.

And we all share our desire to have a functional and stable insurance market and that they do not go insolvent and that they're not forced out of business in the state. So we share, I think, a lot of concerns, and I hope that this will be productive in the beginning of a good relationship with the insurance Commissioner, to hopefully find solutions that work for all Californians.

That's how I'll be approaching this, and I know my colleagues will as well, and I appreciate it and look forward to the dialogue that we're about to engage in.

Thank you, Mr. Vice Chair. Please note, Members, we will take questions and answers after each panel. I'd like to begin this hearing with the first panel today. We have the honorable Ricardo Lara, insurance Commissioner of the Department of Insurance, who will be here momentarily, and with him, Michael Martinez, Chief Deputy Commissioner and Legislative Director. So I think we can start with Michael. Come on up.

Apologize. I'm trying to slow walk it because the Commissioner is presently in the building right now and heading up to, and there he is. There he is. Thank you very much. As a staff Member.

Welcome.

Are we ready? Oh my God. Now I have to find my talking points. But you know what? Just give me the. I was trying to not to use paper. This is what happens. Okay. I tried. I'll recycle them, I promise. Thank you. Good morning, Madam Chair and Mr. Vice Chair, it's great to be here. And esteemed Members of the Committee, thank you for inviting me here today. I'm joined by Michael Martinez, my Chief Deputy Commissioner and Legislative Director.

As the elected insurance Commissioner of the nation's largest insurance market and fourth in the world, I have taken significant steps to safeguard the availability of insurance for consumers and maintain a competitive insurance market under the authority granted to the Insurance Commissioner by the California voters in passing Proposition 103 back in 1988. Our experts at the Department of Insurance are entirely focused on improving the lives of Californians.

My department's investigation of complaints and oversight of the conduct of insurance companies following the wildfires has resulted in $469,000,000 returned to consumers since 2018. These members are benefits that would have not have been recovered without our actions. I was asked by the Committee to provide an overview of my department's role in regulating the insurance industry and moreover, the California Fair Plan and my recent actions to modernize the fair plan to be more responsive to the needs of California's consumers and businesses.

But before I get into that, I want you to give me a couple minutes to just let you know that there's a bigger picture for why we are here today. For years, California has warned insurance companies repeatedly to prepare for the impact that climate change is having on risk and our ability as individuals, communities, and the state really to prepare for this changing climate.

I am proud to have launched the California Sustainable Insurance roadmap with the United nations representing the first time California and indeed any us state has laid out a strategic vision for the insurance sector to address climate change. As we combat the impacts of climate change, this roadmap outlines the strategies and actions we will take to protect consumers to create a more sustainable insurance market. Without this comprehensive approach, the insurance sector will not achieve sustainability and our communities will not achieve climate resilience.

I believe having a robust and competitive insurance market is really critical to protecting Californians from these increased risks, including our climate intensified wildfires. I believe insurance companies that threaten to withdraw from wildfire risk regions of California really defy the central purpose of insurance, which is to incentivize home and community hardening behaviors that will ultimately reduce risk.

That is why I partnered with our Governor and his Administration, including several of his state emergency preparedness agencies, for the first time again engaged with stakeholders thoroughly over three years and used our extensive expertise to create the first in the nation insurance pricing regulation that requires all insurance companies to recognize and reward wildfire mitigation efforts made by homeowners, businesses and communities. For example, under my regulation, insurance companies are required to reward policyholders actions like upgrading roofs and windows, defensible space, and living in firewise communities.

Transparency is another important benefit of my regulation requiring insurance companies to provide consumers with their property risk score and importantly, a right to appeal that score. I have also advocated for increased state budget funding to help residents and businesses pay for mitigation efforts necessary for them to retain their insurance coverage.

I believe funding predisaster mitigation for local communities is critical to the future of insurance availability, and I commend the Legislature and the Governor for their ongoing investments in grants for hazardous fuel reduction and community resilience and risk mitigation. These projects are critical if we are to be able to live in an insurable world. Every dollar of pre disaster mitigation saves $5 to $7 in avoided future insurance losses, thus helping make insurance more available and affordable.

In December 2019, I implemented a moratorium law that I proudly authored while I was in the California State Senate that protects wildfire survivors by preventing homeowners insurance companies from nonrenewing policies for those living adjacent to or within a declared wildfire emergency for one total year. Recognizing that it's absolutely critical to give consumers some breathing room after a wildfire disaster, my action has also gives insurance companies a chance to assess so not to make quick decisions or rash decisions, especially dropping their longtime customers.

To date, I'm proud to say since 2019, I have protected more than 4 million residential policies from nonrenewal by their insurance company this measure has been successful in protecting consumers while providing stability to the insurance market. However, it is important to note that this law does not provide the same one year moratorium for nonrenewals to our businesses and our commercial corridors, which is an important note. We know that our businesses are the economic backbone to our communities across the state.

And for those consumers that may not have lost their homes for a wildfire, they may still live in temporary housing because they have no running water, working electricity and accessible infrastructure. That's why we also sponsored a Bill enacted in 2021 to help give additional breathing room to these consumers after a devastating wildfire and help them get back on their feet to rebuild their lives.

The focus of this hearing today is on the California Fair Plan, and I want us to keep in mind the following facts during our discussion today, 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 Fair Plan, more than 115 insurance companies write homeowners coverage and more than 200 insurance companies write commercial coverage.

These numbers have remained consistent since I took office in 2019. The fair plan again was established by the Governor and the state Legislature more than 50 years ago as a critical insurance safety net. It was statutorily created following the Watts Riots in Los Angeles when property insurers left downtown and the inner city core due to civil unrest. California is not alone in giving consumers access to residual insurer of last resort market, which will cover cover you if no insurance company will.

Today, at least 32 states plus DC give consumers this option. And it is important to note that the California law creating the fair plan several decades ago made insurance companies, not taxpayers made insurance companies, not taxpayers, responsible for ensuring access to coverage under the oversight of the insurance Commissioner. And I believe the fair plan has not kept pace with California's changing consumer insurance needs. It must continue to progress and progress and modernize to protect consumers today and in the future.

Therefore, I have taken several actions to modernize a fair plan to meet the changing needs for consumers and businesses. As such, ordering the fair plan to increase its coverage limits for residents and businesses for the first time in more than two decades.

Implementing a new state law allowing the fair plan to cover agricultural businesses requiring the fair plan to offer greater coverage options to residents, including a traditional homeowner's policy in addition to its current limited peril policy and last year holding the department's first ever investigatory hearing on the fair plan, we heard from Californians across our state who are counting on the fair plan to be there in the long run, including homeowners associations, recreational youth camps, and our agricultural businesses.

The fair plan will tell you that it faces major challenges, and I believe it must rise to meet these challenges. Given that we are at a time with growing peril linked to climate change and wildfires, the fair plan's mission still rings true to this day. I am committed to ensuring that the fair plan meets its mission of ensuring access and availability to insurance for those Californians who need it in a transparent way. My Department has identified areas where the fair plan can and must do better.

At my investigatory hearing last July, I identified three main areas for improvement. One, the fair plan needs to provide insurance to homeowners and businesses unable to obtain coverage in the insurance market. Two, the fair plan needs to offer more coverage and higher policy limits to California homeowners and businesses. Third, the fair plan needs to expand its own personal and resources to meet consumers'needs and make structural and operational changes to achieve these goals.

I do want to acknowledge the continued support that I received from Members of the Assembly and the Senate insurance committees for my work in addressing the issues of policy limits that are presently too low for some of our homeowners associations and other businesses. This is a top priority for me and my Department, and we are doing our due diligence right now, so thank you for standing with me on this issue.

The legislation that created the fair plan more than 50 years ago provides strong oversight by the insurance Commissioner. My goal continues to be actionable solutions to help Californians with the statutory granted authority. I have used this oversight to conduct market conduct exams for the fair plan's underwriting standards, practices, and procedures, including completing a market conduct exam of the fair plan's handling of smoke damage claims and investigation of a fair plan in not providing fire suppression discounts to policyholders.

That should have been since the Department approved those discounts back in 2011, conducted an operational and financial surveillance exam of the fair plan, strategic direction, governance oversight, operational challenges and financial controls in place.

I examined the appropriate increase of coverage limits for personal dwellings and commercial properties covered by the fair plan and again responded to consumer complaints regarding the fair plan's day to day operations, such as delays in payment of policyholder claims, response to consumer complaints, and drop consumer calls, many coming from your very own constituents. My Department staff has identified a series of action steps that the fair plan should take to meet its missions and modernize to meet today's needs and perils as the insurer of last resort.

These include best practices for consumer services governance, capital management, financial oversight, underwriting and rating and claims processes, among others. However, my oversight does not extend into overseeing the fair plan's day to day operations. The responsibility over the daily operations of the fair plan lies within its governing Committee of Admitted Insurance Companies. The Legislature and the Governor intended that the insurance Commissioner and the insurance industry have defined yet distinct roles in the oversight of the fair plan.

I look to leaders of the fair plan, consisting of the admitted insurance market, to exercise their authority and to work with me to address these ongoing issues. Again, the history of the fair plan really reflects an ability to grow in order to meet the changing demand of our consumers and businesses that depend on it as a last resort for insurance.

That's how the fair plan has expanded over time, from its initial offering of only property insurance policies to homeowners to include policies for businesses, business owners and now our farms, wineries and other agricultural businesses. Sometimes that motivation to evolve has come from the insurance Commissioner, the Legislature and or the Governor. And sometimes the motivations come from the fair plan itself on a larger scale.

I continue to work with the insurance industry to hold them accountable and to work to ensure a competitive, voluntary insurance market in our state. As you know, many rural residents in our states are retirees on fixed incomes, working people, working families and those pushed out of the urban core.

When people cannot obtain affordable insurance and have no incentive to harden their homes and communities, it can lead to a downward spiral of increasing community wildfire risk, falling home values, Low property tax rules and less revenue for basic services like emergency response and school facilities for our children. I don't have to repeat this, you all know this already. You're seeing this happen in some of your communities. No one person should bear the cost.

We are all in this together to strengthen the insurance market for all, and not just a select few. We have to make sure that all Californians have the same access to insurance, especially our most vulnerable from our community.

And although under Prop 103, insurance companies alone decide whether to offer insurance in areas of high wildfire risk exposure, my Department and I continue to negotiate with insurance companies so that they can continue to write in parts of the state that are of higher risk for wildfires or continue to write in a particular business sector where there is continued need.

In sum, I like to say Mother Nature is our best advocate we have on climate change, and as one looks at wildfires, heatwaves, recent atmospheric river floodings, and more to come on that by the way, one cannot deny the reality that we are facing or need for immediate action. Further risk reduction and closing protection gaps between insured and uninsured losses for vulnerable individuals and communities are vital for strengthening California's climate resiliency today and tomorrow.

And to truly protect our communities from climate change, we have to put equity at the center of our agenda. Closing the protection gap is critical. So it is not just the wealthy that can recover or rebuild after an upcoming storm, wildfire and heat waves, but actually everyone. So thank you again for the opportunity to testify and it's a great pleasure to be back in the building, which I haven't been in so many years.

Thank you, insurance Commissioner. We appreciate you being here with us today. So now we're going to open up to questions and answers. Assembly Member Grayson.

Thank you, Madam Chair and Commissioner.

How is the FAIR plan funded? How are rates set, and how are limits determined? And that would include both for homeowners and commercial. Okay, thank you.

All right. Thank you, Mr. Grayson. Michael Martinez, Chief Deputy Commissioner and Legislative Director, and appreciate that question. Thank you. And so, overall, the fair plan, decades ago, when it was statutorily created by the Governor and state Legislature, it was created several decades ago as part of a collective of all the admitted insurance carriers that if they provided one, say, Iota, one policy, that they would be compelled under existing state law to be a part of the California FAIR plan.

And so if and when there was a need for funding or an assessment that the admitted carriers would be there to back up the fair plan. The fair plan is not a governmental entity. It is, again, a collection of the state's admitted carriers that are, in turn, regulated by the Insurance Commissioner under the Proposition 103 prior approval system passed by voters several decades ago. And so that is generally in regard to the FAIR plan.

The FAIR plan also has a statutorily created governing committee consisting of major admitted carriers in which they all have a vote, the admitted carriers to, in turn, oversee the operations and governance of the FAIR plan, the rate setting under Proposition 103, passed by voters in 1988, several decades ago, it gave the Insurance Commissioner the authority to regulate rates.

And what that means is that in California, insurance companies that want to charge a certain rate or a higher rate, they would have to come to the department in order to seek prior approval, approval from the Commissioner, from the Department of Insurance. And we have a team of experts, actuarial and analytical experts, that take the time to look at these rate filings provided to the Department. And there's a tremendous amount of back and forth in these.

And so, again, if an insurance company, whether a homeowner's insurance company or a commercial insurer, wants to charge, again, a certain rate, they would have to come to the Department to say, hey, this is based on an insurance company's. And the insurance company, by the way, is the one that needs to come to the Department and seek the rate that they believe they need.

And that's the back and forth that goes between the Department, team of experts with the insurance company to, again, actuarial and the analytical in order to determine a rate that is not excessive, not discriminatory, and something that could pass muster of Proposition 103. And so we have done Yeoman's effort to get filings in and out as soon as we can under Commissioner Lara's leadership.

He and I personally have been meeting with insurers to triage a lot of high priority filings in order to get them out, because at the start of the day and the end of the day, that is the Commissioner's role and responsibility, in addition to, of course, tantamount is consumer protection, is also to ensure a robust and competitive marketplace.

And so we have worked night and day to be able to turn around a series of many, many filings because under the prior approval system to get them back out the door. And so that's something that as rates are set under the Commissioner of the Department, we continue to be devoted to that effort.

Hopefully, then, thank you very much.

Thank you, Deputy Commissioner. I think Assemblyman Essayli has a question.

Thank you, Madam Chair. Good afternoon, Commissioner. How are you?

Great. How are you?

Thank you for being here. And I just want to start by saying I'm glad you're here. And I can just tell you we are genuinely interested in working with you and your team to solve this issue. We do see that there are significant challenges facing the insurance market, and we're here to help you work that out. So my questions are more aimed at identifying the issues. So before you fix a problem, you have to acknowledge it first. So it's the first step.

Today we're focused on the FAIR plan. And I'm glad you acknowledged that the FAIR plan is an insurance of last resort. It's meant to be the exception and not the rule. And so if we have a lot of people running to the FAIR plan, which we've had, looks like over 100,000 people in the last few years go into the FAIR plan, to me, it means something's not working in the admitted market. Right. So there's a reason that people are going to the FAIR plan.

They don't want to be there. Right. They'd rather get an admitted product. And one of the issues you identified is you said that the insurance companies in your assessment failed to plan for climate change risk. I think were your statements. And I think really what we're alluding to is wildfire coverage. I mean, wildfires have really devastated the state in the last few years. I'm looking at a chart here. Insurance companies paid out $20 billion in 2017 and 2018. That's a lot of money.

It wiped out 26 years of profit for those companies. So it's a huge loss. I think we should acknowledge that the industry has taken a huge hit and they have to be able to be in business. So one of the questions I had for you, if we are interested in modeling for climate change and properly assessing and calculating risk, is your Department open to allowing them to use catastrophic risk modeling?

Moving forward, and I'll note that it appears that we're the only state that doesn't use that form of modeling, and it might be the best way to assess future risk.

Thank you. That's a great question and agree with your assessment. And this is why it's the important balance act that we're playing at the Department of Insurance, which is securing that we have a strong insurance market to pay out claims. Right. And so we want insurance companies to be successful, but we also want to have the strong consumer protections so that people want not only get their claims, but they get them at the expected time, and that they also aren't waiting to be able to rebuild.

Right. And so this is the constant Ying and Yang that happens within our Department. The issues with catastrophic modeling, especially when it comes to wildfire, the technology still is too new to really dictate how a wildfire is going to really react. As we know, they're becoming much more voracious. They're skipping through freeways, rivers. And so it's technically difficult right now to be able to understand what kind of algorithms are using, especially if those algorithms are not necessarily being shared with a Department.

We are also trying to figure out if these catastrophic models are going to also be used to discriminate who gets insurance and who doesn't. And so playing my Department and I are not comfortable yet really allowing insurance companies to use one to add one more tool into the rate filing that's going to contribute to the cost of a very costly product, especially for folks living in the wildland urban interface.

But it's something that we're trying to tackle at the National Association of Insurance Commissioners, where we've created a Center for catastrophic modeling to help departments really understand what is the technology that's out there, what are the algorithms that are being used, and how can they be incorporated in the future in a rate filing process right now, given the consumer protections that we have and the fact that insurance continues to be not so affordable for folks living in the WUI, I'm not comfortable allowing insurance companies to use these catastrophic models when it comes to wildfires because, quite frankly, it's still very new and they're very unpredictable.

A change in the weather, a change in wind, can send the entire direction of the fire somewhere else, and then again, trying to safeguard consumers from losing their coverage because now they're all of a sudden in a supposedly high wildfire risk area that, by the way, have never had fires before or nowhere near a fire. And so this is the constant struggle that we have with these cap models. I'm sorry to give you a long answer.

I'm trying not to be what I used to be when I was up on your, but I'm trying to explain to you that it's something that we're looking at, but we're not prepared to do at this moment, just given that it's so uncertain how these models are being used and many of those we don't have access information to.

Go ahead.

I appreciate that and I hear your concerns, and we'd love to work with you to address each of those. I don't know that the way we're doing it now is necessarily the best way either, because right now, by law, they're required to use the average historic losses for the last 20 years.

Right.

It's not always the best indicator of the future. And so if your Department got access to these algorithms and could review them and be confident in their scientific reliability, is that something that would give you more confidence to explore? I'll just note that California is the only state that doesn't use it. Every other state does use this modeling. And the insurance industry, I mean, they want to stay in business, too, right? So they want to use accurate modeling.

They don't want to go bankrupt, and they indicate this would be a better way to do it. So if we could overcome those concerns, is that something that you'd be open to?

Absolutely. You're absolutely right about the fact that we're using old historic data to determine what these rates are or where we are at most risk for wildfire. And with the changing climate, those historical data points may not even be adequate anymore. And so this is why we are partnering with other states. Just as you say, we're the only state that doesn't allow them. California also is the only state that has some of the most strongest consumer protections.

And through Prop 103 gives us a very clear process. So we're going to have to look at the entire way of how we determine where these wildfire urban interface areas are, just as we're about to figure out on flooding as well. Right. These flood maps are old, and so we need to update our own data before we start.

And that's the other thing that I forgot to mention about these catastrophic models, is that if they're using antiquated data, that no longer really reflects the certainty of where these perils are happening. That also puts consumers, I believe, in a disadvantage because, again, they're already paying really high premiums for living in these communities, I have to be very careful. Obviously, I'm committed, I'll tell you now, I'm publicly committed to giving the insurance companies the tools they need.

But it cannot be another tack on the cost for consumers who already cannot afford their insurance coverage.

The concern, I have commissioners, I understand the desire to keep costs low. I mean, California is already unaffordable in many aspects. It's a very expensive state, so I get that. But my concern is that by not allowing the admitted market to adjust their rates to reflect the risk, it's pushing more people into the FAIR plan. It's driving up costs in the FAIR plan, and ultimately, the FAIR plan is not solvent.

If, in fact, a huge event were to hit what I consider the highest risk insured are in the FAIR plan, I mean, there are people that can't get insurance at the high risk pool. So if a big event were to hit the FAIR plan, it's going to have to require an assessment on the insureds, and that's ultimately going to raise rates on the back end. So either way, it's going to go up.

It's just a matter of, do we do it in a gradual and measured way, or is it going to be a big hit? And I'll just end with this. Madam Chair, I just want to give you an example, and I'm not saying I have all the solutions today. I'm just identifying the issues. And we want to work with you in this. And I really believe the fate of the insurance market is in your hands. So you're an important guy.

You're an important guy, and we want to help you and work with you. But I just want to give you this example that was brought to my office's attention, where in an HOA for condos, they were paying about $40,000 a year for full coverage. And then the next year, they got a quote for $2.5 million.

Yeah.

And they ultimately went with partial coverage. So they aren't even fully covered and it still cost $1.0 million. And the effect of that was everyone's HOA assessment went up by $500 a month. Can you imagine that?

You have a mortgage, you have these expenses, and then the HOA increases your monthly dues by $500. That could drive some people homeless, right?

Absolutely.

Absolutely. So now imagine if we were to allow a catastrophic model that yet we don't have the data for that. Now captures this homeowner this complex. It's only going to increase again, add to their policies. So on the HOAs, we'd love to come back and we are currently doing a full assessment and I have a whole team specializing working on HOA policies because we know this is the next issue that we have to tackle.

And unfortunately, that story repeats itself over and over throughout the entire state. The other thing too, when we talk about rate setting and taking account for the rates is the fact that also insurance companies weren't taking account for the actual mitigation that consumers were doing. So you're right, the rate that they were setting wasn't appropriate to the actual risk because many of these folks had brought down their individual risk by doing the home hardening and doing the defensible space. But that wasn't taken into account in the rate setting either.

And so why we need to have, and we're more than happy to have this conversation and meet with your staff about how we could bring some more transparency around the rate setting process, but also additionally have them take into account and why my regulation now, again, the first of its kind that's going to mandate insurance companies give people discounts for the home hardening that they've done and actually give them their fire risk score, which by the way, they will just give you a risk score.

Back in the day, they wouldn't tell you how they got it. If they can appeal it, they wouldn't tell you why their neighbor got coverage and they did. And they live in the same community. And so now we're going to have, as the rates are coming back in July, I believe they have to resubmit, we're going to be starting to get the data of one, how they're going to start giving these discounts because we want to incentivize people.

At the end of the day, what I can do within my tools is help insurance companies and communities bring down the risk for everybody. You bring down the risk. You keep insurers writing in the community, you get more insurers writing. You create the market mechanism where everybody's competing for people's business. And that's what we want to do. But we can't do that without bringing down the risk for everyone. And so that's what we're working on. But this is a longer conversation and.

I appreciate, thank you for those comments. And absolutely, we want to lower risk, but we're never going to eliminate it. So with that, I have other questions I'll reserve, but thank you, Chair, for allowing me to ask those.

You're welcome. I believe Assemblyman Fong has a question.

Thank you. If I could ask kind of a broader 30,000 foot level question. How do home insurance rates and the level of coverage in California compare to other states? I'm sure you're talking with your fellow colleagues in other states. How does that compare?

That's a massive question. I don't have specific figures on other states. I can tell you because of Prop 103 in California we have a very deliberate process and where we really put the consumer first in terms of making sure that the rates are fair. They're not discriminatory and that they're actually sound. And so we have a whole cadre of insurance experts, actuaries and legal attorneys that look at that.

So when an insurance company puts in the file as Mike was saying it goes through the entire process. I don't know where we at. I can certainly get that data for you. Because I don't know what other states I can tell you. And something to be very proud of is that we have some of the strongest consumer protections for consumer insurance consumers in California.

I appreciate that. If your deputy or someone your staff could provide that certainly would kind of flesh out kind of a holistic perspective for us. I know the FAIR plan as reference is the insurer of last resort. If it was treated like any other licensed insurer what would the Department of Insurance do? In your list of solutions? What do you prioritize in terms of trying to get the FAIR plan to be solvent and fiscally sound?

Absolutely. Thank you. And again it's really only 3% of the market. The entire market that's in the fair plan. 97% of Californians have access or are currently covered by an emitted insurer. And so the number one thing that I heard after the wildfires and going up and down the Sierras, San Diego, you name it, San Bernardino, was the fact that the fair plan.

Once an insurance company sent you to the fair plan which is run by the insurance companies, they couldn't get a comprehensive policy just as they would in the emitted market. And so what would happen? Know Mr. Lara is going to get sent to the FAIR plan. They're only going to be very limited in your coverage. But the insurance company will cut. You're going to have to buy all this wraparound insurance to fully cover your property.

And every time you go into another contract with an insurance company guess what? That's another rate hike on the cost of your insurance. And so the first thing that we said is let's make sure that the fair plan. If you're going to get sent by the insurance companies that run the FAIR plan, let's make sure that there is a full coverage option for you so that you can not have to get all this wraparound insurance and give them some reprieve if you're going to send them.

We are all in agreement here that we don't want folks to stay on the FAIR plan. We can all agree on that. But if there's no other option, the FAIR plan has to meet the needs just as they did back during the Watts riots in LA. So we need appropriate coverage limits. We need reasonable consumer. Oh my God, I'm blanking. Don't get old. Consumer protection, consumer coverage limits. We need a comprehensive policy option for them and consumer relations.

I mean, back in the day, people had to, they couldn't pay with credit card, for example. Right? And so all these things as you can imagine, and I wish I could take you back in time to just hear constituents completely. They've lost their home. They're sent to the FAIR plan and they're just trying to figure out, can I get somebody to call me back? How can I know to be fair about the FAIR plan?

They've worked on the customer service side, but I want them to stop fighting me in court and work with us to actually meet the needs of the consumers and then work on bringing down the cost so that those people can get out of the FAIR plan and go into the emitted market. But at the meantime, that's the reality folks. People can't afford their coverage.

And climate change is again, as the Senator was saying, forcing us and forcing the fair plan to modernize just as we did with wineries, with farms, that we moved quickly to make sure that they were also eligible for the FAIR plan because they were operating somewhat without insurance. We have to figure this out about summer camps and all these things that are happening in the wildland urban areas where they're also having a hard time. And so the changes that we're proposing are critical for the fair plan.

But we also want to strategize with them to figure out how we get people back in the emitted market, which is where we want them, with the consumer protections, with the regulatory authority that we have to be able to make sure that people are taken care of and that we have a strong and vibrant insurance market.

Well, as someone represents Kern and Tulare counties, I certainly appreciate. The AG land and certainly the solutions you put forward in trying to expand coverage. I think our larger concern, I'm sure I won't speak for other members, is that I think while only 3% now the trend is more and more will probably be put onto the fair plan. Or will be forced to enter or take on the fair plan because of the dynamics in the market right now.

And so I think for us as a committee, certainly would appreciate you continuing to work with the insurance industry to fix some of the regulations. I think that currently need to be kind of looked at, whether it would be cash traffic modeling or reinsurance to stabilize the market, increase availability, which I think is something that I think we all kind of share for homeowners, HOAs, businesses alike throughout the state. I will just ask one last question.

In terms of, to transition to something specific to CAL FIRE, have you or your Department been in contact with CAL FIRE in regards to the updates to the fire severity zone maps and how will that affect.

Absolutely, we work with CAL FIRE hand in glove and with all the emergency preparedness agencies, especially on the upcoming wildfire risk maps and the impact that that's actually going to have potentially on rates again, because guess those maps are now going to be larger and people are going to be more exposed. So what does that mean for consumers? What does that mean for businesses, for HOA policies?

So we are having those discussions with them to make sure that those maps are indeed truly indicative of what is happening and that we don't disproportionately impact folks that may not have to be included in these wildfire maps, but we have to update them because that's the reality, I guess.

To follow up just real quickly, what would your recommendation or advice be to communities affected by these new maps? Should they be working with your office, with CAL FIRE? With both, you can send information offline. If there's a particular person in your department.

I would tell those consumers to call us immediately. And your district staff will be hearing from, if you haven't already, from our team, I've doubled the amount of outreach folks. We have teams dispatched to every part of the state and every one of your assembly districts to make sure that we're having those conversations.

A lot of these ideas that came about actually came from us going out into the community, listening to homeowners that have lost their homes and who were at their wits end trying to figure out what to do, how do they rebuild? And so a lot of these ideas, I would say 100% of the ideas came about from these meetings.

Thank you, Commissioner.

Thank you.

Okay, we have time for one more question for this portion of the hearing. Assemblywoman Schiavo.

Thank you so much. Scoot up here. Sorry. So thank you so much for being here and for the work that you've been doing. I know we've been in touch about it. It's a huge issue in my district, as you know. And I know that you all have been working for years, and some of that work is now coming to fruition. I'm very interested to see how it rolls out and how it works. And the HOA issue is just personally a huge issue.

Our HOA was kicked off our fire insurance had to go on a catastrophic plan, had multiple $1000 assessments, and our HOAs were raised over $200 a month. On top of all of that, we have lots of seniors on fixed incomes, and I do not know how they're doing it. So I appreciate the work that you're doing to look into HOAs. I think there's also a bill that's looking at raising the cap around HOAs so that they can access the FAIR plan more often.

I wondered, I've been talking with a lot of folks about this issue. I know that you have the new regulation that's going to be looking at people being able to lower their rates because they increased defensible space and home hardening. Anecdotally, I've heard from someone who's done everything they were asked to do and then still didn't get a lower rate. And so I'm wondering, how does the enforcement happen around this? What's the appeal process?

How are people able to, how can we track whether or not that's actually happening?

No, thank you, Senator, for that question. The regulation hasn't gone into place yet because we are asking for the insurance companies to resubmit the rate filings. So they're going to come to us to explain to us how they're doing these discounts. And so I think the deadline is July.

It's April.

April. April. There you go. April. So they're going to be submitting those, and then we're going to be working with them, with our Department to make sure that they're enforceable, that they're actually what is intended from the regulation. So that process is just happening. The regulation was approved in October, so we're trying to move as quickly as possible to get the insurance companies to resubmit their files with the updated discounts.

Thank you.

All right, I want to thank you, insurance Commissioner Lara, for being here. We did give him the option to zoom, and he said, no, I want to be here in person. So thank you for flying up, and thank you, Chief Deputy Commissioner Martinez, for being here. We appreciate. Okay, our next panel is the California FAIR panel. We have Victoria Roach, President of the fair plan, and Armand Feliciano. General counsel with public policy advocates.

This is not a silo issue. The Commissioner was right. There's larger pictures involved, and we'd hope to connect those dots for you today. It's cross cutting issues. You have housing issues involved here, farming, you name it, it's cannabis. So I think there's implications for all that. And I think for today, the prayer plan wants to lay out sort of the implications so you have better information in front of you as you decide on how to handle these public policy challenges.

So with that, the fair plan is prepared to collaborate with all stakeholders, consumers, regulator, and the Legislature. With that, I want to introduce the Fair Plan President Victoria Roach.

Thank you, Armand. Thank you, Madam Chair, Members of the Committee. So, as Armand says, our goal here today is to present you with some information and facts, because the issues in front of us are very complex and they are all related.

And as we go through them, it's important to keep in mind what effect our actions have, not only on the Fair Plan and the people who are insured by the fair plan, but on constituents across the state who may be affected by the actions we're taking. So I'm not sure who's running the slides. Oh, sorry. Thank you. Okay. Can you go to the next slide, please? Thanks. Sorry.

So just to give you some background information we've talked about, the fair plan was established by the Legislature in the 1960s in direct response to the Watts Riots. It was later expanded to cover the brush fire peril in certain designated brush areas and subsequently expanded to cover all high risk policies in the state. So there's two points I want to cover here. One is that we were established by the Legislature.

The Legislature was very clear that we were designed as an insurer of last resort to cover basic property coverage for consumers who couldn't get insurance in the normal market. So two components of that. One, basic property insurance. Basic property insurance, by definition, only covers specific perils such as fire. It is not intended to be a comprehensive homeowner's policy.

The Legislature established us that way, and the statute is very clear that that's all we are to offer, partially because we shouldn't be in competition with the direct market. Right. That's not our role. The second piece is we are insurer of last resort. So if you look on the right hand of the slide, it can show you the way we're set out in statute is that first a consumer should go to the admitted market or the voluntary market.

Those are people who write insurance in the State of California, regulated by the California Department of Insurance and are licensed to do business here. There's 118 of those insurers in the state. If they can't find insurance there, the next line of defense is the surplus lines. Surplus lines are less regulated. They concentrate in high risk pools. If they can't find insurance in surplus lines, then they're supposed to come to the California Fair Plan.

So that's how we're set up in the statute, and that's what we try to follow. Next slide. So the California Fair Plan is an Association, and we are backed by the voluntary market in the State of California. We are not a state agency. There is no state or taxpayer funding that goes into the fair plan. We bring in premiums, and from those premiums, we're supposed to be paying our losses. That's kind of how we're set up, right.

We are a not for profit, so there's no profit margin in any of our rate making. We don't add that in. We're not for profit organization. Another key factor, we are not subject to Prop 103. So because Prop 103 handles the insurance industry and there's actually a separate insurance code that established the California fair plan, we're not subject to the regulations of Prop 103. We also cover properties regardless of wildfire exposure. And we'll talk a little bit more about this.

But as an insurer in the voluntary market, I can pick and choose, right? I can say of you five, I'm going to take two of you, and that's enough exposure for me in that area. The other three of you need to go somewhere else, and I can take two over here so I can limit my high risk pool. We take everybody, right. If everybody's in a high risk area, we take them all regardless of their wildfire exposure. Higher risk means higher rates, right.

Because we only ensure the high risk pool. So if we go to the next slide, we can look at kind of where we are today. So this is the last four years in our growth, right. We've more than doubled in the number of policies in the last four years. During that same time frame, we have grown over four times in our exposure. So we ended 2018, we had about $50 billion of exposure across the state.

We ended 22, upwards of $200 billion of exposure in the state. So smaller part of the market, but big implications in terms of what our exposure is and what could happen. We are currently under capitalized, knock on wood right.

If we had a large fire today, we would not have the money on hand to pay our losses. We're just not set up that way. We don't keep a surplus like a regular insurance company, and we are under capitalized to cover those losses, which means that money has to come from somewhere, right.

The way we're established by the statute is if we don't have money to cover our losses, we go to the voluntary market and we send them a bill. And based on their market share in the homeowners market, they pay part of that bill. Right.

So we're going to talk a little bit more about what that means and how it works. But part of what we're going to talk about today is the fact that we're under capitalized. And why are we, because we are required by statute to have actuarily sound rates. In simple terms, that means when I go to the Department of Insurance and say, here's how much I need to charge, I have to include all of my expenses and then my projected losses.

So we talked a little bit about cap modeling before right. Cap modeling says today, the way I do it, I look back over the last 20 years. Well, 20 years ago, climate change was not what it is today, and the wildfires aren't what they are today. But I look back 20 years and say that's how many losses I had. So that's what we're going to use in our rate modeling, in our rate filing. Cap modeling allows me to look forward. Right. And there's a lot of people who use catastrophe modeling, and there's a lot of science behind it. Nothing is a true science right.

Just like earthquakes, we can't predict them, but there's a lot of science that goes into those catastrophe modeling. The biggest issue for us, and you'll hear it throughout this presentation, is we do not get to include all of our expenses. So our single biggest expense as an organization is reinsurance. So we buy insurance to share the risk.

Right. We go out and we buy insurance. So we pay so much of the losses, and then we have insurance to help us pay the rest of them. Right. We are authorized by statute to purchase reinsurance. We are required by statute to have actuarily sound rates, which means I have to include all of my expenses in that rate making. We are not allowed or permitted to include it in our rate making, which means I'm under capitalized because I'm not charging the rates I need to charge for that high risk pool. Next slide, the consumer market, the insurance market continues change. There's no question about that.

Right. And we're making a lot of changes internally and externally to address those changes. So in the last three years, we have changed our coverages to offer extended dwelling coverage. We've increased our limits on dwelling coverage, we've increased our limits in commercial, we've implemented online credit card payments. We've extended coverage to farm risks and wineries. We filed with the Department to offer the home hardening discounts they were talking about.

We're looking to launch a monthly pay option by the end of the year to make it easier for consumers to pay their premiums. At the same time, internally, we're looking at things to modernize. In the last three years, we've gone from 50 employees to 200 employees. And we're in the process of upgrading and changing our IT systems to support the needs so we can make our changes quicker and get them out to the consumers. Next slide.

As we look forward, there are additional issues on the table, issues that are very relevant and don't have easy answers to. One is that CDI did order us to sell homeowners policies. That is in conflict, we believe, with the statute that says we are only to offer basic property insurance. Also, it puts us in direct competition with the voluntary market, which also by statute, we are not permitted to be.

There are two new issues on the table, and you've seen the letters and the information coming out. One is the HOAs we understand are having a hard time finding coverage. No question about that. Right.

And we need to find solutions to that. The solution on the table is for us to change our limits and offer $20 million per structure. So we're currently at $8.4 million per location. This means that if I was to change our structure, our limits, and we were to offer $20 million per structure, and there was a homeowners Association with five $20 million buildings, I'm now going from 8.4 million to $100 million worth of coverage in an under capitalized situation, firstly.

Secondly, we have done extensive research on this since the issue was raised to try to figure out what would it take for us to be able to offer this coverage. We've worked with our reinsurance brokers. They've gone out and talked to our reinsurers. The reinsurers are not comfortable with those kinds of limits.

As it is today, if I was to offer that kind of limit, it would be carved out of our reinsurance, which means that if we're insuring $100 million or $200 million homeowners Association and that burns in a fire, we're not going to be able to pay those losses. We're going to be sending bills out to the voluntary market to pay those losses. It's just the way it works because we can't get reinsurance on those risks. Right.

There's also a Bill on the table that would amend our statute to require us to cover cannabis, including cannabis farms. Reinsurers aren't real happy about that either. The thought of cannabis farms and wildfire areas, they're not real comfortable with. So they've also told us we'd have to look for other solutions for cannabis farms. So as we're looking at these issues, and again, real issues, we have to figure out how to make sure that the fair plan doesn't become the insurer of first resort.

But we stay as the insurer of last resort and we stay in a capitalized position that allows us to pay our losses so that we don't have to go out to the voluntary market for that money. Next slide. So what does that look like? Right. So what would happen is with these changes, as we become more and more and evolve to insure a first resort, a couple of things happen, right. We go out and we assess the voluntary market, right.

And the assessment could happen whether or not we do these things, it's just how big it is and how quickly it happens, because we're underfunded today. If we had a major catastrophe, we would have to go out and assess the market, right.

And we're not talking about millions of dollars, we're talking about billions of dollars with a B. And every insurer in the State of California who writes property insurance, those 118 Member companies would get a Bill and they would in turn have to pay that money. Right.

So what could happen then is you could have companies who can't afford to pay that money, or they become insolvent, or they just decide the risk is too much and they stop offering insurance. So now we've got fewer choices for insurance because companies aren't writing and we're already seeing some of the effects of that, right.

And the HOA's, that's part of the issue. Nobody's offering that coverage in the voluntary market anymore and they can't get it, so they have nowhere else to go. So we're already seeing some of that happen now, it would just get worse as we continue on this path. The other piece is that those insurance companies are going to pay eventually.

That money is going to trickle down to every constituent in the State of California, whether they live in the wildfire area or they live in suburbs or inner cities. They're going to have to help subsidize those wildfire risks that the California fair plan is covering, because somebody's got to pay the money, and that's kind of, unfortunately, the bottom line is we have to figure out who's going to pay that. So if we go to the next slide, I'll give you a little more background on reinsurance.

So on the left hand side is what we would like the tower to look like. Doesn't exactly look like this today, but the way this would work is the fair plan would have money to cover losses. If we had actually sound rates, which would include the net cost of reinsurance, we would have enough money that if we had a major catastrophe come through, we would be able to pay the losses until it hits a level, the reinsurance kicks in.

We would not go out to the voluntary market until we exhausted what we had and what the reinsurance offers, and then we would go out to the voluntary market. On the right hand side, what you're seeing is, as we start, if we're expanded to offer insurance where there is no reinsurance available, the fair plan will cover what we can cover. And then the bills are going to start going out in an assessment form to the voluntary market, because there's no buffer with the reinsurance.

And that is a real issue for us as we move forward and we look at kind of, what are the options and how do we solve these issues? Is, again, we're back to who's going to pay, right? At some point, it's going to go to the voluntary market. But do we want to go to them directly, or do we want to try to keep these buffers between when the losses are happening between us and when the voluntary market has to start kicking in money.

Okay, next page. So I'm going to turn over to Armand for a minute to talk a little bit about the history of the legislation here.

So the history of the assessment is nothing new. In the mid 1990s, the fair plan did assess the market, $260,000,000. So what the Legislature did was pass a law AB 1754. I'm not going to read the entire quote, but it's pretty clear then that they didn't want all consumers paying for the losses of the fair plan. So under 1754, it says that the fair plan should have adequate rates. Plain English talk.

All their expenses should be included, including reinsurance, so that they can cover these high risk pools. And so that's the law today. It's not been changed. So I think it's a very important context as we look at this today. What it looks like, what's changed today is we're not talking $260,000,000 anymore. Victoria will proceed and kind of paint the picture for you what that looks like. But it could potentially be in the billions.

And at that point, we have to think about the fragile insurance industry market right. I think we're all seeing that today. And so while the loss remains today, currently the federal plan does not have adequate rates to cover this risk.

Thanks, Armand. Okay, so next slide. This slide is really to depict where our concentration of risk is and what it looks like, because these numbers are really big numbers. Unfortunately, the areas are really small areas that we're talking about. So these are the five highest concentration of risk in Northern California and the five highest concentration of risk in Southern California.

Not necessarily the 10 highest in the state, but just to divide the state in half and show you what we're looking at, each of these areas represents a seven mile quarter circle. So if you look at a quarter circle and you look from the center point to the edge, it's 7 miles. It's not a big area. Right.

If you look at the area in red, that's Lake Arrowhead. That is our highest concentration of risk. We have almost $8 billion of exposure in Lake Arrowhead. We cover about 50% of the market in Lake Arrowhead, which means that, God forbid, we had a devastating fire in Lake Arrowhead. First of all, even with reinsurance, there's no way I have enough reinsurance to cover that.

I'd be sending out a Bill of about $6 billion to the industry, who's already, at that point, trying to manage their own losses in that area. And now they're going to get an assessment from the fair plan for $6 billion. Hopefully a very unlikely scenario. But when you look at a real fire, Paradise, right?

And you take that same fire shape that happened in paradise, and I move it about 40 miles south between Yuba City and Grass Valley, with my concentration of risk in that area today, if that same fire burned exactly the same shape in that area, I'm at over $5 billion of exposure. We can't buy that much reinsurance. We don't have that kind of capital on hand. It falls to the market, and that's the way we're structured. Right.

We just need to know as we continue to try to expand what we're covering, it becomes more and more of an issue. So if we look at the next slide, we try to kind of put the big picture on here, right? So we see the fair plan as the bridge, right? We're the support for the people who can't get insurance in the private market. And you can see we are at $220 billion of exposure right now across the state. The bridge is already cracking. Right.

We don't have actuarily sound rates. We can't get the net cost of reinsurance in our rate making approved, even though it's in statute, that we can purchase it. And the statute requires to be actuarily sound. We can't include that expense. So our rates were already under capitalized. There we have reinsurance, which is good for us and good for the industry, but we're looking at expanding beyond where we can get reinsurance.

What happens is, as we start layering on top of this and the bridge collapses, it falls on the voluntary market. And when it falls on the voluntary market, it gets pushed out again to all the constituents in the state, not the ones who are living in the wildfire areas, but the ones who are living in the suburbs and in the inner cities, those who are paying already for their insurance.

Now they're going to subsidize these people who can't get insurance and who are coming to the California Fair plan. We recognize there's not an easy answer, and this is a balancing act right.

Again, our goal here today is kind of lay out the facts and give you the information you need as you go back and talk about what are the solutions and where do we need to find them. If we go to the last slide, these are some low hanging fruit, if you will, right.

No easy answers, but if we had actuarily sound rates, which would include the net cost of reinsurance, we would be able to pay our losses at a level that would mitigate some of that risk to the voluntary market of us going to the voluntary market and asking them for money, right.

If we could include catastrophe modeling in our rate making process, our rates again would be more adequate and more reasonable for the high risk market that we ensure. And lastly, if we can look for ways to streamline the rate filing process, it is complex, there's a lot to it. But when you're looking at 18-24 months to get a rate filing through, you can't operate like that when you're under capitalized already. So that's some of the kind of the low hanging fruit we can look at.

But across the board, I want everybody to understand we are committed to our mission. Right. We're committed to being the insurer of last resort. We're committed to providing insurance for people who cannot get insurance in the normal market. We are committed to working with the CDI, with the legislators, with the stakeholders, to find solutions to these problems. We just want to do it in a fiscally responsible way for the California Fair plan for our policyholders and policyholders outside of the California Fair plan. Thank you.

Thank you, Ms. Roach. Okay, I'm going to open it up for questions, and I'm going to go first. Could you talk a little bit about how you determine the amount you request when you're requesting rates?

Oh, rates.

A rate increase.

A rate increase, yeah. So I am not an actuary.

That's okay.

But basically what we do is we look at all of our losses, we look at all of our exposure that we have out there, and we look at all of our expenses, and we model it basically to come up with what is the appropriate rate. We do it really the same way any insurance company.

There's nothing different about the way we look at our rates than the way the private market does, other than, like I said, we have different statutes in terms of what we should be able to include in our rate making.

Okay. And then when was the last time you filed for a rate increase from CDI and how much did you request and was it approved?

So the last approved rate filing, I believe, is in 2020. And I'm going to guesstimate. I don't know exactly.

That's fine.

I believe we requested 35.6% and we got 15.6%. And then we have a current rate filing out there right now.

Okay. Do we have any other questions? Thank you. Assemblement Wood.

Thank you. The $220,000,000,000 is in exposure in 2023. That's your exposure. That's not the value of the property that people own. Or is it?

It's how much people are insured for. So it's all of our limits for those 272,000 policies, if you take the limit of insurance that all of them have and add them together, it's $220 billion.

But we know that these are not comprehensive policies. So the value of the property, do you see where I'm going?

Yes.

Do we have any estimate of what that's like?

We don't. That's an excellent question. So we do know a lot of our customers anecdotally go out and buy differences and conditions policies in the market. We don't track that. So we don't know how much they bought. All we know is that the broker who's selling them, the policy, with the consumer has decided this is how much they need for dwelling coverage. That's what we know.

How much of your exposure is wildfire related?

About 55%.

And the other is like flood or.

It'S just in urban areas. So it could be homes that have a lot of losses that are coming to us. It could be homes that are not in the insurable condition that other companies will take. We don't really know why they come to us. We just know that they're not in designated wildfire areas.

And then kind of my final couple of questions here. Sure. How much percent by percentage growth have you seen in the number of policies you've issued in the last two years?

About 12% year over year. That's a pretty big jump.

It is a pretty big jump and I'm seeing more and more. What I'd love to see is a map or some data points. I'd like to know where the overall policies are roughly percentage wise throughout the state. So I represent the north coast. We had pretty catastrophic losses in the Tubbs fire. We've also had other fire losses as well. And we have more and more people who never had loss. Entire zip codes being canceled.

Actually, I heard recently of someone in an area where CAL FIRE had actually gone in and done one of those projects that we talked about years ago, gone in and done that work. So it's mitigated from a risk perspective by CAL FIRE. Yet companies still cancel policies in those areas. Also hearing that people who've had canceled policies are also having things like boat policies canceled, which you don't cover boats in the fair plan, do you?

No, we do not.

So if you have a fair plan and you now lost your boat coverage because you live in a high fire area.

And it is ironic, I guess, if you're having losses, you're going to have to go back to the admitted carriers to help make up for that. But the cancellations are contributing to the problem. So I'm guessing it's a smaller price for them to pay than it is to pay the losses than it is to actually insure these properties. Or they'd be insuring them.

Yes, except for they're managing their exposures in those areas. So maybe on an individual case basis until we get to an assessment. So I guess it's 61 and a half a dozen the other. Right. I don't think they're managing that exposure based on not writing here, knowing that they could get a huge assessment here. It's an issue for them. Right.

They need the rates in order to offer. That's what they say anyway. I'm not going to speak for the private market, but we need to do something to have them writing in those areas. I think that's what you're saying too, right?

Yeah.

I'm with you there. We can get you more information, more detailed information by county or by zip code, in terms of what we're writing in different areas. We can get that for you.

Yeah, that would be helpful. And the reason people are being pushed into the fair plan, because they're losing coverage. They're even losing coverage where they've done home hardening, wildfire mitigation. And like I said, in an area where CAL FIRE has gone in and done work, and that's CAL FIRE's work, saying, we've done wildfire mitigation here, and yet they're still losing coverage. So that's hugely concerned. If it's good enough for CAL FIRE, why isn't it good enough for the carriers? Thank you, Madam Chair.

Okay, Assembly Member Davies.

Thank you. Good afternoon. My district is south Orange County, north San Diego, and we've been dealing with this quite a bit. And just in my Orange County area, we have lease 50% of the choice. So I'm getting incredible amount of calls coming in saying, listen, RHA now is $1,000 a month. We've got a substance of $25,000 where it's just, I mean, it's just unsustainable. And they're like, what are we supposed to do?

We can't sell it because no one's going to buy it and we can't afford to leave. And we're kind of in this position now. And I've been listening to this and I appreciate this. So what I did is I talked to a different district, and I know you've kind of covered this, but one of the main thing was, what type of plan is it to address that this doesn't become a monopoly?

And the other one is that if we're getting 12% increase in doing these policies and fair plan, is there a point where the more you have, and if we don't have buyers and things like that, that the price would go down.

So just like every insurance company, if you don't have losses as you're doing, your rate making, there's always that potential, right? So I can tell you right now, we have a pending filing with the Department for commercial. We actually do have a rate decrease pending with them. So the longer we go without wildfires, we've had a couple of good years, which has helped us. And without those kinds of losses, it absolutely gets mixed in with your rate making and your rates start coming down.

Okay. And then another point I want to touch upon.

Yeah, okay. Thank you. Another point I want. You said that 55% of these policies are from fires, forest fires, compared to the other 45 is more urban and so forth. What about splitting up these two because they are completely different. You may have some issues with homes in urban areas, but you're not saying that you can't live here if you don't have this insurance. And especially with HOAs, you don't have a choice. That is a law. You have to have insurance when you have the HOA.

It's a legal document, but those that don't. So I'm just trying to figure if there's a way of know. Obviously we need a lot of know. The disconnect obviously, with CAL FIRE and what they're doing and is this will help, this will work just like when we give rebates and that, but then the insurance companies saying, no, that doesn't work. To me.

I think right now that's probably one of the number one things we need to do is get everyone in the room and say, listen, we've got to fix this. These people cannot be leaving. We don't even have housing for people coming in. We're going to take people out of their housing and then try to find something. So I think there's a lot of different things, but I don't think that the communication is going where it needs to be.

So I think sitting in a room with the insurers, sitting in the room with CAL FIRE and figuring out what's going to work. So when we say, here's your checklist, if you do this, you can be insured and they know that it's worth it. And perhaps the state can go ahead and actually help with funding on something like this.

Just like when they do give rebates, when it comes to water, doing artificial lawns, things like this, we have money and we just need to make sure instead of maybe constantly starting new programs, that we take some of the money we have here in the budget and put it onto things that are existing problems and starting putting money to places that don't have problems now. So thank you so much.

Yeah, thank you. And the only thing I'll comment on that is that just to make sure I was clear when I talked about the rate making. Right. It's rate making for the entire state, but the people that are in the wildfire areas are being charged a different rate than the people that are being charged a higher rate than the people who are in the urban areas just because of the risk. Right.

And we're trying to move toward a more sophisticated rating that allows us to rate that wildfire risk and give some of, at least some of the discounts or the considerations for some of the improvements the property owners have made, both in commercial and in personal lines. Thank you very much.

Yeah, thank you. Assembly Member Fong, do you have a question?

Yes, I just want to kind of drill down on what you told Assembly Member Wood. So in terms of projected growth over time, you said that you saw a 12% increase in policies last year. Was that specifically in the wildfire space because 55% of your properties is wildfire, or is that 12% overall?

It's 12% overall. We're seeing more growth in what we would consider moderate wildfire area. So we have a pretty heavy representation already in the highest wildfire area. I mean, there's only so many homes and businesses in that area. So we have a pretty high concentration in those areas already. But we're seeing it in the moderate and low wildfire areas. We're seeing some in the urban areas, too, but we're seeing more in that moderate area.

And do you expect that 12% trend to continue or to grow? I mean, it's not linear planning wise.

We have planned for another 12% this year just because in the last two years, that's what we've seen, and we don't see any changes in the market right now that would tell us that's going to be different this year than it has in the last two years. So we've planned for about an 11 to 12% growth this year also.

Okay, and my last question, you kind of alluded to it when speaking with Assembly Wood, but when CAL FIRE does a mitigation, if there's an HOA that it's mitigating, if there's new construction, that, of course, is probably going to have higher hardening, it's hardened more for wildfires versus an older structure. Should those things be factored in to the calculation of things? I know right now it isn't, but should it be?

It absolutely should be. So we do offer a discount for firewise. So if they've been designated as a firewise community, they get a discount for that. We have already filed with the Department for home hardening discounts. So we're waiting for approval on that, hopefully, and we can get that out to the consumer so we can offer it for home hardening. And part of our filing that's in play right now offers us a new wildfire risk scoring which actually takes into account property specific characteristics.

So if I have buildings that are already with fire resistant materials, if I've done some of the defensible space issues, that's already going to be factored into their rates. So absolutely everything the consumer can do to mitigate that risk we believe should be a factor as we go into the rate making process.

Thank you very much.

Okay. Thank you, Mrs. Roach and Mr. Feliciano, we appreciate you being here today. We're going to move on to the next panel, which is Clifton Brown with the surplus Line Association of California, who will discuss the surplus lines market and how it works with the fair plan. Thank.

Good afternoon. My name is Cliston Brown, and I am the Vice President of public affairs for the Surplus Line Association of California. I would like to thank the chair, the Vice Chair, and the Members of this Committee for this opportunity to brief you today regarding the State of the Insurance Market and the surplus line industry's role in that market market. First, I would like to provide some brief background on who we are and what we do.

The Surplus Line Association was created in 1937 and it was appointed in 1994 as the California Department of Insurance's Surplus Lines advisory organization. In this role, we review every surplus lines policy filed in the State of California to ensure compliance with all pertinent laws and regulations. In 2022, approximately 7000 California licensed surplus line brokers placed 913,113 policies totaling more than $16.3 billion in premiums.

It is important to note up front that state law requires our Members to perform a diligent search for an admitted carrier that will cover a risk before placing that policy in the surplus lines market, except in cases where the Commissioner has predetermined that the risk is unavailable in the admitted market. The code, California Insurance Code considers three declinations from admitted carriers to be prima facie evidence that a diligent search has taken place.

In some instances, admitted insurers will make a business decision not to cover a particular risk or class of risks. These are usually in cases of distressed, new, complex or high capacity risks. There are many reasons why an admitted carrier may reduce its insured concentration. It may find it is too concentrated in a particular area or the risk profile might have changed due to forces beyond its control, such as climate change or government action.

In these cases, consumers need options or they will be left without the insurance coverage they need. Per state statute, when an admitted carrier cannot be found to cover a risk, consumers and their agents have the option to turn to the surplus lines market. If neither an admitted carrier nor a surplus line insurer will cover a property risk, the consumer may turn to the fair plan as the insurer of last resort. The overwhelming majority of risks that go into the surplus lines market are commercial risks.

Very little personal lines business goes into the surplus lines market. Over the last five calendar years, homeowners insurance has made up only 1.65% to 3.4% of total surplus lines premiums in California. Although we do not have data on the value of homes insured in the surplus lines marketplace, it is our sense from the geographic locations with the highest concentration of surplus lines, homeowners policies that most such homes are high end dwellings with owners who need more coverage than the fair plan can provide.

In these cases, the surplus lines industry is filling a role that is no longer being served by the admitted market, which is exactly the role the State of California has envisioned for our industry. Our purpose is not to supplant the admitted market. Rather, we are here to provide options to consumers who might otherwise not be able to obtain the level of insurance they want during a market dislocation like the one we are seeing now.

But from time to time, surplus line insurers like admitted carriers will make a business decision to pull back on a particular coverage if they cannot underwrite the risk. And we have been seeing that happen in the homeowners market.

When admitted carriers began pulling back on homeowners coverage in the mid 2010s, the number of California homeowners policies placed by surplus lines carriers surged to more than 60,000, while the number of homeowners policies going into the surplus lines market increased for several years starting around 2015. We have begun to see those numbers decline considerably in recent years, even as premiums have increased to meet the growing risk posed by wildfires. As you know, the ongoing challenges presented by climate change have led to more fires with increased severity, which means greater potential for losses.

One of the results of that increased risk has been a decline in appetite by both admitted and surplus line insurers for issuing homeowners policies in vulnerable areas such as wildland urban interface zones.

Our data from the last few years shows a significant drop in the number of homeowners policies that have been placed by California licensed surplus line brokers, with totals dropping by approximately 5000 to 6000 filings per year for the next three years, then inching back up from 25,000 in 2021 to just under 30,000 in 2022.

In short, tens of thousands of homeowners policies that had previously been placed in the surplus lines marketplace either went back to the admitted market or into the fair plan or lapsed without replacement. When fewer admitted or surplus line insurers are issuing homeowners policies, the inevitable result is that demand for fair plan policies will increase. That appears to be precisely what we are seeing in the marketplace today.

The fair plan is being inundated by consumers demand for homeowners policies that are no longer being written in the admitted market or surplus lines marketplace. At this time, I would be glad to take any questions you might have. Thank you again for this opportunity to testify here today about our industry's role in ensuring a healthy, fair and competitive insurance market for California consumers.

Thank you, Mr. Brown. I'm going to open up to questions. Members, do you have any questions? No? Okay. Thank you so much for being here today. We greatly appreciate it.

Thank you very much. Thank you.

Okay, the next panel will hear the insurer perspectives. With us, we have Mark Sektnan, Vice President of the American Property Casualty Insurance Association, and Seren Taylor, Vice President with the Personal Insurance Federation of California. Welcome, gentlemen.

Thank you and good afternoon, Chair and Members, I'm Mark Sektan. I'm Vice President of the American Property Casualty Insurance Association, which is a national trade representing companies that write homeowners, auto, commercial, workers comp, all lines of property casualty. I want to thank the staff for their very thorough briefing document. I hear it's gone viral, so I'm excited about that. I also would like to thank the Commissioner and Ms. Martinez for coming and the other presenters who are going to join with us to work together.

I know you've heard a lot about reinsurance today, and it seems to be a common theme because it is such an issue. As you know, reinsurance is insurance that insurance companies buy. In fact, actually, reinsurance companies buy reinsurance, too. It's a way of spreading the risk. And a lot of this is done globally. And because it's done globally, what you'll find is that the global economy and globally events have a huge impact. Right now, reinsurance is at a historically high level.

It's never been this high before. The other issue that insurance companies are facing quite dramatically is inflation. We all see inflation. We've all faced it. But many of the items and products that insurance companies need to rebuild, homes to replace, cars, so on and so forth, those rates are much, much higher than the consumer price index.

So when you have the fact that in addition, California does not allow insurers, it's the only state in the nation doesn't allow insurers to include the cost of reinsurance in their rates. So when you put all this together and then add California's relatively complex rate making system, which has been talked about a lot here, as being relatively slow and not quick to deal with these types of changes, you do see issues in the market. Insurers want to write insurance.

California is the fourth largest economy in the world. We do want to be here. But you can't write policies of the cost of providing and paying for the claims that you need to pay for is more than the rate that you can get. And that's a problem we're facing here. We do know that there are issues in the HOA world. We're hearing a lot of this. You're hearing a lot of this.

I heard a builder talk to me the other day saying that he would be much happier to pay 100% more in the admitted market than having to go out to the surplus lines market, which may cost him more than 1600% more than what he's paying for lesser policies. Reinsurance has a huge impact on not only the price, but also the terms and conditions.

One of the terms and conditions that is fairly significant is a reinsurer may limit the number of policies that can be written in a particular wildfire area or have wildfire risk. So what may happen? The Commissioner talked about his moratorium. So think about it. 4 million homes have been taken out and have been locked up. So what happens with the other homes that are in this area?

If an insurer buy either requirements for their reinsurer or because they need to reduce their appetite for risk, has to non renew homes, there aren't a lot of homes left to do that. So sometimes you see situations like Assembly Member Wood is seen where there may be mitigation, but because of the number of homes that are locked up in the moratorium, there may not be the flexibility within the company to do that.

The other thing we have to remember is the moratorium is based on zip code. It's not on people who are actually affected by the wildfire. There's a whole set of laws different that affect and provide coverage and protection for those who, these are people who are adjacent. Some of these zip codes, particularly when we have large fires that have large geographic areas, you may have homes that are 50, 60 miles away from where the fire was, but are still getting this type of protection.

Again, it's a tool that limits the insurer's ability to deal with their book of business. We talk a lot about mitigation. Mitigation is key. We do know that a lot of these HoAs communities were built before the wildfire codes came in, and that's a huge issue, and they're tough to mitigate going back. We also talk about the fact that there is both home hardening, which is important.

But as the state fire marshal said in the meeting a couple of years ago, where she had an aha moment, she said, I realized that community mitigation is actually more important than individual mitigation. You can do all the mitigation to your house, but if your neighbor doesn't do it, it may not matter. So we need to think of this more broadly. Mitigation is the answer to doing risk. Risk reduction is the way to reduce cost. Thank you.

Okay. Good afternoon. Is this on? Yeah. There we go.

Make it a little closer, like a Verizon commercial.

Can you hear me? Good afternoon, Madam Chair Members. Seren Taylor, on behalf of the Personal Insurance Federation of California and the National Association of Mutual Insurance Companies, greatly appreciate the opportunity to share our perspective. Mark and I were sort of talking in the back that so much of what we were going to say got covered, and maybe we should jettison our talking points here and just get to conversation. But I feel that I'll be somewhat repetitive, but it still bears some additional coverage.

And we did provide the Committee with a detailed comment letter that you may wish to review. I'll try to summarize that here, but in short, really what it says. It's a challenging time for everyone, right? 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.

And as was alluded to earlier, insurers lost over $20 billion, which wiped out two times their combined underwriting profits for the prior 26 years. So several factors have led to this increase in severe wildfire events over the past few years. Climate change, along with population shifts towards the wildland urban interface, have intensified the impacts of wildfires. Fortunately, more focus is being placed on ways people can prevent or mitigate damage to their homes, and we've seen significant new funding in recent state budgets to increase wildfire resilience.

I know many of you played a role in getting that money. In addition, Commissioner Laura team is working diligently to stabilize the homeowners' insurance market, especially with respect to wildfire. The CDI has been approving Homeowners' rate filings that incentivize insurers to recognize the value of mitigation efforts taken by homeowners and communities. However, while the progress is good, it hasn't been enough. And we all recognize there are too many people struggling to find the coverage they need. So the question is, what should we do?

And from our perspective, there are some challenges associated with the current rules. We've talked about it a lot, but these rules were developed 35 years ago, long before the advent of climate change impacts, the era of technology that brought us smartphones, smart cars, smart climate models. I think we would respectfully disagree with the insurance Commissioner saying that this technology is not understood. It has been around for a long time. The Legislature has made tremendous policy decisions based on climate models right.

We're phasing out fossil fuels, getting rid of gas stoves, planning climate infrastructure, resilient bonds and funding projects, all based on the data and technology that's in these models. And these models have been used for years and decades across the globe. So the idea that we can't understand these models, I think we would take some issue with.

But I think we'd like to work with the Commissioner to work through these issues and say, hey, if you have concerns about the technology or you feel there's a black box that you can't see into, then let's work through that. Let's talk about that. Can we set up a process? I think the modelers, you could probably have a whole hearing just on models. Right.

And the modelers would probably tell you they're happy to share all the details of their model if there's an NDA, if it's not disclosed to their competitors. So that's one issue with the climate models. But these rules, they've worked fine for many decades. Right. But they don't recognize the recent impact of climate change and what it poses to California properties. And then these rules also include elements that discourage insurers from increasing availability of coverage for properties in wildfire areas.

So as a result, the homeowners market has fallen in a capacity crisis, with many carriers who wish to serve California, instead reducing new business capacity and non renewing properties because they can't achieve an appropriate return. So some examples, and again, we've talked about them, but these rules impede the goal of increased availability. And they do. I just want to say they long predate the current insurance Commissioner. He sort of inherited this problem, the wildfires start 2017, 2018.

He comes into office these rules around 35 years ago, long before he was here. But we do have this net cost of reinsurance and rate making that the fair plan talked about. It's how insurers spread California wildfire risk globally, outside of California, protect themselves from insolvency, and ensure they can keep the promise to pay claims after a loss. When they have to do without reinsurance, it reduces an insurer's ability to provide coverage to more wildfire exposed properties.

So you end up contracting because you can't spread that risk somewhere else. And then since that net cost is not a permitted expense in the Prop 103 rules, an insurer either has to pay that out of their own pocket or they just non renew the riskiest properties so that they can maintain their financial strength. So that's the business decision that they're being forced to make.

Another rule that we talked about was the use of catastrophe models, and California regulations make it illegal to include climate change projections and fire insurance rates. So insurers must estimate their future losses, looking backwards at the average of the last 20 years. And that does not reflect the climate related risks or the benefit, frankly, of the new mitigation strategies. Right.

So if you're using cap models, you could actually look at some of those areas you talked about where you may not have a loss experience yet and say, I can recognize my potential losses, get rate for that, and I could recognize the mitigation that's being done. But that doesn't work if I'm looking backwards because I haven't experienced a loss. And that mitigation really isn't even factored into the rates yet because it hasn't been experienced. So that's where these rules intertwine.

And then when you sort of say the fair plan, well, insurers don't renew here, but then it goes to the fair plan and then they pay it on the back end because they're going to get assessed. It must be cheaper. I don't think that's the right equation that they're looking at. Right. They're basically saying I can't get the rates I need to go in there even with the mitigation, because mitigation isn't elimination and I don't have a loss experience to justify the rates.

I need to go into that particular area. So you can see where these rules are starting to come into play and affecting insurer behavior. So in any case, the impacts of climate change in California are readily apparent. We have the droughts, we have the floods, we have the mudslides, the wildfires. It's a constant topic of policy making. And yet insurers are forced to pretend there is no impact from climate change. We talked about California being the only state that doesn't allow consideration of reinsurance costs.

And really, the fair plan plays this vital role in California's insurance market as the insurer of last resort. But we would say rather than grow the fair plan, we should pursue opportunities to increase the health of the traditional market. And we think with the inclusion of wildfire catastrophe models and reinsurance costs, insurers could greatly increase availability in these wildfire exposed areas and we'd be able to depopulate the fair plan once adequate rates are approved.

So we're keenly aware of the challenges our policyholders and your constituents face. And we want to work with CDI, with the Legislature, all the stakeholders to have a more healthy and competitive insurance market. So thank you.

Thank you. Do we have any questions? Assembly Member Wood.

Yeah. No surprise, of course. I should have sat on that side.

No, I appreciate what you're saying. I guess obviously, with reinsurance being so expensive and then not being able to include it in your rates, if it were included in the rates, is there a General idea of what that would mean to the consumer as a percentage of.

Of, I don't know. So help me understand, what is the impact to the consumer if you can include reinsurance in your rates?

Well, I mean, certainly we would say, if you're talking about price wise, we would say it's still going to be far less expensive than the fair play, which is a high risk pool, and it's going to be less expensive than the surplus lines, which really aren't regulated and subject to the prior approval process. So I can tell you with a lot of certainty that it's going to be far cheaper than what they're seeing now.

When you talk about these HOAs that are seeing a 1000% increase after being non-renewed, I can almost guarantee you that's not an admitted carrier because their rate filing would take a year and be subject to prior approval. So if someone can come in a month later and increase 1000%, it's going to have to be a non-admitted carrier who comes in, I would hazard to guess at the net impact of reinsurance and obviously, as Mr. Sekton was referring know, reinsurance costs are growing incredibly this year.

You're going to hear about the earthquake authority, I'm sure, later this year as well, where their reinsurance cost, I think they're looking at a 70% rate increase over five years if they don't do something. So it's expensive and it's going to fluctuate as reinsurance costs fluctuate. So I'm not like Miss Roach, I'm not an actuary, so I can't put a number on it, but less than, far less.

And if you really want to get at this availability issue, which what we're hearing is really a lot of people, as Mark said, would say it, I just want to be able to get admitted insurance over here. I'm willing to pay is it 10-20 percent more or whatever it is going to be. But I just really want to be able to get that insurance and keep the boat insurance and the life insurance and the car and keep it all bundled together too.

Well, remember, if the fair plan is set actuarily sound rates as they're required to by statute, and they're getting the rate that they need, as Sarah said, by definition, because they're picking up the high risk, their rates are going to be higher. We do see situations because the fair plan doesn't necessarily have actually sound rates where we do have some competition, and that's not right. The fair plan should never be in competition with other insurers. They should continue to be the insurer of last resort.

And the final question, I guess, is you talk about modeling or ways of looking at things. I guess I still struggle with entire zip codes losing coverage. If you've got community, maybe you've got a group of homes that have all done wildfire mitigation around them, or as I talked about, Cal Fire coming in and doing wildfire mitigation, and then suddenly the insurance is gone, period. What do I tell my constituents?

You did everything right, your neighbors did everything right, and you still got canceled, and the only option you now have is the fair plan. So what do I tell my constituents there? Because I'm at a loss, right?

And I'd say, unfortunately, it's not like there's an easy good answer, because at the end of the day, we're all experiencing this really recent change in risk and the view of risk, and the reality is prices of insurance are going to go up, whether you're with the fair plan or the admitted market. And it's, how can we expand that availability? I've heard some people say the zip code pressure that happens from the moratorium in one place, I think Mark was alluding to this.

Mr. Sekto was alluding to this earlier. It could be that you're being forced to keep all this risk over here after a fire under the current moratorium rules that the Commissioner was talking about. So now you only have a certain amount of capacity. You have a solvency risk, you have a certain amount of capacity, again, that gets back to the reinsurance. How can I offload risk?

Well, if I can buy more reinsurance, I can offload some of this risk and then I can take on new risk. But now I'm being forced to keep this risk over here. So these folks who go and mitigate and Cal Fire comes in and says, you're great, and we go, I don't have any more capacity now because I'm stuck with the 2 million homes that are inside the moratoria. That's one plausible explanation.

The other explanation kind of goes at, what I was saying is it may be even though they've done the right things, they're still in a high fire severity zone. And if there hasn't been a loss experience there yet, it's not in the backwards looking.

And they go, I still can't get an appropriate rate because at the end of the day, insurers are in the business of selling insurance, and if they could get a rate that they thought would match the risk, they would go in that area and sell. I mean, they're not going to walk away from a business opportunity if they think it's fair. I don't know if that's a great answer for your constituent.

I guess the final, and I apologize, I said final question before, but the reinsurance issue, is that by statute or by regulation?

It's by regulation.

It's long standing, but it is in regulation.

Yes.

And I want to point out one issue that's come up a lot. There is this myth that California consumers would have to pay for Florida hurricanes. That is not true. California companies can segment the risk for California so that California consumers are only paying for California wildfires. For example, the State of Florida actually does this because they don't want to pay for California wildfires on Florida residents where the cost of insurance is significantly higher than it here is in California. So it can be done.

The companies are willing to do it, and it's just another cost of doing business. The challenge you have in the California market is you look at it like this. You've got huge climate change changes that we're not seeing. We're driving the car backwards through the rear view mirror because we can't use models looking forward. Okay. You can't do reinsurance. You have tools that you can't use because of moratoriums and other types of things.

From an insurance company that's looking to expand their business, California is not necessarily an attractive market because the rates aren't adequate. Now, as Sarah said, the Department of Insurance has been looking at this and working on this, and we've been working with them closely. I think one of the challenges is that during the pandemic, they approved almost no rates, certainly nothing on the auto side. For 31 months, the homeowner stuff has been slow. The other issue I think we need to remember is the Commissioner talks a lot about his mitigation models and discounts.

Remember, the rate filings aren't even to be made until next month. They're going to take a significant amount of time before they actually get approved. And even the DOI in their own paperwork says even if you do all those things and we say you have to do all of them, you can't pick and choose. It isn't a menu. The cost savings are not going to be significant. Maybe only $200.

Well, if I might just add on, I would say with regard to the reinsurance issue, I would put it more. We do want to be able to work with the Commission if they have those concerns or if consumer groups have those concerns about reinsurance and what happens in Florida. We think there's ways to work through those in a collaborative way and address those concerns.

Thank you, gentlemen. Okay. At this time, I'd like to call up the last. Oh, sorry. Go ahead.

Just a real quick question. You heard me ask the insurance Commissioner about the catastrophic modeling. He basically alluded to the fact that the Department doesn't have a clear understanding of the algorithms and how it would function. Are you guys committed to working with the Commissioner to walk them through the modeling and the analytics that goes into that?

Well, certainly, yes, of course, part of that is on the modelers, but they've certainly expressed to us a willingness to open the proverbial Kimono and share whatever folks want to learn about those models. They just want to be able to protect their intellectual property, whether that's having academics, people from the Department, whoever wants to learn more about the details of those models, we believe there's mechanisms to allow that to happen.

Right. It doesn't need to be public, just with the Commissioner.

Right. As it is in many states where the models are reviewed by the Department but not released. And you want this for one important reason, is you want the modelers to continue to provide the best science possible, but they don't necessarily want to provide it to their competitors.

Thank you for that. And I really appreciate, Chairwoman, that we had this opportunity today to engage. I think what's clear is that the fair plan is really a band-aid for a much bigger issue. And so I look forward to working with you and your staff on these issues.

Thank you, Mr. Vice Chair. Thank you, gentlemen. The last panel we'll hear is the policyholder perspective. And with us today, we have Amy Bach, Executive Director of the United Policyholder, and John Norwood, legislative advocate for Independent Insurance Agents and Brokers of California. Welcome.

Thank you so much. Good afternoon. And I'm Amy Bach. This year marks United Policyholders' 32nd year as a nonprofit that has been educating and assisting insurance consumers in California and helping solve insurance-related problems, advocating for fair practices, laws, regulations, and working very closely with the California Department of Insurance, as well as Mr. Norwood's clients, agents, and brokers. We do webinars helping people, particularly now, shop in this very, very challenging marketplace situation that we have.

Clearly, as with most problems, this one requires some compromises and innovation combined with moderation. Insurance companies have been hating on Prop 103 since the day the ballot measure was passed. They have been trying to get credit for reinsurance for a very long time. They have been pushing to be able to use CAT models for a very long time.

So I just want to say that while there may be necessity now to grant in some way some of what they're asking for, I would say a lot of moderation is in order here because remember that CAT models are nothing more than very sophisticated crystal balls. No one knows what's going to happen tomorrow. And as fancy as these models may look, they are often wrong.

And when you see how the RMS 11, which is a model, a hurricane-related model, when you see what that did to affordability all throughout the Gulf Coast states, when that model changed just a little bit and it really made prices go crazy, you know, you need to be moving with moderation in this situation. We're very fortunate to have the fair plan.

We have to preserve its capacity to continue to be a reliable safety valve for periods like this when insurers stop competing, which historically has happened before, though not to the degree we're seeing currently. There was a time when one leading insurer was very unhappy with either the, I guess it was the Legislature and, or the Department and stopped writing home insurance policies for a couple of years. And we said, okay, fine, don't let the door hit you. And they came back.

So there's definitely some politics in play here. But I do not downplay what we heard from Victoria Roach. And obviously, certainly I know the Commissioner and his team are really working overtime. Not so much to understand the models, I'd say, but to act responsibly on the rate increase requests. And I think 90 some percent of the rate increase requests have been granted in the last few years.

I mean, you ask your constituents and ask them, does it feel like the rates are being suppressed and they're going to be like, what are you talking? So we have been through these situations before, not this bad. Competition is always kind of filled in. John's clients, particularly brokers who can put you with a variety of different companies, usually will fix these problems when there's a shortage of options.

But that was before insurers started using risk models, predictive analytics and aerial surveillance and all the artificial intelligence, everything they use now to really narrow in risks. They basically have been scaring themselves out of taking risks. Right. So that is a real thing. And so we find ourselves, yes, we did have some really bad years. And when you look at, with the wildfires, when you look at what happened to Florida's market after they had a series of bad hurricane years, it makes some sense.

But what we're looking for here is moderation. Right? Some sort of moderation. Just a few more points I want to make. You heard the Commissioner talk about what really needs to happen to make the fair plan continue to serve this very important function? There's definitely some, I was glad to hear Victoria say that they've doubled their staff. They definitely did not have enough staff. Now they are rising somewhat to the demand. And I do think that given the situation with HOAs, we're hearing it.

Your colleague is. We're all hearing it. Having the fair plan be able to offer increased limits of up to 20 million does make sense for HOAs. And then I think it would be very risky to allow the fair plan or participating insurers to get full credit for reinsurance or to make unlimited use of CAT models. I think that would just be really have a, I think you'll be hearing about it from your constituents loud and clear.

But I think the Commissioner is really putting a lot of time into sitting down with the insurers and trying to figure this out. I know that the CEA, we've been looking a lot at. Well, given that you've been hearing about reinsurance costs all day. Right.

Reinsurance unregulated prices are higher than they've ever, you know, Glenn Pomeroy, who's the head of the CEA, and I and other people have been thinking for years about what could the state do in terms of providing some sort of alternative measure of backstop that reinsurance provides to reduce the reliance on reinsurance somewhat and lessen that sector's basically vice grip on all of us. Right. So that's something to look at.

Look at Florida's Cap Fund, their Hurricane Cap Fund, which is basically a type of public insurance for reinsurance for high risk. So those are basically the points I wanted to make.

Assemblymember Wood I mean, you know, we do a lot of work in your area, and we, through my organization's Wildfire Risk Reduction Asset Protection Working group for now going on two and a half years, we've been working with stakeholders to get these mitigation programs solid, to get the standards solid, to get those regs in place, to get the discounts there, because we all recognize that people need financial incentives in order to spend time and money on fixing what to them ain't broke. Right.

So we're moving in the right direction on mitigation and discounts, and I think that we got to really give the Commissioner and his team a chance to do their job and try to move forward here without doing something really dramatic. And thank you so much for your time and attention.

Madam Chair Members. John Norwood, on behalf of the Independent Insurance Agents and Brokers of California. Our members serve consumers and providing insurance in literally every community in California. They don't just write with the big personal lines insurance companies, but they write with the other hundred insurance companies in California that write homeowners insurance and commercial insurance for both residences and businesses. Across the state, our members tell us is the worst climate they've ever seen for property insurance.

The two highest price options, the fair plan and the non-admitted market, are often the only places they can go. As you've heard today, admitted insurers are retreating from California market and have been for some time. They tell their agents not to submit new business. They take their company off comparative rating sites, they eliminate premium financing options, reduce advertising, eliminate discounts, and do other things to basically defer business.

I think a lot of that, by the way, is driven by the moratoriums where if they can't deal in these certain areas, they have to go somewhere else because what's happening, and we have a client like this, the reinsurer comes to them and says, you've got to cut back. If you can't afford more insurance, you got to cut back your market. So they're out nonrenewing people. They don't want to non-renew because they have no other choice.

The other thing is, I think a lot of these companies, given the magnitude of what the fair plan was talking about in terms of potential assessment, they're not going to take that. So they're moving out of California as quickly as possible. The current situation is not only undermining our members, but it's having catastrophic effects on consumers. Consumers are in some cases facing foreclosure because under their mortgage they have to have insurance.

In other cases, if they can't find it, the banks has the ability to force place insurance at really high rates. We have businesses that can't get lines of credit. They can't finance new operations. They can't essentially finance their businesses because for lack of insurance, this current market is just not sustainable. Thank goodness for the fair plan. Even writing with the fair plan, there are issues, there's issues of coverage, there's issues of stacking policy. There's limits on all kinds of things.

It's not the be all to end all. In fact, as somebody said, it is a band-aid at most. That being said, our members are going to keep pumping everything they can into the fair plan because they don't have a choice. But the idea that you're going to have the fair plan, take all these high-risk policies without any diversification in terms of geographic risk is the very definition of insolvency, it's going to happen.

What we really have to have is a competitive insurance market where insurers have confidence in their rates and can have geographic distribution. And we think that'll bring the market back. Our members, their customers, are caught squarely between the Department of Insurance and the insurers in the state. The insurers, as you've heard, talk about the fact that they can't get an adequate rate, that it takes too long, whatever the case may be.

The Insurance Commissioner has complained that companies aren't asking for what they really need, that if they need 30%, it's going to take four or five 6.9 filings, and that's taking up all this time. All that may well be true, but really doesn't matter to us. We kind of are looking for a solution.

And the big problem is, I think the major factor contributing to the situation is an outdated and inflexible rating law that doesn't recognize actual costs incurred by companies, i.e. reinsurance, or, and ignores the science of modeling for future risks. And that's just not understandable. Everything we're doing in this country, federally and state, in terms of climate change and all the things that people talked about, getting rid of your gas stoves, is that all being driven by modeling. That's all it is. Cal Fire uses modeling.

OES uses modeling. CEA uses modeling. The Department uses modeling. In their own climate change report last year, what did they say? That there's going to be a 77% increase in the number of homes in California subject to severe wildfire. Now, guess what? Everybody in the world that's providing financing for insurance companies in the state reads that, and that's what they're responding to, and that's what we have.

Nobody really wants to incur higher insurance costs and force that on consumers, but we believe that consumers are better off essentially paying a little bit more for insurance and having a competitive market where they have options rather than being forced into the highest two coverages. And you look at that. Take it as an example. There are homeowners associations today that are maybe spending $50,000 for property insurance. Well, what we've heard in our business is that companies need a 20% to 40% change in rates.

Well, take 30%. So now, if they had a 30% increase, it goes from 50 to 65,000. At least that's doable. It's a lot different than 300, 400, 1,000%. Take an average homeowner's insurance policy, let's say $1,000 annual premium, well, it goes up 30%. That's a really nice dinner out someplace, but that's what it is. It's a lot better than spending $3000 or $4,000. That's the challenge we've got as an industry, as regulators, as legislators have got to sit down and figure this out.

I mean, there's solutions that are out there. A couple of other real quick comments. When the Commissioner talks about 3% of the market here, that's 3% of residences in the homeowners in the fair plan. It's not the number of residences that are in the non-admitted market. It's not all the businesses and things that are there. So this problem is bigger than 3%. And I think that's kind of understating the issue. So I think that's something we have to consider.

There's somewhere between 500,000 and a million people out there that are really having a problem, and it's going to grow, if you believe this modeling with that, I'm happy to be your last speaker, and I appreciate the opportunity.

Thank you, Ms. Bach. Thank you, Mr. Norwood. Do we have any questions? Assemblymember Wood?

Yeah, first of all, thank you. And obviously, we heard the insurance company's perspective, heard your perspective there. Feels like there's potential middle ground on some of. So I guess I wonder, is everybody in a silo here, or is there an opportunity for everybody to get together at the table and talk about this and work out some real solutions?

And I would put Cal Fire at the table, too, because if they're the ones that are setting standards out there for what is acceptable mitigation for fires, then everybody needs to know what that is and what that means and how it can be used and how it would not be used. Right. Is that happening?

It's certainly happening. At my wrap working group, we've had Cal Fire. It sort of has been a process of what actually moves the needle in terms of hardening a home and defensible space and then community level, shaded field breaks, all that. I think Cal Fire is very much in the conversation. I kind of feel like we are starting to get, there's a lot more dialogue going on now.

I mean, obviously, we've emerging from the closed part of the pandemic, and there's a lot more dialogue, I think, between the Department of Insurance and insurers happening. I think we're all kind of recognizing the moratoriums have been incredibly valuable to a lot of your constituents. Right. And again, we've had knock on wood a couple of good years, which makes a huge difference. There's a lot of perception that drives insurance executives' willingness to take market share and leave.

So I think the carriers are very much, a lot of them coming around to, okay, we will recognize that you can actually do things to prevent a home from burning. I mean, it was a long time where they were sort of like, we're 10 years away from it, we can't. But now I think there's a lot more dialoguing going on between insurance companies and more acceptance that mitigation actually works.

But we're on track with the regs and the filings, and some insurers have started to dip their feet in with like a 5% discount or this and that. We're on the right track, I'd say, but there's just no changing. You can move pieces around, but clearly when you see what happened over 2017, 18, 19, 20 while I cringe when I hear insurers say, oh, it wiped out 20 years of underwriting income, they've never lived on underwriting income alone, ever anyway.

They always have ways of investing, but you cannot deny that from their perspective, the situation is very different and the risk is higher and people have to pay more. And that's the hard message here.

I absolutely think that there's room for middle ground. I mean, even if you allow insurers to use modeling and reinsurance, the department is not going to accept that off the bat. They're going to push back just like they do. That's the whole process. We would encourage the Legislature, the regulators, the industry-associated groups to sit down, and I think there needs to be some oversight of that to make sure that it's happening and that there's regular meetings and that we're pushing forward to get something done.

As I said, agents and brokers in the middle of this, just like consumers are in the middle of this. Under Department regulations, we can't even be an intervener, which makes no sense. We actually have customers we represent as opposed to some groups. So, yeah, we would encourage very much that, negotiations, discussions, mediation, whatever you call it, start moving forward. Yesterday.

There are thorny topics that has happened within the past. I hope that can happen. I would have to agree with your assessment that I would say for me as a consumer, I would gladly pay, not gladly, but I would pay 20 or 30% more premium that gives me comprehensive coverage than going to a plan that is a much higher premium. That doesn't cover me, but it's the only thing available. How do we get to that place?

Where we can be able to, companies can be able to offer those again so that we can all benefit.

Just if I could, one last comment is that, like I said, our members represent a lot of the smaller market share in the personal lines. These are not small companies. They're just smaller market share and personal lines. They may be right a lot in commercial lines. The big companies that are doing personal lines that you see on TV all the time, they're going to stay here, they're going to work through this.

But these other companies that, as Amy said, has, over the years, bounced off the market because they become available when somebody else, they see California, and if the risk is too high in terms of the modeling and they just walk away, they can go spend their capital someplace else. And that affects our members because they just don't have, and their clients because they don't have a place to put that business where they've always been able to put it.

So the market's not all the same, and it's different for different people, and we just have to be inclusive of that.

Thank you so much, Ms. Bach, Mr. Norwood, we appreciate you being here. Okay. At this time, I'd like to open up for public comment. If you could please state your name, affiliation, and provide a brief remark.

Thank you, sir. Madam Chair and member, thank you very much for the opportunity. I'm Dan Dunmoyer with the California Building Industry Association. I also want to thank your chief consultant for her efforts. Ms. O'Malley was very helpful. California Building Industry Association builds nine out of the 10 housing units built each year in the California. Last year, that was 120,000 housing units. My comments today, and this may scare people who know my background, is in total agreement with the consumer perspective.

The consumers I want to talk about today are the condos we build. We build tens of thousands of condos in California. And right now, building condos is in complete and total jeopardy. The individual that you heard about the insurance industry, that was. I mean, the building industry was talking about, the higher rates was me. Our record for increase in premium on a condo Association year over year was 6900%, not 1000, 6900%.

So 40,000 to 2.8 million. Monthly charge changed from $250 per month for the Association dues to $1500 a month. We're talking about foreclosure and bankruptcy of people who bought our homes last year. And that focus is today. It's not like could happen. So here's our solution. In the minute I have, we believe the fair plan is the short term and the emphasis here is the short-term solution.

Fair plan insures a $3.3 million home, but doesn't insure a $500,000 condo because it's commercial coverage and it's in an Association. Ms. Roach is brilliant. She summarized her challenges. We want a short-term solution. 12 to 18 months within the fair plan for our condo associations, up to 20 million per building unit. And that would at least get us through the next 18 months. The private market, the admitted carriers you heard about, they have to solve this as much as Ms. Roche.

She has $220,000,000,000 in exposure. The private market, you ready for this number, has $4 quadrillion in exposure. So there's capacity in the private market. So we want to get the private market back in. We urge them to go to the Commissioner quickly and come up with the rates they need. We'll take 40%, over 6900% every day of the week. As hard as it is for me to say that, that's what we need. So we want this market to work.

We want the private sector back to them, but we need the fair plan tomorrow because we're talking about people tomorrow not being able to stay in their homes. Last thing, we are not selling any more condos that are completely built with contracts and 100% cash offers because there's no insurance. That's happening today. So we would love to be part of the stakeholders. We want to be part of the solution. Madam Chair, thank you.

You're welcome. Thank you.

I'm short, so I'm going to bring this down. So thank you guys. First, for those of you that remained, we appreciate it very heavily. My name is Aurora Mullett. I am with Sky Insurance Brokers. I am also what people out there would consider a high wildfire expert in the marketplace. We focus almost 100% of our efforts on helping those in high-risk areas. I want to talk a little bit about.

We've all heard that Fair Plan is the band-aid and a lot of the pressure that Fairplan is feeling and the reason why they are having to increase their rates is the lack of oversight that our Commissioner is doing on the insurance industry. So he first deregulated the reasoning that you could not go to Fair Plan for price. And though we understand the mindset for that, what that did was open up for very unscrupulous agents into the marketplace, including captives like farmers, Triple A.

They are no longer advising customers to go out there and look for alternatives in the marketplace. They are simply looking at the cash dollar. Even if they can write it in an admitted market and they get more premium off of writing it in the fair plan. They are putting them into the fair plan. And the Commissioner is aware of this and he's doing nothing to regulate how and when those customers are in there and how to get those customers off of the fair plan.

So until we start holding him accountable for the oversight that he needs to do, we're going to continue to put pressure onto the California fair plan. Having us say that they need to do a comprehensive policy is going to fold it. It's going to put even more pressure on there. It's going to have a long-term effect on the insurance market. The DIC policies that are available out in the marketplace, he is not regulating those.

They are not only surcharging under those DIC policies, then they're getting surcharged under the California Fair Plan. So companies being able to rate for fire when they're not providing fire is 100% under the regulation of our current Commissioner. And he's doing nothing to help absolve those increased costs on your constituents.

So until this type of regulation starts to happen, this is going to kick the can down the road and we're not going to have any solutions or give anything for the standard market to come back in to relieve some of that pressure off of the fair plan. Thank you.

Hi. I'm shorter than she is apparently. My name is Dawn Foster and I am a Farmers agent in Paradise, California. Been a Farmers agent for 20 years. I am lucky that I'm a Farmers agent because then if I can't place you with Farmers, I then become a broker. So I represent multiple companies. I currently have 500 nonrenewals sitting on my desk from multiple carriers. Farmers is not one of them. Farmers has not non-renewed anyone.

Foremost is I want to put in everybody's ear that is here. Mobile home coverage, manufactured homes, big problem. Farmers is trying to rebuild our town. I'm sorry, Paradise is trying to rebuild our town. I would love it if Farmers did it, but they're only doing a couple. We've so far done a little over 2000 homes. We lost 17,000 residences in one day's fire and multiple commercial buildings. I currently write about 60% of them in the standard market. I am a big proponent of the fair plan.

I only offer it as a last resort, but surplus lines are harder and more expensive. I mean, you can have a fair plan policy that's going to be $6,000 and a Lloyds of London product that's going to be $16,000 for less coverage. So surplus lines is kind of a nightmare right now for us in our community. The biggest thing I wanted to make sure to mention is I don't understand why nobody is talking about what they did for earthquake, right?

I mean, they didn't know that was coming. They didn't have any CAT models. They didn't have anything, no crystal ball that told them an earthquake was going to happen and destroy everything. But the government got together immediately, within six months and created the California Earthquake Authority. The Commissioner has told me point blank the reason he doesn't back that is because less than 10% of Californians have earthquake insurance. That's unfortunate. So the other option to that would be adding a catastrophe deductible on the standard policy.

If they were able to have a wildfire or a catastrophe deductible on the standard policy, then you could have a $1000 deductible for a kitchen fire. And that may open the market back up for the standard people. Mr. Wood, what I tell your constituents when they ask me what the heck am I supposed to do? I tell them to call you. You're welcome. I mean, call Commissioner Lara.

Make your government aware of the fact that this is an issue and it's the standard market that's broken, not the fair plan. I live in Paradise. I sell in Paradise and in McGillia and the communities around there. And like I said, 60% of my business is standard placement. I have less California fair plan policies than most brokers I talk to.

And I'm with Aurora on the fact that there are brokers out there that write it with the fair plan, because to be honest, it's easier to write with the fair plan now than to write with any other carrier. And that is horrible. I am strongly, I pray every night, and I'm not that religious. I did buy a new crystal ball because mine broke in the fire. And I ask it every night, please do not let Commissioner Lara win and make them write a comprehensive policy.

I will get out of insurance. I'll probably go to work for the fair plan. We all will. Right? So that really is everything. Everybody else hit on everything else. And the fair plan is not the fix to everything. It should be removed from that.

Thank you. Do we have anybody else for public comment? No? Okay. All right. Well, this concludes our hearing. I just want to take a minute to thank the Committee staff for all the work that you've done putting this hearing together, and I'm going to wrap this up quickly. I believe a key takeaway today is a need for modernization. We're still relying on a framework for the insurance industry that was established in 1988.

And we've heard today that the framework we have hinders us from considering more advanced technologies. It was created at a time when we weren't grappling with the severity of climate change, which we are kind of in the throes of right now because the fair plan is not under the provisions of Prop 103. This Association seems to be the easy answer when the admitted market isn't properly working. But is this the only solution we have to continue to expand the fair plan?

I'm looking forward to ongoing discussions and want to thank the members, panelists, and the public for being here today. All right. That's it. Thank you all.