Legislative Brief: Proposition 36 & Parametric Insurance

As the weather becomes crisper and children of all ages are going back to school, our state is entering another season of sorts, election season. There is a proposition for this year’s ballot that may be of interest to insurance professionals and risk buyers alike.

PROP 36: ALLOWS FELONY CHARGES AND INCREASES SENTENCES FOR CERTAIN DRUG AND THEFT CRIMES. INITIATIVE STATUTE.

Currently, under the voter adopted Proposition 47, “Proposition 47 changed some theft and drug crimes from felonies to misdemeanors. For example, shoplifting (stealing items worth $950 or less from a store) and drug possession generally became misdemeanors.

If California Voters passes Proposition, the following changes will be made: “…this crime a felony if the person has two or more past convictions for certain theft crimes (such as shoplifting, burglary, or carjacking). The sentence would be up to three years in county jail or state prison. These changes undo some of the punishment reductions in Proposition 47.

The passage of this proposition may reduce the property related claims that our insureds who operate commercial business. Since the passage of Prop 47, those who operate retail operations face significant property crimes committed against them (i.e. shoplifting). As many of us know, it has been increasingly more difficult and expensive for risk buyers to secure commercial policies.

Parametric Insurance

No one can escape the realities and challenges of wildfire exposures that affected the California Property Insurance Market. As both as practitioners and consumers we have seen admitted insurance companies either reducing or eliminating their book in wildfire exposed locations. The challenge of wildfire is not limited to personal lines. Commercial Risk Buyers who operate their business in areas of urban interface are affected as well. Risk buyers and Agents/Brokers are now looking to surplus lines markets for solutions for their property risks. As many can attest, this also proves to be a challenge. Recently, many agents and risk buyers considering parametric insurance as an option.

Parametric insurance is defined as the following, “Parametric insurance is an agreement under which an entity assuming risk (the insurer) agrees to pay the indemnitee (the insured) an agreed amount upon the occurrence of a specified event, such as an earthquake or hurricane of specified intensity. The event, or parameter is often indicated by an established and authoritative index for that type of event, such as the Richter scale for earthquake intensity or the Saffir-Simpson scale for hurricanes. For that reason, parametric coverage is also referred to as index-based insurance.

Para meters can be defined by other objective factors, such as the extent of physical damage, and are typically limited to certain time periods and geographic areas. The parties may also develop customized risk parameters based on wind speeds, storm surge, rainfall (or lack thereof), and other factors, both natural and human-driven, alone or in combination.

The California Assembly Insurance Committee has taken interest in Parametric Insurance. Before this committee, Cliston Brown Vice President, Public Affairs for Surplus Line Association of California testified on this topic. Mr. Brown indicated that Parametric Insurance is a new product in CA. The SLA recorded a total of 67 parametric insurance transactions through September 27, 2024.

Here is the breakdown:

The recent named storms in Florida will also make the overall property market more costly for everybody. Coverages like Parametric may off a possible solution for risk buyers who face challenges in the admitted market. As the California legislature and Executive Branch (and CA DOI) respond to this, this type of coverage will be growing. I hope to share with everybody additional developments in future articles.

I look forward to sharing more news from Sacramento in the next article. If you have any questions/comments, please feel free to reach out to me at allenshiu@outlook.com.

Allen Shiu

https://voterguide.sos.ca.gov/propositions/36/analysis.htm

https://www.irmi.com/term/insurance-definitions/parametric-insurance

https://ains.assembly.ca.gov/system/files/2024-10/cliston-brown-sla-october-9-2024-testimony.pdf

Commissioner Lara announces next phase of Sustainable Insurance Strategy to safeguard Californians’ access to insurance

News: 2024 Press Release

For Release: March 14, 2024

Media Calls Only: 916-492-3566

Email Inquiries: cdipress@insurance.ca.gov

Commissioner Lara announces next phase of Sustainable Insurance Strategy to safeguard Californians’ access to insurance

Catastrophe modeling regulation promotes transparency, insurance availability, and wildfire safety

SACRAMENTO, Calif. — Insurance Commissioner Ricardo Lara released his catastrophe modeling regulation that will help restore options for all Californians, the latest phase of his Sustainable Insurance Strategy to safeguard the integrity of the state’s insurance market. The Department of Insurance will hold a public workshop on April 23 to take input before starting the process of submitting the regulation for approval by the Office of Administrative Law.

Today’s announcement keeps California on track for a December 2024 goal of enacting the state’s largest insurance reform in over 30 years. It follows Commissioner Lara’s release last month of a new regulation to improve oversight and handling of insurance rate filings.

Catastrophic insurance losses are defined as those that are larger and affect multiple policyholders as a result of a severe event, such as a wildfire affecting dozens of homes compared to a common house fire. For more than 30 years, California regulations have allowed insurance companies to apply a catastrophe factor to insurance rates based on historical wildfire losses. These outdated rules have contributed to rate spikes and balloon premiums following major wildfire disasters without fully accounting for the growing risk caused by climate change or risk mitigation measures taken by communities or regionally, as a result of local, state, and federal investments.

Currently, the Department of Insurance allows the use of catastrophe models for earthquake losses and fire following earthquake. The proposed regulation expands the allowable use of catastrophe models to include wildfire, terrorism, and flood lines for homeowners and commercial insurance lines.

Commissioner Lara’s strategy addresses a major limitation of Proposition 103, passed by voters in 1988. Under that law, insurance companies are free to propose rates at any level needed to cover future losses but, unlike public utilities, are not required to cover all residents. With the combination of climate-intensified disasters, rising costs of repair and rebuilding, and global economic forces, major companies have increased rates while pulling back from higher-risk properties where the FAIR Plan is now the only option.

“My Sustainable Insurance Strategy is intended to address decades-long neglected issues. Under outdated rules, the growth of climate-driven mega fires has supercharged insurance costs for many Californians while making insurance harder to find,” said Commissioner Lara about the second in a series of a proposed regulatory changes where he is seeking public comment and review. “We can no longer look solely to the past as a guide to the future. My strategy will help modernize our marketplace, restoring options for consumers while safeguarding the independent, transparent review of rate filings by Department of Insurance experts, which is a bedrock principle of California law.”

Commissioner Lara’s proposed regulation will have major benefits for Californians in the form of:

• More reliable rates: Insurance consumers will have more stable costs than under current regulations, which have resulted in sudden and steep increases for those at higher risk of wildfire.

• Greater availability of insurance: Insurance companies will increase their writing because they can better anticipate future losses, rather than making abrupt decisions to non-renew higher-risk policyholders, pause writing, or rapidly increase rates.

• Stronger oversight: The Department of Insurance will have strong public oversight of modeling, which is already being widely used by insurance companies outside of rate-making and across the nation. The Department will have access to models and build expertise, so California can continue to lead on consumer protection.

• Safer communities: Catastrophe models can capture efforts taken by federal, state, and local governments, property owners, communities and utility companies to mitigate the exposure of communities to catastrophic events – encouraging and rewarding those efforts.

The regulation corrects a major shortfall of using historical data, which fails to account for wildfire mitigation. The regulation specifies that any model must incorporate the best available scientific information on risk mitigation at the property, community, and landscape scales, including risk mitigation initiated by local and regional utility companies. This forward-looking change will also enhance a recent regulation that Commissioner Lara spearheaded and now enforces, requiring wildfire safety discounts for homeowners and businesses and aligning with record investments in wildfire mitigation by Governor Newsom and the California Legislature.

The regulation complies with California’s strong consumer protection laws, which requires that anytime an insurance company seeks to change its rates, it must provide a complete rate application with all information that the Insurance Commissioner requires for review. The proposed regulation creates a new process for review of models by a panel of experts overseen by the Department of Insurance -- before insurance companies can use them in a rate filing and meet the stringent transparency requirements under Proposition 103. The panel would evaluate the appropriateness and soundness of each model and a Department of Insurance official would determine what information about the model must be included in rate applications. Any member of the public can participate in this review.

The Department of Insurance will hold a public workshop to take input on the proposed regulation on April 23, 2024, at 2PM/PT.

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Media Notes:

• View the draft text of the catastrophe modeling regulation.

• View the workshop invitation.

• Catastrophe models are computerized processes that simulate potential catastrophic events. Catastrophe models have been rapidly evolving since their introduction in the 1980s, incorporating historical data, technology, scientific research, engineering methods, and statistical analysis to model complex scenarios and events. Catastrophe models were developed to estimate the probability of loss due to extreme weather events but have expanded to apply to non-weather risks including casualty or liability loss, terrorism, and cyber-attacks. 

  Led by Insurance Commissioner Ricardo Lara, the California Department of Insurance is the consumer protection agency for the nation's largest insurance marketplace and safeguards all of the state’s consumers by fairly regulating the insurance industry. Under the Commissioner’s direction, the Department uses its authority to protect Californians from insurance rates that are excessive, inadequate, or unfairly discriminatory, oversee insurer solvency to pay claims, set standards for agents and broker licensing, perform market conduct reviews of insurance companies, resolve consumer complaints, and investigate and prosecute insurance fraud. Consumers are urged to call 1-800-927-4357 with any questions or contact us at www.insurance.ca.gov via webform or online chat. Non-media inquiries should be directed to the Consumer Hotline at 800-927-4357. Teletypewriter (TTY), please dial 800-482-4833.