Support Letter – Home Insurance Trailer Bill

State of California Milton Marks Commission on California State Government Organization and Economy 925 L Street, Suite 805 website: www.lhc.ca.gov Sacramento, CA 95814 phone: (916) 445-2125 July 29, 2024 The Honorable Gavin Newsom Governor of California The Honorable Mike McGuire The Honorable Brian Jones President pro Tempore of the Senate Senate Minority Leader and members of the Senate The Honorable Robert Rivas The Honorable James Gallagher Speaker of the Assembly Assembly Minority Leader and members of the Assembly Dear Governor and Members of the Legislature: The Little Hoover Commission supports pending legislation introduced by Governor Newsom that would streamline the review of insurance rate filings.1 We believe the legislation would reduce uncertainty for insurers, help stabilize the market, and ultimately provide a greater chance of continued coverage for Californians seeking to insure their most valuable possession. Although our Commission anticipates releasing a full report later this year assessing the homeowners insurance market and making recommendations for reform, the urgency of this problem and the timing of the legislative calendar cause us to conclude that an immediate letter best fulfills our Commission’s statutory charge to make recommendations that foster economy, efficiency, and improved service in state government. Earlier this year, the Commission launched a review of California’s home insurance market to better understand the availability of homeowners insurance and explore potential reforms that may be needed. As we conducted our hearings, the Governor released his own proposal, embodied in a budget trailer bill, to speed up the process to review and approve insurance rate increases before they can be implemented. Proposition 103 — approved by the voters in 1988 and still the state’s basic regulatory framework for insurance — established timelines for the length of the rate review process. It required the Department of Insurance to act within 60 days on rate requests without a hearing and 180 days on those with a hearing.2 In practice, California’s rate reviews can take much longer. Pedro Nava, Chairman Gil Garcetti Liz Ortega, Assemblymember Anthony Cannella, Vice Chairman José Atilio Hernández Janna Sidley Dion Aroner Jason Johnson Scott Wilk, Senator David Beier Dave Min, Senator Ethan Rarick, Executive Director Phillip Chen, Assemblymember Between 2018 and 2022, it took 236 days on average to reach a resolution in a home insurance rate filing in California3 – slower than in all states besides Colorado.4 This average is affected by extreme- outliers, but the state’s ranking remains the same when looking at the median resolution time, which was 198 days during this period.5 Delays are growing longer. The average resolution time for these types of filings was 308 days in 2022, up from 151 days in 2013. Insurers argue that California’s slow and opaque rate review process makes it difficult to adapt quickly to changing market conditions. They also say that the current process can leave them in “pricing limbo” for months on end, making it challenging to operate effectively. They contend that greater predictability in the filing process would increase insurers’ confidence in the California market and spur investment.6 Consumer advocates remain concerned that expediting rate reviews could dampen transparency and public participation in the rate making process.7 Stakeholders debate who is to blame for these delays. Some, including Commissioner Lara, attribute the delays to various administrative challenges. Department staffing levels, which have dwindled since the pandemic, make it difficult to process rate filings in a timely manner. Insurers may fail to provide the Department with complete data needed to justify changing their rates, resulting in a lengthy back-and- forth.8 Others say Department staff ask many more questions in the rate review process compared to other states.9 Some believe that California’s unique intervenor process is the source of delays.10 In May, Governor Gavin Newsom released his own proposal to streamline and provide more clarity in rate reviews. This proposal builds on Commissioner Lara’s work through the Sustainable Insurance Strategy to improve the rate review process, including by increasing staff, providing more clarity in submission requirements, and ensuring that intervenors only raise concerns relevant to the rate filing at hand and do not repeat department objections.11 Under the trailer bill, the Department would have 60 days to review insurers’ rate applications after they are deemed “complete.”12 If more time is needed, the proposal would allow for one or more 30-day extensions, as long as the Department shares information on the status of the filing, including what issues remain unresolved and its position on these issues. At the 120-day mark, the Department would be required to provide its own estimated acceptable rate, which the insurer can choose to accept or reject. If the insurer rejects the proposed rate, the review process would continue, with 30-day extensions and public disclosures, as outlined above. Intervenors, as they do under current law, would still have 45 days after the Department provides public notice of the complete rate application to file a petition to participate in the rate review process. The proposal would also require the Department to publish a tool to help reconcile differences in data between the Department and insurers. In May, Commissioner Lara told legislators that the Department is working with an outside contracting firm to develop the tool and that the first of its two parts will be done by the end of the year.13 Far too many Californians continue to lose their insurance, pay more for less coverage through the FAIR Plan, or make the difficult decision to simply go without coverage.14 By expediting the rate review process, we believe the Governor’s proposal would help stabilize the market and enable insurers to lift pauses and once again begin writing new policies. For these reasons, the Little Hoover Commission is pleased to support the Governor’s proposed trailer bill. If the Commission or our staff can provide any further assistance as this proposal moves through the budget process, please do not hesitate to ask. Little Hoo v er Commission Sincerely, Pedro Nava, Chair Little Hoover Commission Notes 1 California Department of Finance. Trailer Bill: Streamlined Review Pending Insurance Filings. Updated May 28, 2024. https://esd.dof.ca.gov/trailer-bill/public/trailerBill/pdf/1140. 2 Cal. Ins. Code § 1861.05 3 Earlier data from the California Department of Insurance indicate that it took an average of 167 days to approve home insurance rate filings from January 2017 to September 2020. Source: California Department of Insurance, “Virtual Investigatory Hearing on Homeowners' Insurance Availability and Affordability.” October 19, 2020. https://www.insurance.ca.gov/01- consumers/200-wrr/upload/CDI-Investigatory-Hearing-on-Homeowners-Insurance-Availability-and-Affordability- FINAL_Public_10_19_2020.pdf. 4 Lawrence Powell, R.J. Lehmann, and Ian Adams. “Rethinking Prop 103’s Approach to Insurance Regulation.” International Center for Law and Economics. November 6, 2023. https://laweconcenter.org/resources/rethinking-prop-103s-approach-to- insurance-regulation/. 5 Lawrence Powell, R.J. Lehmann, and Ian Adams. “Rethinking Prop 103’s Approach to Insurance Regulation.” International Center for Law and Economics. November 6, 2023. https://laweconcenter.org/resources/rethinking-prop-103s-approach-to- insurance-regulation/. 6 Risk Information Inc. Property Insurance Report. Vol. 13#13/709r. December 4, 2023. Also, Rex Frazier, President, Personal Insurance Federation of California. Written Testimony to the Commission. March 27, 2024. 7 Carmen Balber, Executive Director, Consumer Watchdog. Testimony to the Little Hoover Commission. March 28, 2024. 8 California State Insurance Commissioner Ricardo Lara. Testimony to the California Assembly Standing Committee on Insurance. May 15, 2024. Also, Megan Fan Munce. “California’s insurance crisis is ‘devastating’ the real estate market, commissioner says.” San Francisco Chronicle. June 7, 2024. https://www.sfchronicle.com/california/article/home-insurance- ricardo-lara-19503995.php. 9 Risk Information Inc. Property Insurance Report. Vol. 13#13/709r. December 4, 2023. 10 California State Insurance Commissioner Ricardo Lara. Testimony to the California Assembly Standing Committee on Insurance. May 15, 2024. Also, Personal Insurance Federation of California. “Issue of Importance to PIFC: Intervenor Reform.” https://pifc.org/priorities/. 11 California Department of Insurance. Sustainable Insurance Strategy. https://www.insurance.ca.gov/01-consumers/180- climate-change/SustainableInsuranceStrategy.cfm. Also, California Department of Insurance. “Commissioner Lara unveils first wave of proposed regulatory reforms to help safeguard the integrity of the state’s insurance market.” February 9, 2024. https://www.insurance.ca.gov/0400-news/0100-press-releases/2024/release007-2024.cfm. Also, California State Insurance Commissioner Ricardo Lara. Testimony to the California Assembly Standing Committee on Insurance. May 15, 2024. 12 Under the trailer bill, the 60-day clock does not begin until the Department of Insurance has deemed the rate application complete. Commissioner Lara is working to provide clear guidelines on what it means to have a “complete rate application” through his Sustainable Insurance Strategy. Ricardo Lara, Insurance Commissioner and Lucy Wang, Special Counsel and Deputy Commissioner, California State Department of Insurance. Testimony to the California Assembly Standing Committee on Insurance. May 15, 2024. Also, California Department of Insurance. “Commissioner Lara unveils first wave of proposed regulatory reforms to help safeguard the integrity of the state’s insurance market.” February 9, 2024. https://www.insurance.ca.gov/0400-news/0100-press-releases/2024/release007-2024.cfm. 13 California State Insurance Commissioner Ricardo Lara. Testimony to the California Assembly Standing Committee on Insurance. May 15, 2024. 14 Amy Bach, Executive Director, United Policyholders. Written Testimony to the Little Hoover Commission. March 27, 2024. Little Hoo v er Commission