Gov't meddling forces another CA'n insurance company withdrawal
Since State Farm announced it will no longer insure new policies in California, state gov't has been scrambling to peddle excuses such as global inflation and “climate change.” OC Register's Steven Greenhut pinpoints the real reason many insurance companies have pulled out of the Golden State: rampant regulatory overreach (especially via Prop 103, which makes turning a profit much more difficult for insurers).
On Friday, State Farm announced it will “cease accepting new applications including all business and personal lines property and casualty insurance.” It will service existing policies, but stop writing new ones on May 27....
State Farm and most news reports blamed the obvious factors – growing wildfire exposure, rising construction costs and higher costs for reinsurance (the insurance that insurance companies purchase). The California Department of Insurance said the “factors driving State Farm’s decisions are beyond our control, including climate change ….”
Can we just cut the double-speak? Although wildfires and inflation are the proximate causes of the company’s decision, those are not the main reasons. Insurance companies are operating efficiently in other parts of the country, which also face climate-change challenges and inflation. Yet several insurers have been pulling out or pulling back in California.
Those decisions relate to our regulatory system. This is nothing new. In a column in the Wall Street Journal in March, I warned about “California’s coming insurance crisis.” Yes, recent floods and wildfires battered insurers with $1.5-billion in losses, but the state’s real problem centers on a 1988 statewide initiative that gave the insurance commissioner near-dictatorial powers to set and roll back rates.
Quite simply, Proposition 103 – or at least the current inflexible implementation of it – won’t let insurers price their products to reflect their actual risks. No insurance commissioner ever wants to approve major rate hikes for obvious political reasons, so the problem never gets resolved. And the trial-attorney-friendly Prop.-103 system seems designed to torment insurers.
For example, in 2016 the insurance commissioner rejected State Farm’s effort to raise fire-insurance rates by 6.9 percent – and ordered it instead to reduce rates by 7 percent based on the department’s squirrelly revenue calculations that are part of the rate-setting formula.
The courts ultimately sided with State Farm – but they still forced the company to pay massive legal fees to consumer “intervenors” that challenged their filing. Meanwhile, lawmakers keep approving political “fixes” such as moratoria on non-renewals, which further challenges profitability. Given this rigged market, is it surprising that insurance companies are looking for the exit doors?
This article originally appeared in the Orange County Register. Read the whole thing here.
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Image by State Farm on Flickr