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FAIR Plan legal challenge a 'distraction' from fixing Calif. rate structure

A lawsuit filed by California's fire insurer of last resort against the state's insurance regulator is distracting from the real issue of fixing a flawed rate structure, the head of a state insurance association said.

The FAIR Plan on Dec. 13 asked the Los Angeles Superior Court to rule that California Insurance Commissioner Ricardo Lara must withdraw an order requiring the plan to offer a comprehensive homeowners insurance policy, known as an HO-3, in addition to its dwelling fire-only coverage by June 1, 2020. An HO-3 plan includes coverage for water damage and personal liability, as well as for fire.

Established in 1968, the FAIR Plan is a pool of all insurers authorized to sell basic property insurance in California. The plan only provides fire insurance for homeowners who have either lost coverage or are unable to find insurance in the voluntary market.

The plan said Lara's directive violates state law and would force the insurer out of compliance with its statutory mandate "to provide basic property insurance, serve as a stabilizing force in the insurance marketplace, and to maintain actuarially sound rates."

Lara responded by saying he would fight the lawsuit on behalf of consumers.

"Insurers can't have it both ways," he said. "They cannot continue to cancel policyholders at an alarming rate, leaving them with the FAIR Plan as their only option, with woefully inadequate coverage."

Rex Frazier, president of the Personal Insurance Federation of California, said the move by the FAIR Plan and its president, Anneliese Jivan, "seems consistent with the statements that [Jivan] has been making for many months." However, Frazier said the "skirmish" is "an unfortunate distraction from the work that we really should be doing," of finding a way for the admitted market to provide coverage in high-risk areas.

"What we really need to do is to figure out how to get the admitted market's average pricing to be more reflective of the risks that we face so that we can get new business, frankly, by the incumbent companies, as well as attract new capital in California," Frazier said in an interview.

Unlike other states that allow insurers to use catastrophe models to determine rates, California requires them to take the average of actual losses for the previous 20 years. The result is that when there is a period of fewer losses, the Department of Insurance will push for lower rates, Frazier said.

"In 2015, [CDI was] in a fight with State Farm [over rates]," Frazier said. "They ordered their rates down 8% when State Farm was asking for an increase of 6%."

While companies can use periods of low losses to build up reserves against future catastrophes in other states, that cannot happen in California, Frazier argued.

"The Department of Insurance tells companies, 'Well, when you should be squirreling money away, we're going to look at that and say you're charging too much because your losses are low,'" he said.

After the devastating 2017 and 2018 wildfire seasons resulted in losses of almost $25 billion, the 20-year average spiked and rates skyrocketed, which Frazier said left many homeowners asking why their premiums had doubled.

"We should have had a slow progression that tracked inflation over a long period of time, but we have these old rules that really aren't prepared for these megafires now," he said. "And so how can we be in the 'new normal' and, at the same time, say we have to build our rates based upon the average of what's happened over the last 20 years?"

Lara's Nov. 14 order was in response to meetings he had with officials and homeowners who had lost their insurance in the 10 counties labeled "high risk" for wildfires. On Dec. 5, Lara ordered a one-year moratorium on nonrenewals by insurance companies in areas affected by recent fires.

The California Department of Insurance recently added ZIP codes for a further eight fires, taking the number of policyholders covered by the moratorium to more than 1 million.

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