The Expert Podcast

The California insurance commission has issued a special bulletin to put a moratorium on non-renewals of insurance policies. So if you had an insurance policy in the area around where these fires were, your insurance company cannot now drop you for a certain period of time. Even if you're not a resident of California in these areas, this type of action is something to be aware of if you're in a high disaster-prone area. It could be Florida with hurricanes, Texas with tornadoes, or Oklahoma with hail storms. It could be any area that has natural disasters. Many times, the insurance commissioner wants to protect property owners and policyholders from losing coverage when there's a disaster.

Well, here's the thing: if you live in this area and you had insurance on the date of the disaster, your claim is going to be processed, even if they cancel you the day after the fire. They can't cancel your prior coverage. This is only going to stop cancellations for future policies. Homeowners who live in those areas where their house did not burn down obviously want to have insurance. But why are those the only people being protected from non-renewals? Why not somebody who lives in San Francisco, San Diego, or Sacramento? Why are these zip codes you can see on the screen the only ones that are non-renewal?

You might think, "Well, the insurance company might be more likely to cancel them because that area has now been proven to be prone for fire." Well, it's only been proven to that this week. All the areas in California have been proven to be prone to some things: earthquakes, fires, mudslides. This is more of a PR thing than anything else. The other problem is if you tell an insurance company you can't cancel this policy... and cancellation is kind of the wrong word because insurance companies don't cancel existing policies. What they do, and you can see the word here, is called non-renewal. Non-renewal means that every year your insurance policy ends on a certain date, the expiration date, and you get a new policy that starts for the next year.

That's important because things change: rates change, coverages change, and your home value may change. So it's really non-renewal, but they're also telling insurance companies you can't non-renew somebody. You have to renew their policy and give them a new policy, even if you don't want to. It's kind of like telling a dealership, "Look, this customer bought a car from you three years ago, and they're going to come in at the end of three years, and you have to sell them another car for a certain price." You can't change your mind.

The reason why that's difficult is because insurance companies have to, by law, charge enough money for premiums on their policies to put money in the bank so they can pay out claims. If you're an insurance company and say, "I'm going to sell insurance for a dollar, just pay me a dollar," that might sound great, except for if they only charged everybody a dollar, they wouldn't have any money in the bank when there was a claim that they have to pay out to pay for somebody's loss.

So the insurance commissioner looks at the bank account of every insurance company on a regular basis to make sure that they have enough money to pay out claims. If you are not collecting enough to pay out claims, the insurance commissioner will shut you down. So if you can't non-renew somebody because they're in a high-risk area, eventually, your company won't be able to exist and survive. You might say, "Well, just raise the rates." Yeah, well, there's two problems with raising rates.

First of all, if you raise rates too much, consumers are not going to buy, for one of two reasons: either they can't afford it, or they're just too insulted, thinking that the price is too high. The other thing is the insurance commissioner in every state also controls policy rates. You can't raise your rates above a certain amount—sometimes 5% a year, 6% a year, whatever it is—and you have to go by prior year's claims. So if all of a sudden there's an increase in claims, you may not be able to raise your rates fast enough to cover future years if you know there's going to be more disasters, climate change, or inflation.

So it's a catch-22 for insurance companies, which is why some companies are withdrawing from states, withdrawing from markets, because they're not able to meet the financial requirements of the commissioner that says, "Look, you have to have X amount of money in the bank." If you're not taking it in from policyholders, you're out of business, and they're making these non-renewal decisions. This is scary if you're a company that has to balance your budget, your profit and loss, and then an outside agency of the government is telling you what you can and can't do. If you're not able to balance your budget, you may not be able to stay in business, at least in that state.

It sounds like a good thing, and I'm sure as an insured property owner, you might think, "Yeah, this is the right thing to do." But you have to always look down the road and find out really what's going to happen with this. If too many insurance companies leave a market, that means whoever's left is, number one, going to have to raise their rates higher because they have more of a risk. Number two, they may not be financially able to cover that high of a percentage of all the losses. If you have a fire that burns through Pacific Palisades and there are nine insurance companies in that area that covers that area, every insurance company only has one nth, or about 12% of the loss on their backs.

If you run off seven of those insurance companies, so now there's only two, well, each insurance company is going to have to carry the burden of 50% of the losses, which might put them out of business. So there's a lot more at play than just the immediate knee-jerk reaction. It may be the right thing to do, but there's more to think about with insurance to make sure there's a robust, successful market in the future.

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