Q: My homeowner’s insurance is a mess. I have lived in the Monterey area for many years. I always paid my premiums on time and never filed a claim, but I lost my coverage last year when my insurance company said they wouldn’t renew my policy. Finding new insurance has proven impossible. I was going to apply to the California FAIR plan, but I hear it is very expensive. What are your thoughts?
A: You are not alone when it comes to insurance problems. Many homeowners across California face similar challenges. Several large insurance companies have limited their exposure to California risk over the past few years; some have stopped writing new policies, and others have chosen not to renew existing policies. Why would a rational entity like an insurance company pass on the opportunity to insure your home? The answer is simple: they cannot do it profitably at current rates.
Before I answer your question, I need to explain something: at its roots, California’s insurance crisis is an example of basic economics gone awry. Those who need insurance can’t get it, while those who want to sell insurance can’t charge a price high enough to make it profitable. And why isn’t it profitable? Because in 1988, California voters passed Proposition 103, which placed insurance commissioners between buyers and sellers of insurance. According to Prop 103, the role of the law was to “protect consumers from arbitrary insurance rates and practices, to encourage a competitive insurance marketplace, to provide for an accountable Insurance Commissioner, and to ensure that insurance is fair, available, and affordable for all Californians.”
These goals are laudable, but the devil is in the details. It is very 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, that might feel good to us in the moment, but the end result is a shortage of insurance like we are experiencing now in California. Price controls invariably lead to shortages.
A better strategy for protecting consumers from price-gouging is to promote greater competition in the market for insurance. In a free market, supply and demand dynamics discipline the greedy. Insurance companies that try to charge too much will lose market share and profits. This is the power of free market capitalism. To riff on a famous quote from Winston Churchill, “Free market capitalism is the worst economic system, except for all the others.”
Some readers might think I am either naïve to corporate greed, or heartless toward those financially challenged by higher insurance rates. I assure you that I am neither. As discussed, a free market can deal with corporate greed; we have other means for helping those in financial stress. I’m simply suggesting that the real solution to our current insurance shortage is rethinking our dysfunctional regulatory regime.
Now, having said that, the California Insurance Commissioner has recently granted some limited rate relief to a few insurance companies. Additionally, there are some rule changes in the works, which would allow insurance companies to consider anticipated effects of climate change risk when proposing their rate increases. These changes should entice some providers back into the California market, but the return will probably be slow. Meanwhile, the FAIR plan may be your best (or only) option.
There’s very little to recommend about the California FAIR plan—except that it may be your only choice. According to people I know who have FAIR insurance, it is expensive, slow to put in place, and its customer service is non-existent. Governor Newsom’s home is insured by the FAIR plan, and he is not a fan, either. In an interview last September on the Politico website, he said: “People cannot get insurance. I know this intimately. As someone who owns a home that’s on the FAIR plan, I understand intimately the issue, because it’s brought to my attention almost on a daily basis. It’s not just the cost.”
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to email@example.com.