Red Tape Podcast, Episode 8 – Build high where it’s dry
Red Tape is the newest R Street podcast about the country’s biggest problems and the surprising ways that governments (and regular people) often get in the way of solving them. It was produced in partnership with Pod People. Listen wherever you find podcasts, including Apple Podcasts and Spotify, and learn more about the podcast here.
Episode description:
What do California and Florida have in common other than beaches and Disney? Natural disasters and insurance markets that are in shambles.
Kelli Pierce interviews Caroline Melear, R Street’s resident fellow on Insurance and Trade policy. Caroline, a Florida resident, breaks down the state’s years long struggle with massive hurricanes, insurance, and why the crisis recently came to a head.
The situation in California is no less chaotic. Kelli also speaks to Steve Greenhut, R Street’s western region director and a California resident, about California’s recent wildfires and floods, the political decisions that have caused major insurance companies to leave the state, and what can be done to prevent California from having the same insurance problems as Florida. (Note: R Street recorded this episode before the existence of Hurricane Hilary.)
Episode Transcript:
Kelli Pierce:
Hey, Shosh, ever been abducted by an alien?
Shoshana Weissmann:
I don’t know. There was one time I was hiking alone and I met a shiny silver guy with big eyes and I don’t remember much, so maybe.
Kelli Pierce:
Well, if you ever do get abducted by aliens on one of those long and remote hikes you do, you might be interested to know that there’s an insurance policy for that.
Shoshana Weissmann:
Wait. Have they ever had to payout? That’s my first question.
Kelli Pierce:
It doesn’t look like it, but Lloyd’s of London that ensures the celebrity body parts, they’ve sold tens of thousands of policies for alien abduction and there’s firms now in the US that are doing it.
Shoshana Weissmann:
Yeah, I wouldn’t have thought that it would be the UK because we’re the ones who do crop circles. It’s not them, right?
Kelli Pierce:
No, not at all. You want to know some other crazy policies?
Shoshana Weissmann:
Oh gosh, yes, please.
Kelli Pierce:
This is direct from Jerry Theodorou, R Street’s Policy Director for Finance, Insurance and Trade. He knew an accident and health underwriter who wrote a policy for a team of mountaineers climbing a mountain in the Himalayas. It was one of the most dangerous mountains to climb, so he wrote it with a two climber deductible. That meant that coverage would only kick in after two climbers fell off the mountain.
Shoshana Weissmann:
That’s a really dark insurance policy to write.
Kelli Pierce:
Apparently that person was the only underwriter willing to roll the dice for those climbers.
Shoshana Weissmann:
That’s crazy. That’s really funny.
Kelli Pierce:
There are so many niche insurance policies just like that stuff. Do you want to hear one more?
Shoshana Weissmann:
Oh my gosh. Of course.
Kelli Pierce:
There’s an insurance policy for cold feet.
Shoshana Weissmann:
I have Raynaud’s, which makes my feet cold. So do I need my feet insured?
Kelli Pierce:
No. It’s also known as change of heart insurance, so it reimburses a third party for wedding costs if the bride groom call off the nuptials. As long as you call it off a year in advance though. That’s the part that sucks. I mean, along with not being married.
Shoshana Weissmann:
Today’s episode is about insurance. Am I right?
Kelli Pierce:
How’d you guess? You’re getting good at this co-hosting thing, Shosh.
Shoshana Weissmann:
Oh man. Thanks, Kelli. Now please send me the link for that alien abduction insurance policy unless it’s too late for me.
Kelli Pierce:
Sounds like it is, but, sure thing.
I’m Kelli Pierce, an award-winning journalist and digital media associate at R Street.
Shoshana Weissmann:
I’m Shoshana Weissmann, Director of Digital Media and a fellow at R Street.
Kelli Pierce:
And this is Red Tape. So Shosh, now that you know that our episode today is all about insurance, how excited are you on a scale from one to 10?
Shoshana Weissmann:
Well, considering how much I love dealing with my health insurance, as someone with every autoimmune disease, I would say I’m about to turn this episode off.
Kelli Pierce:
Wait, wait, wait. Hang on. Hang on. Stick around. Let me ease you into it because thankfully, today’s episode has nothing to do with health insurance, but more around how the fundamental things that we’ve been able to ensure in the past, things like our homes are becoming harder and harder to get because of stuff that’s mostly out of our control. I’m looking at you, climate change.
Shoshana Weissmann:
I know that the increase in regularity of climate related disasters and responses and state policy have specifically made homeowner’s insurance in certain parts of the country unobtainable. Also, when insurance companies need approval to raise rates from a state and when the state’s like, “LOL, no, you need to reduce it,” I just don’t know how they’re supposed to operate.
Kelli Pierce:
Yep. The government’s also making a mess here, almost to the point where depending on where you live, homeowner’s insurance is becoming just as rare to get as some of those examples we talked about at the top of the show.
Shoshana Weissmann:
That’s crazy. So where are we focusing our attention in this episode?
Kelli Pierce:
Well, we’re going to focus specifically on California and Florida, both because they’re facing significant public policy challenges around their insurance markets for very different kinds of climate challenges, but also because R-Street experts that I’ll be speaking with today are from each of those states. However, even if you don’t live there, stick around. What happens in those states can filter down to the rest of the country very easily.
Shoshana Weissmann:
Insurance companies are national, sometimes international companies. If they fail in certain states and other states get into that policy too, that can really mess up the whole national market.
Kelli Pierce:
And you know that politicians from other states look at places like California and Florida and they go, “What are they doing?”
Shoshana Weissmann:
Oh yeah. States are constantly looking at those two, among others, but those are two big ones. So for today, who specifically do you have coming up?
Kelli Pierce:
We’re going to start in Florida where I’ll be speaking with Caroline Melear. She lives there and she’s also R Street’s Resident Fellow on Insurance and Trade. We’ll be discussing the factors contributing to that state’s homeowner’s insurance crisis like hurricanes and lawyers.
Shoshana Weissmann:
Yeah, that makes sense. Plus it’s a massive red state, which I can imagine poses different outcomes to the massive blue state that you’re also focusing on in this episode.
Kelli Pierce:
Exactly. Because after Caroline, I’ll be speaking with Steve Greenhut, R Street’s Western Region Director who lives in California. We’ll discuss how politicians and something Californians voted for is leading to insurance companies leaving the state. We also talk about what can be done to fix it.
Shoshana Weissmann:
And risks galore, earthquakes, wildfires and floods. Say it with me. Oh my.
Kelli Pierce:
All right. Let’s get into it. But a quick note, if you’re a new parent, you’re not crazy. You’ll hear Caroline’s little toddler in the background. However, she did a great job during the interview and her kid’s clearly not a fan of insurance regulations like mom, but don’t worry, his dad was there to handle things. And now my conversation with Caroline Malear.
So Caroline, many people are going to Florida these days and they’re just buying their dream homes. I have a former coworker who’s building a house there right now all custom with this really cool recording studio and I’m super jealous, but he might not be able to get homeowner’s insurance. That’s got to be a shock.
Caroline Melear:
Well, there’s always the capability to get homeowner’s insurance. Whether or not it’s going to be your ideal is another question. Floridians are paying on average three times more than the national average for homeowner’s insurance. So a lot of people are turning to the state backed system, which is called Citizens, and the policies that are under the umbrella of Citizens have grown substantially over the past few years, used to be referred to as the insurer of last resort. In fact, it’s still referred to as such. However, it has, in recent years, become more or less the cheapest and therefore most desirable option for most people. So even among residents who have more than one option, they see the rates from Citizens, they’re so much more affordable. They are making a conscious choice to have their homeowner’s insurance with Citizens, even if they do have the option of other insurers.
You’ve also got sort of a unique aspect in Florida too, I would say a more significant degree of people who purchase in Florida who are paying in cash. If you pay in cash, you are not required by a lender obviously to have a homeowner’s insurance. So there is likely a substantial amount of people who say, “I own the property outright. I’m not required to have insurance. I’m not going to pay for it, and I’m going to take the gamble.” And that’s obviously an issue too because insurance is there for the worst case scenario type of situation, and that certainly happens in Florida.
Kelli Pierce:
Yeah, absolutely. And as you alluded to, this has been a longstanding problem. You are a Floridian. You were there before it was cool, but even you had trouble getting homeowner’s insurance, right?
Caroline Melear:
That’s correct. My husband and I became first time homeowners a little over a year ago. When we were going to secure homeowner’s insurance, we genuinely could not find anyone who would provide insurance for us except for the state backed system. That was the only option available to us.
Kelli Pierce:
Wow. I’ve also heard that a lot of insurance companies have left the state. Why is that and is there any hope of reversing this trend?
Caroline Melear:
Probably the biggest reason is the litigation landscape in the state of Florida, which has allowed for a lot of frivolous and unreasonable lawsuits in a lot of cases against insurance companies. In a lot of cases, it’s sort of predatory situations where homeowners are hoodwinked into signing over benefits of their insurance policy to contractors. There’s a whole host of litigious litigation issues that are occurring as well that have really made the situation in Florida completely out of control.
Kelli Pierce:
Does it seem like every day there’s a new person getting out of Florida’s homeowner’s insurance market or just insurance market in general, or is it overblown a little bit?
Caroline Melear:
I wouldn’t necessarily say it’s overblown. I think we’ve been referring to it as a crisis for a while, and I think with Hurricane Ian, which occurred last year and caused massive damage in the state and very serious financial losses, that really was the impetus for the legislature to make some major changes that we are hoping will better the situation. And we believe that they will. However, that’ll take time, but in the meantime, there are still insurers leaving the state or going completely insolvent. They can no longer afford to operate in the state either as a result of the storms or as a result of litigation issues.
Kelli Pierce:
Wow. Let’s break down the issues though with Florida’s homeowners insurance one by one. There are major issues under the surface, which we’re going to get into later in the interview, but let’s talk about the one people think of automatically, which is hurricanes. How much damage do they do?
Caroline Melear:
Well, it can be obviously very extreme, and we’re not talking about just insurance losses, we’re talking about loss of life. We’re talking about people losing their homes that they’ve lived in possibly their entire lives, maybe even their parents grew up in these homes. I mean, we’re talking about people losing, in some cases, everything. Everything. So they’re extremely devastating. They’re very scary. It’s something taken very, very seriously. But in terms of financial losses, specifically Hurricane Ian, which I referred to, that cost $112 billion. Now that’s not insured losses, that’s just losses overall, but that’s $112 billion. It’s pretty substantial. Another recent hurricane was Hurricane Michael that was about $25 billion, which probably doesn’t sound that much in comparison to Hurricane Ian, but it’s still very, very significant.
Kelli Pierce:
And that’s billion with a B.
Caroline Melear:
Correct.
Kelli Pierce:
If you go back in time a little bit, why were insurers caught off guard with Hurricane Andrew? Were people just not prepared for a Category 5 hurricane or had this never happened in Florida before?
Caroline Melear:
I think it had been a long time since a really devastating hurricane had occurred. And by a long time, I mean many, many decades. My recollection and understanding of it is that the Miami community had grown really, really rapidly and hundreds and hundreds of homes were being built up really quickly and they weren’t operating under very strict building codes. And it had been so long since a catastrophic storm had happened, it kind of became, “Well, it’s never going to happen to me,” sort of situation. And those homes were not at all built to withstand the storm.
Kelli Pierce:
That makes a lot of sense. Insurers are also planning on more hurricanes, I think, because of climate change, correct? So that could add to the issue here in a big way.
Caroline Melear:
They certainly are, and that’s been a position of the insurance industry for a while now. They do anticipate increasing environmental events occurring over the coming years, and according to their data, they’ve seen that happen in recent years as well. So it’s something that they are preparing for and they have a variety of different tools for handling that. Not all of them are going to be great things that people want to hear, but it’s just sort of the realities of the business and what they’ll have to do to stay solvent.
Kelli Pierce:
What are some of those things that people won’t want to hear? I got to ask.
Caroline Melear:
Well, raising rates. So the rate needs to reflect the risk, and that’s just sort of the bottom line with insurance. The insurance rates need to be actuarially sound, which means that they are able to pay out claims should they happen, that your rate isn’t artificially low like it is with so many different government funded and government run insurance companies or insurance agencies. I could point to a couple. One being the Florida state backed Citizens is certainly one, but also the National Flood Insurance Program is another huge example of that. So they’re not required to be actuarially sound. The business isn’t backed by taxpayers or tax dollars, so they have to be able to pay out the losses, and if the losses are increasing, the natural thing to happen is that the rates are going to increase as well.
Kelli Pierce:
I want to get to the stuff now that might pop the eyes out of people’s heads that are listening, and this has nothing to do with natural disasters. We talked about this earlier. 79% of all homeowners insurance lawsuits in the US come out of Florida. That’s 79%. What in the world is going on there?
Caroline Melear:
For reference, we are a populated state, but we only account for 9% of all the policies in the country and 79% of the claims. So what’s happening there is the major issues with litigation in the state of Florida, there’s been a variety of different things that have been allowed to occur in the state over many years, including assignment of benefits, which is where the benefits of the policy can be assigned to say a contractor. And then the contractor sues the insurance company, has assigned the benefits to themselves, and with the homeowner’s signature, but that’s a whole other issue where contractors were going door to door. It was fairly predatory. There’s also something called one-way attorney fees that have been allowed in the state of Florida and they’re not allowed in most other states. So that’s been another big contributing factor.
Kelli Pierce:
What’s one-way attorney’s fees?
Caroline Melear:
One-way attorney fees are if the plaintiff is awarded in a suit and they get even a penny of damages that the attorney can then file for their fees to be paid as a part of the suit as well. They were getting these fees well in excess of what a normal hourly rate would be for what they spent on the case. So it was just astronomical amounts of money that attorneys were receiving because of the legal landscape in the state of Florida that they would not otherwise be capable of getting based on the work that they did on a case.
Kelli Pierce:
That makes sense. And I want to be very clear, we’re not saying that someone shouldn’t get a payout if something bad happens, it’s just that this legal landscape was not at all favoring the regular person. It was a bunch of people kind of stuffing their pockets.
Caroline Melear:
Oh, that’s exactly right. Yeah. I mean the homeowners are the victims through and through. They were approached in predatory ways to sign over their benefits, convinced maybe sometimes to engage in litigation or lawsuits that they otherwise would’ve never found any sort of issue with what was going on with their insurance. It has led to downstream much higher costs for homeowners across the entire state, and a lot of insurers have specifically cited the legal landscape in the state of Florida as the reason for not operating in the state. They’re not even saying that it’s storms. In some cases, they are saying that it’s storms, but there’s been plenty of companies that have specifically stated, “We cannot afford to operate in the state of Florida because of the legal landscape.” So you’re reducing competition obviously and forcing so many more people into the state backed system. So it’s an absolute mess for homeowners.
Kelli Pierce:
And all of this, as we’ve been talking about, has been pushing Floridians to use what’s called the insurer of last resort. What is that?
Caroline Melear:
The insurer of last resort is called Citizens. So Citizens is a state backed insurer of last resort. As we’ve already said, the policies have grown astronomically under Citizens and they are statutorily capped at how much their rates can increase year over year. So they are not in line with any of the private insurers. That has made them a more desirable option to homeowners, which is the exact opposite of what’s supposed to be occurring. A couple changes were made in the legislative session as well to try and require flood insurance in tandem with Citizens insurance policies. So for new Citizens policy holders in certain flood zones, they will be required to purchase flood insurance as well. So I think, A, that gives people more awareness around flood insurance. And B, it might make people sort of rethink and say, “Well, wait a second, I don’t want to have this whole extra policy.”
And certainly we’re for freedom of choice here. If a homeowner genuinely feels that they don’t need flood insurance, then hopefully they have another option where they can go as well. But it gives people a moment to think about flood insurance and maybe disincentivizes people from automatically going with Citizens as well.
Kelli Pierce:
Yeah, absolutely. I think Hurricane Ian definitely was a wake up call for a lot of people because just seeing those images on the news, I mean, it just looked like places that people enjoyed going on vacation and living, and then it just looked like they were wiped off the map. So that made a lot of sense that things needed to change.
Caroline Melear:
Yeah, absolutely. The significant financial toll that storm took, again, it was $112 billion in losses, and that’s not just Florida, that’s the storm in its entirety. But that was certainly I think an impetus for change in the Florida legislature to say, “This might be our last chance here, you guys. We’ve got to make some major changes now or this entire industry is going to collapse.” Florida has continued to grow despite the issues, but I think that we are hopefully on the right track as far as what the legislature is capable of doing.
Kelli Pierce:
So lastly, two-part question, what does Florida need to do to fix its insurance market, and what can other states take away from Florida’s experience so they don’t repeat those mistakes?
Caroline Melear:
I think right now Florida has to take some time and do everything that they can to entice insurers back into the state. Again, a lot of the changes that have been made are going to do that. The hurricane risk has been here. It’s here to stay. It may be growing. That’s certainly the view of the insurance industry is that that risk is growing, but there are a variety of different ways that the insurance industry accounts for those growing risks. Looking at other states where the regulatory landscape is very overburdensome in terms of allowing insurance companies to raise rates, having to go to the insurance commissioner in order to get rate increases and how burdensome that process can a lot of times be. I think it’s something to look at because these companies have to be able to operate profitably, and if they can’t, then they won’t be able to provide insurance to as many people or they won’t be able to provide insurance to your state.
So competition is key here. We need regulatory landscapes that promote competition and entice more businesses to flourish, to operate in each individual state because there’s insurance companies that pick specific states and say, “We’re not going to write policies there.” Florida has been one of those. California has been one of those, and the regulatory landscape is a big part of that.
Kelli Pierce:
Yeah, absolutely. It’s not just red state, blue state, it’s policies that are business friendly and we understand because sometimes people have had negative experiences with insurance companies, but you have to stop and think, “Okay, what is actually going to make the most sense to get to better policies and eventually better rates and better coverages?” And that’s usually getting more players into the game, not having the lawsuits fly or price caps.
Caroline Melear:
Right, absolutely. And insurance does get sort of a bad rap. I believe there’s 13 states where the state insurance regulator is elected instead of appointed. So if you were running for insurance regulator, what would you say? You would say, “I will do everything I can to keep your rates low or get them lower.” Right? I mean, that’s a winning message in terms of a campaign. The less popular messages, “I am going to make sure the insurance companies have lots of competition.” You’re going down a path that makes it a little more challenging to get yourself elected. So I think in those states where the insurance commissioner is elected, California is one of them, there is an incentive to operate in a different way that isn’t focused on what’s best for the insurance industry, which then in turn is best for the insurance consumers. It doesn’t need to be an us versus them type of situation. That’s an R Street philosophy is free markets, real solutions.
So we want to see as much competition as possible because we think that is the best way to offer the best products and offer them at the best prices. It’s exclusively by allowing for the most competition. But yes, the insurance company certainly gets a bad rep, and there’s a couple reasons for that, but one that’s interesting to think about is insurance is often associated with tragedy. When do you turn to your insurance company? You had a car accident, you have a health scare, your home gets destroyed in a storm. I mean, you’re turning to your insurance company in probably some of your worst times in life or your most desperate times of need. And so it’s associated with tragedy, which is a bad starting point, but it’s good for people to think about it more as their first line of defense. When something bad happens, that’s your first line of financial defense is the insurance product that you have purchased for yourself or your home or your family or what have you.
Kelli Pierce:
Yeah, absolutely. And I want to say thank you so much, Caroline, for going through the toddler hurricane while talking with me right now.
Caroline Melear:
Yeah, no kidding. I still hear him. I guess we’re not napping today.
Shoshana Weissmann:
I love the way Caroline is able to talk through this stuff, especially because she’s a resident, she’s a little bit closer to it, and I also think she’s really good about just bringing a really, really deep issue to the surface.
Kelli Pierce:
And it’s totally understandable that people don’t have love for insurance companies, right? They’re not sympathetic to insurance companies. That makes total sense. But you also have to understand that just suing them all the time is also not protecting consumers. I think that’s what Caroline brought to the forefront, that we really need to think differently about how and when we actually take action against an insurance company.
Shoshana Weissmann:
Yeah. It’s actually really funny, and I know this might be a weird reference, but I think the South Park episode with the pen and the lawsuits was actually really prescient here when they were showing, “Okay, when you sue people, who are you suing? What’s the outcome? What are you hoping to get out of it?” And making sure that there’s a tight means end fit, which is a funny lesson to get from South Park, but I kind of think about that when we talk about all the lawsuits over insurance and stuff in general too.
Kelli Pierce:
It also makes me think of the very famous editorial in the Wall Street Journal about 30 years ago. It was from George McGovern who was a longtime liberal senator. I mean, he was the Bernie Sanders of his day. After he retired, he bought this hotel in New England and he ended up with a lot of frivolous lawsuits and the end of his piece, basically what he talked about was, “Okay, we need to have nuance in our conversations about what laws work and what laws do not.” So it’s not that the big bad insurance company is always good, right? But it’s also not that the average lawyer is great either, right? So we need to think about what are the sort of laws and unintended consequences of them, when we’re coming to policy.
Shoshana Weissmann:
Yeah. Even if you don’t like an organization, a company, whatever, you still want to make sure that the laws make sense because if the laws don’t make sense or even just have unintended consequences and cause other problems, that’s still a problem that then you have to deal with and you’re cutting your nose to spite your face.
Kelli Pierce:
Absolutely. As we see in Florida, the lawyers are making out, not people.
Shoshana Weissmann:
That’s a really good point. Well, let’s take a break. Red Tape from R Street will be right back.
Kelli Pierce:
Welcome back.
Shoshana Weissmann:
Okay, Kelli, we started on the east coast with Florida. Now it’s time to move west.
Kelli Pierce:
Yep. As far west as this continent will take us over, well, to California.
Shoshana Weissmann:
This is probably a pretty obvious question, but what makes California different from Florida when it comes to the insurance market?
Kelli Pierce:
Well, obviously Florida is the red state, California is the blue state, but it’s something that the people voted in that is making it impossible for them now to get homeowner’s insurance.
Shoshana Weissmann:
It’s an interesting thing that the people can kind of cut their nose to spite their face here too.
Kelli Pierce:
You know what? They were trying to make sure that they weren’t price gouged, and then it’s now spiraled out of control.
Shoshana Weissmann:
Yeah. Price controls don’t work super great. All right. Well, I think everyone probably has a gist. Let’s get to your conversation with Steve.
Kelli Pierce:
Steve, what’s going on with California? Can you explain that state to me? Because I’m an ex-Californian, born and raised there and I don’t get it.
Steve Greenhut:
Well, we probably need several podcasts to deal with what’s going on in California. I mean, it’s a wonderful state. I love it. I moved here from the Midwest 25 years ago. I’ve been up in northern California for a dozen years. I love it here. It’s a wonderful state. The keyword is despite. Despite the public policy challenges, which of course keep me employed because there’s plenty to opine about and plenty to do in the state legislature.
Kelli Pierce:
Yeah California is a great state. I like to joke, but the fact of the matter is it gets hate that it really doesn’t deserve. There’s an old joke about France has all these lovely wonderful things and then God gave France to the French to equal it out. It kind of seems like that for California sometimes. But seriously, even if the people listening to us don’t live in California, I think it’s really important for them to pay attention to what we’re talking about because California ideas tend to get exported everywhere. When it comes to insurance specifically, California’s having a lot of issues and it’s just getting harder to get insurance there. Right?
Steve Greenhut:
Right. Well, I think your first point is true that we’re such a big state, we’re almost 40 million people. We can’t quite get to 40 million now that the population’s declining a bit, but we’ve been, in the past, a rapidly growing state. We’re huge in terms of population and size and the legislature and our governors always point out that what they do here is going to go elsewhere. Because we’re such a big market, a lot of the regulations we pass here almost always have an impact on other parts of the country because manufacturers and all sorts of businesses have to adapt to the California market. So it is important that policymakers elsewhere and citizens pay attention to what’s going on in California because what’s happening here, at least philosophically, is going to be introduced in other parts of the country. So we have to pay attention.
So the big news is on insurance, which is kind of interesting because insurance generally is viewed as not interesting. In my column for the Orange County Register, the Southern California News Group today, I joked about how if you want to get some alone time at a cocktail party, bring up insurance regulation and people’s eyes will glaze over and then they’ll have to hurry away and find some other reason to talk to someone else. So it’s not a topic that a lot of people want to talk about. I actually find insurance to be quite interesting because it’s the foundation of so much of what we do. In fact, having a vibrant insurance market is really an alternative to regulation because insurance companies will mandate things more effectively than regulators. With the wildfire season, insurers will require certain things of homeowners to guard against wildfire exposure. I mean, on one property I remember the insurance inspector came by and he found a few things that I had to fix up if I wanted to continue to have that insurance policy.
So insurance is a really important market mechanism. California, this should surprise no one, has been screwing up its insurance market. And the main problem is we’re not allowing insurers to price their policies in a way that reflect the risk and insurers have been backing out quietly, but it’s no longer quiet. State Farm, which is the largest insurer in California, I think their homeowner’s market, it was almost 20% in 2021 and is probably over 21% now. They announced that they’re no longer going to be writing new homeowner’s policies, which is a major blow to the state’s already struggling insurance markets. It doesn’t take an expert to understand what’s been going on.
Starting in 1988, voters approved Proposition 103. That was a statewide initiative that essentially gave the insurance commissioner a prior approval. In other words, the state had to decide whether an insurance increase would be granted or not, and also gave the insurance commissioner czar-like powers to roll back insurance rates. And that was probably the start of the problem. Insurers are not able to accurately price their insurance product. When there’s too much risk, if you’re an insurer, and you have all sorts of homeowners policies and there’s a risk of a major wildfire, like we have regularly, you could put the company at risk. So it’s been a real challenge. And right now, we have lots of people who can’t get insurance and prices, of course, are increasing as competition has gone down. As I mentioned before, usually insurance regulation is a boring topic that no one wants to talk about, and now we see it all over the news and the major national outlets. All the state media is talking about it.
Kelli Pierce:
Yeah, it’s amazing how people will pay attention to this stuff when it hits their pocketbook. That’s for sure. Speaking of people, on Red Tape, we talk a lot about how government gets in the way, but as you’ve been mentioning, a big reason California is in the pickle it’s in when it comes to insurance is because of that ballot initiative voters approved about 35 years ago called Prop 103, and it does give the insurance commissioner broad powers to regulate how much you are going to pay for insurance. I want to ask you, what’s the problem when politicians promise to stop something called price gouging? In this case, California’s insurance commissioner. What’s the downside there?
Steve Greenhut:
Now what politician would want to be an insurance commissioner and approve large rate increases? That’s probably not a politically tenable position. And in fact, Republican commissioners, who you would expect to be more favorable towards the free market, have been reticent about improving rate increases also. I think the incentive is for the insurance commissioner to fight for the consumer and to stop price gouging from insurers. The incentive is for them not to approve rate increases. So the company comes before the commission with a proposed rate increase. For instance, in one case I had written about State Farm several years ago, came before the commission to ask for a 6.9% rate increase. I believe that’s the maximum allowed they could ask for. And instead of giving them a rate increase, the then insurance commissioner Dave Jones mandated a 7% price rollback. So insurance companies don’t even want to come and ask for anything because they might get slapped with it.
So bottom line, if you’re selling something, whether it’s insurance or any product or service, you need to be able to base your pricing on supply and demand, and you need to be able to adjust that pricing on market conditions pretty quickly. We all see how prices on everything have been going up quite a bit lately the last couple years. So if you have to wait several years to litigate a case or in just a normal rate filing, it takes at least six months. I mean, one insurer, their rate filing dragged on for two years and they finally just gave up. That is not an efficient way to set prices. And prices are determined by competition more than anything else. Even though the way the system is set up presumably reduces insurance costs, it keeps competition out, and that’s over the long term, the way that you keep the best possible products, the lowest pricing, it’s based on competition and insurers need to be able to base their rates on their risk or they’re going to quietly or not so quietly get out of the market.
I just want to point out one thing that there is a proper role for insurance regulation. The insurance commissioner or the Department of Insurance has a proper role to ensure that insurance companies have the capital, have the resources to pay the claims because otherwise they’re writing policies and if something happens, they may not be able to make good on them, and they also have a perfectly appropriate right to make sure that insurance companies operate in good faith and pay legitimate claims. But having the regulators set the insurance rates is really a disastrous situation.
Kelli Pierce:
I think it’s a good thing that you brought up regulation because you hear that word and usually people on the left have a point of view on it, and people on the right have another point of view instead of actually looking at what that regulation does. And it’s very important to say that we’re not against regulating the insurance industry, it’s just what is that regulation? It’s also understandable to me that people don’t have a lot of sympathy for multi-billion dollar insurance companies. Maybe they were screwed over by one. But something to keep in mind is a lot of times people can be sold bad ideas like price controls, which is basically what California is doing. If you package them correctly, which is what the politicians are saying it’s an accountability measure. At the end of the day, however, it’s regular people that end up holding the bag.
Steve Greenhut:
Well, sure, advocates for more regulation on everything. They always have the easy argument, right? So there’s price gouging. We need to control X, Y, Z companies. But there are people who want to regulate and say, “Oh, look, you’re paying too much at the pump. Price gouging. Let’s pass a regulation.” Certainly at R Street, we’re not against all regulations. There’s some that are important. It’s just that when you have to look at the fine print, and the problem in the insurance market is that we do not have enough people, enough companies writing insurance policies that people need, and we need to have a functioning insurance market. We all need these insurance products to function in our daily lives. We need car insurance, we need home insurance, and you need to have companies providing this.
These government programs that are the insurers of last resort do not provide particularly good insurance products. They take forever to do everything and taxpayers shouldn’t be on the hook for providing insurance to people. We need a functioning market. No one loves big companies of any sort usually, but that’s just the way it is. We need these companies to offer products.
Kelli Pierce:
There’s also other challenges, besides the political, that California faces when it comes to insurance, and that’s the effects of climate change. You see a lot of fires, sometimes atmospheric rivers. Talk about how that affects what we pay for insurance.
Steve Greenhut:
Oh yeah, absolutely. It’s just whatever happens, and things do happen here all the time, the insurers need the flexibility to price their products to reflect the risk. I know the Department of Insurance looks back 20 years of losses of an insurance company to help calculate rates, but ironically, we’re definitely the state most committed to battling climate change. And that’s another podcast, another discussion I suppose. But that would suggest, and they suggest that because of climate change, and I do believe there is climate change and it is causing a lot of the problems they say, which is hotter summers, which means more wildfires, it might mean more floods. Well therefore, the past 20 years maybe aren’t the best guide for where the rates ought to be.
Maybe it should be where we’re at now and the next 20 years. You see my point that if they’re trying to restrict the ability of insurance companies to price their products to reflect the changing climate, it’s really just an effort to keep prices low and no one’s going to pull out of a market or scale back in a market if they’re making money or they feel that they will continue to make a lot of money. They pull out because they’re afraid that there’s too much risk and all insurance is is it’s risk protection and they have to analyze potential risks. So climate change is increasing the risk. So therefore, you would think the Department of Insurance would take that into consideration. Yet, the Department of Insurance makes it hard for insurance companies to rate their homeowner’s policies based on risks in specific areas.
Kelli Pierce:
Yeah. Absolutely. Because as you’re pointing out, you don’t just leave a market with 39 million plus people without good reason because that’s 39 million plus possible policy holders. That’s 39 million people possibly paying you, and if someone’s leaving, there’s got to be a good reason. And there’s natural disasters and climate change that are factoring into this. But as we’ve been talking about, there’s also California policy because there’s an affordable housing problem in California that’s starting to push people further and further out into these wildland areas that are more prone to wildfires. And that’s got to be an issue too.
Steve Greenhut:
Yeah, that’s a really good point. They call it the wildland interface. Essentially, it’s new areas where people are building and the state’s trying to encourage building. I think one of the areas where the state legislature and the governor have gotten it right, or at least not as wrong as before, is on housing. Our median home prices, I mean, they have fallen a bit, but the statewide median, I believe, is over $800,000. I mean, it’s pretty incredible. Back in 2015, the state was underbuilding to the tune of 140,000 units a year. The reason they’ve been underbuilding is because of all the different state environmental rules like CEQA, the California Environmental Quality Act, which essentially gives anyone status to sue for any reason against any project they don’t like, which always delays or cancels projects. So your voters are tired of the congestion so the incentive is to oppose new housing construction.
So the state has been deregulating some of those things. A lot of these things are good. I like them. I’ve supported them because they’re deregulatory in nature. They allow markets to work. But the rationale for the state doing that is they’re trying to encourage density and discourage suburban construction. I think we need all of those things, but bottom line is you’re still going to have construction out towards the wildlands. And in California, unlike in other parts of the country that I’ve lived, gets extremely dry here. Some people just don’t even understand that. My relatives back in Pennsylvania and Virginia, they don’t understand when I say, “It is not going to rain for the next five months. It’s not going to rain.” But I don’t believe in changing the whole land use regulation and making it harder to build new houses, which will only exacerbate a different problem. I just think we allow insurers to price policies that reflect the risk.
So if I build a house in the middle of the woods up in the Sierra Nevada, I’m sure that would cost more than my home policy here in a non wildfire prone locale, but my flood insurance policy should be higher because we’re not that far from the river. So insurers have to take all those things into account and the state distorts their ability to take them into account.
Kelli Pierce:
Yeah. Absolutely. I think it’s not popular to say because a lot of people who are going into that urban wildland interface, they are not super wealthy. When you say things like, “You need to have a little bit more fire insurance. It might cost a little bit more.” They might go, “I don’t know about that.” And I don’t know any politician that’s going to advocate for that in those communities. But there are also issues, I think, with overgrown forests and power lines. Those are things that California, some of which they can’t tackle because it’s federal land, and we talked about those issues there on an earlier podcast, but some of them are state lands and they have overgrown forests there, power lines that are hitting dead trees, and these can spark fires like the campfire in Northern California in 2018 that just flattened everything and killed a bunch of people. But it seems like they’re not at all addressing those issues.
Steve Greenhut:
I mean, they’re addressing them. They’re just not addressing them correctly. There’s been a lot of fighting over it. But I guess what happens is everything is so regulated and so far removed from market forces like the regulated utility company, PG&E, there’s been a huge fight over how much liability they should have for the fires that are caused by their power lines, and there needs to be a lot of significant upgrades in that area. But also, you’re totally right on the forest clearing efforts. The governor had championed all the new forest clearing efforts that he had approved, and then I think it was one of the major media companies did some reporting and found that the state really hasn’t been doing nearly as much as he had said.
And you’re right, government land, whether it’s federal land or state land, this government doesn’t do a very good job of taking care of the things it has. That’s why I’m always an advocate for more private ownership. Private owners tend to be more fastidious about maintaining whatever they own. I just don’t have any simple answer for those things other than reduce the footprint of the state and federal government.
Kelli Pierce:
Well, a lot of times there aren’t simple answers to things. Sometimes there are, and sometimes it’s a little more complicated than that. Now, we’ve talked a lot about the problems. Let’s discuss those solutions. What can California do to disentangle themselves from this mess and get a better insurance market for its residents?
Steve Greenhut:
Well, solutions are always difficult. And I think on insurance, I think a lot of the political thinking and the Department of Insurance, and not just this commissioner, but for quite a few years, it comes from this kind of consumerist philosophy. California is run by progressives. They generally believe that businesses are price gouging or often bad actors. They don’t want to encourage market reforms. They want more government involvement. So until they change that philosophy and understand that we need more market involvement, we need more businesses. Of course, as we mentioned before, there’s a legitimate role of regulating those businesses, but that we need to encourage rather than punish businesses. Until they change that philosophy, I don’t think we’re going to get anywhere.
Kelli Pierce:
There’s no silver bullet that’s going to fix it. It’s just going to be a process is what you’re saying.
Steve Greenhut:
I mean, I think if you speed up the rate filing process, that will certainly help. There are always things we can do around the margins. We can always muddle through, but fundamentally, if we want to fix the problem long term, there needs to be a change in thinking.
Shoshana Weissmann:
I always love hearing from Steve because he’s just so knowledgeable about California. He’s been there forever and working there forever and knows everyone. And also, he’s always kind of fighting the status quo in California. I think that’s really important when it comes to the mess of the insurance market over there.
Kelli Pierce:
Absolutely. We talk a lot on Red Tape about government getting in the way, right? But it’s also us. We, regular people, get in our own way all the time. And California’s experience right now I think shows that you can’t be swayed by something in a bright, shiny package. What’s inside the box is not always good. Right now, it’s leading to bad outcomes, especially for people who are on fixed incomes. Price controls by any other name do not smell so sweet. Shosh, get this. The next episode of Red Tape is our last one of the season.
Shoshana Weissmann:
Oh my gosh. Really?
Kelli Pierce:
And to end this season, we’ll be speaking with Eli Lehrer and Erica Schoder. They’ll be telling us the story of how R Street got started, what we believe and how we do it. Until then. Red Tape is produced by R Street in partnership with Pod People.
Shoshana Weissmann:
To learn more about the work we’re doing at R Street, follow us on LinkedIn and on Twitter, and our Twitter is @RSI.
Kelli Pierce:
And for more resources and information on the topics we explored today, you can check out RStreet.org.
Shoshana Weissmann:
Also, if you’ve enjoyed listening to today’s episode, the best thing you can do is share Red Tape with a friend or an enemy.
Kelli Pierce:
And if you’re an overachiever, please leave a glowing review and rate us on Apple Podcasts, Spotify, or wherever you listen to podcasts. It really does help us introduce the show to new listeners.
Shoshana Weissmann:
I’m Shoshana Weissmann.
Kelli Pierce:
I’m Kelli Pierce.
Shoshana Weissmann:
Thanks for listening.
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