Insurance commissioner defends homeowners plan blasted by consumer group

Bruce Breslau has lived in his Chatsworth condo since 2009 and figures that last year he and his partner paid $1,200 in fees to help keep their 290-unit townhouse complex insured in case of fire and other calamities.

That was before Breslau’s California West housing development was dropped by Farmers Insurance and the homeowners board had to hunt around the world to replace the Los Angeles insurer, which was providing $92 million worth of coverage for about $350,000 each year, Breslau said.

After cobbling together a patchwork of insurers that include Lloyd’s of London, the complex still has insurance, but the total cost rose to $1.7 million for just $50 million in coverage, he said. As part of the new deal, homeowners have to pay an extra $4,700 special annual assessment.

“There are people in this community, when this was announced at the board meeting, who were losing their minds. They were panicking,” said Breslau, 71, who is still working and thus more able than others to absorb the added costs. “Where are you going to come up with that?”

Breslau was one of two homeowners who spoke out Tuesday morning at a news conference on the steps of Los Angeles City Hall before a hearing inside held by the state’s Assembly Insurance Committee. Insurance Commissioner Ricardo Lara testified at the hearing about his efforts to resolve the state’s worsening homeowners insurance crisis.

The Chatsworth complex is just one of countless casualties of the crisis, which has witnessed insurers sharply raise rates and pull out of the state, not renew coverage or stop writing new policies, amid escalating losses due to wildfires that have raged up and down California and have been attributed to climate change.

On Tuesday, firefighters were still trying to contain the Bridge fire in the East Fork of the San Gabriel Canyon; it has burned some 55,000 acres and damaged or destroyed more than 50 homes. The more destructive Airport fire in Trabuco Canyon in Orange County had destroyed 120 homes as of Monday.

A Farmers spokesperson declined to comment specifically on California West but said that Farmers regularly reviews its financial exposure and that “when we find risks no longer meet our underwriting guidelines, we inform customers that we are unable to continue offering them coverage.”

The news conference was organized by Consumer Watchdog, a prominent Los Angeles advocacy group that has been critical of a reform plan by Lara called the Sustainable Insurance Strategy, which includes multiple initiatives to lower the cost of insurance and make it more attractive for insurers to resume writing fire coverage in California.

A key part of the strategy, as wildfire losses accelerate, is allowing insurers to use complex computer models — called “black boxes” by the advocacy group — that simulate possible losses from fires in calculating their premiums, rather that relying on past claims data.

In exchange for that concession, the state industry has agreed to start writing policies again in high-wildfire-risk communities using a formula that requires insurance companies to issue a certain number of policies based on the percentage of the market they control. Under the terms of the formula, for example, if an insurer had a 10% statewide market share, it would have to cover at least 8.5% of homes in high-risk communities.

Consumer Watchdog maintains that the final regulations recently issued by the department do not actually require that insurers meet that percentage but instead allow them to meet lesser goals and even devise their own plan to improve their coverage.

Lara also plans to allow insurers for the first time to include in the cost of homeowner premiums reinsurance they buy from large firms to protect their own bottom line from catastrophic events.

Consumer Watchdog says the changes amount to little more than a giveaway to the industry that will result in higher premiums without improving coverage. It suggests insurers be required to offer policies to homeowners and businesses that have taken steps to reduce fire risks on their property.

“Insurance Commissioner Lara has been worse than asleep at the switch. He’s been in the back rooms making deals with the insurance companies,” Jamie Court, president of the group, said at Tuesday’s event.

At the hearing, Lara defended his plan, saying his Sustainable Insurance Strategy is the biggest reform of the industry since the 1988 passage of Proposition 103, which created an elected insurance commissioner with the authority to review, reduce and reject insurer rate hike requests. Consumer Watchdog founder Harvey Rosenfield was the author of the proposition.

Lara said that his plan is updating the decades-old regulations based on the proposition and that his department has been hiring more personnel and consultants as it seeks to have all the regulations in place by the end of the year. “We are building the airplane as we are flying it,” he told the committee.

Lara also announced during the hearing that the department would be working with Cal Poly Humboldt to develop a public computer model that could be used by insurers, communities and other parties to calculate possible wildfire losses.

However, he warned that it would take several years to build the model, and that insurers would be allowed to use their own proprietary algorithms to set rates, which would be reviewed by his department’s regulators. “This is not a quick or simple solution,” he said.

He also criticized Consumer Watchdog as an “entrenched interest” that benefits from its intervention in rate filings by insurers seeking rate increases. Under Proposition 103, as a so-called intervenor, the group can bill for its time spent on such cases.

Lara alleged that the group has made $10 million over the decades, which he said was ultimately paid for by consumers. Consumer Watchdog maintains that its intervention in challenging excessive home, auto and other insurance rates has saved consumers $6 billion over 22 years.

Rex Frazier, president of the Personal Insurance Federation of California, a trade group of property and casualty insurers, responded to Consumer Watchdog’s criticisms of Lara’s plan saying: “We need adults in the room, not a group that only makes money when problems are unsolved.”