WITH THE California commercial property market increasingly stressed with fewer and fewer insurers willing to write policies in the Golden State, the state insurance commissioner has floated a plan aimed at easing the crisis.
The main thrust of the new proposal is to make it easier for insurers to get their rate-hike requests approved, efforts that have been stifled due to laws that have been on the books since the early 1990s from a law known as Prop. 103. As well, insurers are limited in the types of data they can use to justify rate increases, which has constrained them from being able to ask for hikes that are adequate to cover their potential liabilities.
The proposed rule changes, along with others that are coming this year, are aimed at luring insurers back into the marketplace after one carrier after another has either stopped writing commercial property in the state altogether, or restricted how many policies they will write in California, and where.
While insurers are still writing policies in California, their numbers are shrinking, making renewals a difficult process for many businesses. Insurers have also gotten pickier about properties they are willing to cover, with some setting limits on the age of a building and taking into consideration whether the property owner has filed any claims in the last three years.

The commissioner’s plan

Insurance Commissioner Ricardo Lara’s proposed regulations, one of those prongs, would allow insurers to use catastrophe models to better predict insurance rates for wildfire, terrorism and flooding. Currently, they are only allowed to use historical claims data, which is backward-looking and does not account for the surge in risk and costs that’s occurred during the last five to 10 years.

As well, they are not allowed to consider the growing risk caused by climate change, or wildfire risk mitigation measures taken by communities or regionally as a result of local, state and federal investments.
Mark Sektnan, vice president for state government relations for the American Property Casualty Insurance Association, said this change would go a long way towards addressing the insurance crisis in the state.
“As Californians grapple with record inflation and become increasingly vulnerable to climate-driven extreme weather, including catastrophic wildfires, this is a critically needed tool to help identify future risks more accurately and set rates that reflect our new reality,” he said. “More accurate ratemaking will help restore balance to the insurance market and ensure all Californians have access to the coverage they need.”
The trade-off for consumers will be the likelihood of more insurers coming back into the market to write commercial property and homeowner’s insurance in exchange for them asking for large rate hikes.
The latest proposed regulation follows another that was introduced in late February that would speed up approvals of rate-increase requests. These can sometimes take years if the Department
of Insurance asks for more supporting documentation, which can reset the rate approval process, delaying final approval.
Some insurers have waited more than two years to get their rate hikes even considered.
Current rules “lack clarity and fail to specify the exact materials and information required in a complete rate filing application given the change in times and increased complexity of filing,” according to the Department.
This proposed rule codifies clearer instructions for what supporting documentation insurers must submit when filing for rate increases.

The takeaway

A public hearing on the proposed catastrophe-modeling regulations will be held on April 23 and it’s the department’s plan to get these new rules implemented by the end of 2024, along with the rules on speeding up rate-increase requests.
In the coming months, the department plans to propose additional regulations as well as legislation in order to get insurers to write business in the state again.
If enacted, it’s hoped that the various planned changes will provide some relief to homeowners and businesses in the state.
We’ll keep you posted as this develops.

With more and more California businesses being forced to go to the California FAIR Plan for their coverage, the market of last resort has moved to increase its commercial property coverage limits significantly.

This should bring a semblance of relief to companies located in wildfire-prone areas, who have seen their commercial property insurance non-renewed and who have been unable to find replacement coverage. The decision comes as commercial property rates continue rising due to inflationary pressures, but in particular for companies located in areas that are considered urban-wildland interfaces.

Insurers have pulled back on underwriting commercial properties as well as homes in these areas. They’ve taken a number of actions, including:

• Retreating from the California market altogether.
• Selectively underwriting properties that are not considered at-risk.
• Capping their exposures by only covering a set number of properties.
• Requiring property owners to create defensible spaces and take other measures to harden their properties against wildfires.
• Raising rates significantly.

Businesses whose policies are not renewed and who can’t find coverage in the market are able to go to the FAIR (Fair Access to Insurance Requirements) Plan for coverage. This is the market of last resort and premiums can be substantial, while the policy limits have often been inadequate to cover the full cost of the commercial enterprise’s property.

 

Policies cover damage caused by:

• Fire
• Lightning
• Internal explosion

Optional coverages are available at an additional cost, such as coverage for vandalism and malicious mischief.
If you have to go to the FAIR Plan, we can arrange for a “differences in conditions” policy that will cover the areas in which the plan is deficient compared to a commercial property policy.

The FAIR Plan will cover the following commercial structures:

Habitational buildings – Buildings with five or more habitational units such as apartment buildings, hotels, or motels.
Retail establishments – Shops such as boutiques, salons, bakeries, and convenience stores.
Manufacturing – Companies that manufacture most types of products.
Office buildings – Offices for professionals such as design firms, doctors, lawyers, architects, consultants, or other office-based functions.
Buildings under construction – Residential and commercial buildings under construction from the ground up.
Farms and wineries – Basic property insurance for commercial farms, wineries, and ranches, not including coverage for crops and livestock.