By Alexandra Harten

On September 21, 2023, Governor Newsom signed Executive Order N-13-23 directing the Insurance Commissioner “to take prompt regulatory action to strengthen and stabilize California’s marketplace for homeowners insurance and commercial property insurance, and to consider whether the recent sudden deterioration of the private insurance market presents facts that support emergency regulatory action.” In concert with Governor Newsom’s Order, Commissioner Ricardo Lara announced his Sustainable Insurance Strategy — a package of executive actions representing the largest insurance reform since voters passed Proposition 103. The strategy aims to expand consumer options and availability of insurance, particularly in underserved, high-risk areas, and to stabilize California’s insurance market. Under this new deal, insurers have agreed to write 85% of their statewide market share in high-fire-risk zones, leaving the remaining 15% covered by the FAIR plan and other higher-cost insurers. According to the California Department of Insurance (CDI), this will help maintain the solvency of the FAIR plan and bring FAIR customers back into the private market. In exchange, Commissioner Lara plans to allow insurers to use climate catastrophe models when asking to raise rates and to include reinsurance costs into rate filings–both measures could purportedly weaken consumer protections under Proposition 103, enacted by initiative vote in 1988.

Commissioner Lara emphasized that the Sustainable Insurance Strategy will improve the rate approval process’s efficiency, speed, and transparency. However, advocacy groups such as Consumer Watchdog (the primary sponsor of Proposition 103) strongly disagree. A report published by the group in May 2023 contends that “statements by insurance companies doing business in California that they have ‘lost money’ on homeowners insurance for the last 26 years…[and statements] that Proposition 103 is preventing them from charging adequate rates” are false. Consumer Watchdog argues that CDI’s Sustainable Insurance Strategy is not the result of catastrophic loses, but rather, “insurance companies are using their economic power to create shortages for the purpose of pressuring elected officials to change the rules that have kept insurance premiums in California stable.’’ Harvey Rosenfield, author of Proposition 103, contends that Commissioner Lara “sold out Californians in exchange for a ‘promise,’ negotiated behind closed doors, that the insurance industry will start behaving itself once it gets the go-ahead to charge homeowners and renters hundreds or even thousands of dollars more every year.” Climate catastrophe algorithms and Artificial Intelligence models, which insurers may now use to calculate rates under the new plan, are largely untested and often biased.

Proposition 103 requires all such rate-setting methods to be open to public scrutiny as part of the public rate-setting process, but the insurance industry does not make its models public. According to Consumer Watchdog, “this secrecy is guaranteed to lead to higher premiums” and does not comply with Proposition 103’s transparency requirements. The group found that “allowing insurance companies to force their policyholders to pay for reinsurance coverage bought on the global marketplace, which is unregulated and subject to massive swings in response to events anywhere in the world…would increase premiums by 30-50% overnight.”

In addition, Consumer Watchdog contends that the fire damage stimulating record homeowner claims ignores the record damages recorded from utilities based on regular fire protection.  It contends that the record influx of utility payments undermines its false contention of losses justifying steep rates or massive coverage abandonment. Both CDI and Consumer Watchdog continue to comment as the initiative develops.