a question: My home insurance is a mess. I have lived in the Monterey area for many years. I have always paid my premiums on time and have never filed a claim, but I lost coverage last year when my insurance company said they would not renew my policy. Finding new insurance has proven impossible. I was going to apply for the California FAIR plan, but I heard it’s too expensive. What is your opinion?
Answer: You are not alone when it comes to insurance problems. Many homeowners across California face similar challenges. Many major insurance companies have reduced their exposure to California risks over the past few years; Some have stopped writing new policies, and others have chosen not to renew existing ones. Why would a rational entity like an insurance company pass up the opportunity to insure your home? The answer is simple: they can’t do it profitably at current rates.
Before I answer your question, I need to make something clear: At its roots, the California insurance crisis is an example of fundamental economic gone wrong. Those who need insurance cannot get it, while those who want to sell insurance cannot charge a price high enough to make it profitable. Why is it not profitable? Because in 1988, California voters passed Proposition 103, which put insurance commissioners between buyers and sellers of insurance. According to Proposition 103, the role of the law was to “protect consumers from abusive insurance rates and practices, encourage a competitive insurance market, provide a responsible insurance commissioner, and ensure that insurance is fair, available, and affordable for all.” All California residents.”
These goals are laudable, but the devil is in the details. It is all too easy for insurance commissioners – especially those elected by popular vote – to use the power of the office to block necessary increases in insurance rates. As consumers, this may be a good thing for us in the moment, but the end result is a lack of insurance like we are seeing now in California. Price control always leads to shortages.
The best strategy to protect consumers from price gouging is to encourage more competition in the insurance market. In a free market, supply and demand dynamics discipline the greedy. Insurers that try to charge too much will lose market share and profits. This is the power of free market capitalism. To quote a famous quote from Winston Churchill: “Free market capitalism is the worst economic system, except for all others.”
Some readers may think that I am either naive about corporate greed, or heartless toward those facing financial challenges due to high insurance rates. I assure you I am not. As we discussed, the free market can deal with corporate greed; We have other ways to help those experiencing financial stress. I am simply suggesting that the real solution to our current insurance shortage is to rethink our dysfunctional regulatory system.
Now, having said that, the California Insurance Commissioner recently granted some limited rate relief to a few insurers. In addition, there are some rule changes in the works, which would allow insurers to take the expected impacts of climate change risks into account when proposing their rate increases. These changes should encourage some providers to return to the California market, but the return will likely be slow. Meanwhile, the FAIR plan may be your best (or only) option.
There’s not much to recommend about the California FAIR plan – except that it may be your only option. According to people I know who have FAIR insurance, it is expensive, slow to implement, and customer service is nonexistent. Governor Newsom’s home is insured under the FAIR plan, and he’s not a fan of it either. In an interview last September on Politico, he said: “People can’t get insurance. I know this firsthand. As someone who owns a home in a FAIR plan, I completely understand this issue, because it is brought to my attention on an almost daily basis. “It’s not just the cost.”
Steven C. Merrill is an investment advisor and partner at Monterey Private Wealth, Inc., in Monterey. Send investment, tax, retirement or estate planning questions to Steve Merrell, 2340 Garden Road Suite 202, Monterey 93940 or steve@montereypw.com.