The Reinsurance Association of America has come out with a white paper on the California homeowner’s insurance market urging policymakers to consider the risks of inaction.
The paper, “Dynamics and Challenges in California’s Homeowners Insurance Market,” provides background and recommendations for policymakers as they continue to debate solutions to address the current wildfire related homeowners insurance crisis.
“Governor Newsom, Commissioner Lara, and the legislature and its leadership are to be commended for their willingness to address the root causes of the current insurance crisis, including their funding of fire risk reduction efforts,” said said RAA President Frank Nutter in a statement. “The next step is to ensure that insurance companies receive timely approval to charge an adequate, appropriate risk rate, which will enable them to insure disaster-exposed assets prudently. .”
California lawmakers are currently debating possible legislation to address the current crisis, including Proposition 103 which would modernize the regulatory rate structure for new policies. One proposal under consideration would be to expressly allow an insurer to include reinsurance costs in its rate filings. Under a related provision, disaster models may be authorized as support for the estimation of expected insurance losses. In turn, insurers must increase their share of catastrophe exposure in “distressed” markets to at least 85% of their statewide market share.
Nutter expressed concern about some of the ideas.
“While a commitment to increase underwriting in disaster-exposed areas is understandable, we are concerned that the 85% threshold is too high. Insurers should have an adequate rate before they expand their underwriting. No they should be encouraged to expand rapidly. Many insolvencies are caused by the rapid growth of insurers.”
He added: “The actual cost of reinsurance risk transfer should be allowed to reach an adequate rate first. If a commitment to grow market share in problem areas is required, it should be achieved -to a certain extent, financially prudent way to ensure that insurance promises are fulfilled. Reinsurance is a tool that helps insurers to fulfill their promises.
California Homeowners Reinsurance Market Trends
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