We propose one small change in home insurance regulation in the State of California to create a massive change in home insurance that will break the home insurance log jam currently plaguing the State.
The plan was conceived by Build the Future Founder Merritt Farren.
The plan and its key component are called CAL Reinsure.
Introduction
CAL Reinsure is a new reinsurance program that shifts 100% of the risk of total loss due to community fire from insurers writing homeowner policies in California to a new state organized reinsurance entity, CAL Reinsure.
It speeds and simplifies payouts to insureds who lose their homes due to community fire by shifting payout to a simple parametric insurance approach in which loss of a home due to community fire gives rise to an immediate right to payout in the amount of coverage acquired — no delay and no arduous need to establish the value of what was lost or the cost to replace it. If the consumer has $1.5 million in community fire loss coverage and loses a home due to community fire, the consumer has an immediate right to receive $1.5 million.
CAL Reinsure reduces costs to consumers by putting the community fire risk of all Californians buying homeowners and renters insurance into one pool and eliminating all costs associated with post destruction loss settlement.
It allows insurance companies to write insurance policies statewide without fear of insolvency risk in the event of community fire.
CAL Reinsure helps ensure that all California homeowners can obtain the home insurance they need from their choice of insurance providers, obviating the need for California Fair Plan.
Community fire is defined as a fire destroying at least three homes (“Community Fire”). Total loss is defined to include both total loss and a constructive total loss, where constructive total loss is liberally defined to include any home damaged in a Community Fire requiring rebuild or remediation estimated to cost 50% or more of the Community Fire risk coverage carried on the home damaged (“Total Loss”).
Why the Plan is Necessary
Community Fire risk is a very specific risk that touches only a very small percentage of homeowners and renters in the State of California each year, yet potential losses due to Community Fire are wreaking havoc on the entire home insurance eco system in California. By removing this one specific risk from risks that insurance companies take on in writing home insurance and renter insurance policies in the State of California, the plan allows the market for home insurance and renter insurance to resettle and function as it needs to function.
Why the Plan’s High Level of Government Participation is Appropriate
Good home insurance coverage doesn’t just protect homeowners, it protects communities. In doing that, it protects local economies that, together, drive the prosperity of the entire State.
Yet today, homeowners and the communities they live in are not adequately protected. One has only to look at the dismal post fire rebuild statistics following recent California community fires to see just how poorly the current home insurance regime in the State of California is protecting homeowners and communities. The slow pace of rebuild and recovery is devastating for families already traumatized by their loss – and for the entire communities so essential to the physical, financial and mental wellbeing of all Californians.
What the Plan is
Under the Plan, all insurers writing homeowner and renter insurance in California are required to include a Community Fire Component in the policies they write. The Community Fire Component is to consist of three sub-components:
- a Rebuild Cost Component;
- an Alternate Lodging Component; and
- a Property Loss Component.
The Community Fire Component covers loss only in the event of the Total Loss of a home due to Community Fire.
Partial damage in a Community Fire is covered under general fire risk coverage in polices.
The coverage amount for the Rebuild Cost Component must be set at an amount no lower than a minimum amount set by the California Department of Insurance as provided in a Zip Code specific Insurance Rebuild Cost Estimate to be published by the California Department of Insurance each year. The Alternate Lodging Component is to be set automatically at 15% of the Rebuild Cost Component coverage amount and the Property Loss Component is set automatically at 35% of the Rebuild Cost Component coverage amount.
The cost that is to be charged by the insurer to the insured for the Community Fire Component is set annually by CAL Reinsure. It is set to be as low as practicable, given actuarial risks and other relevant financial considerations, including income earned on insurance fees paid into CAL Reinsure. Actuarial risk will take into consideration the degree to which the home being insured has been hardened for fire protection and the degree to which the community in which the home is located has meet minimum fire safety and fire prevention standards established by the California Department of Insurance and CAL Reinsure (“Community Fire Protection Preparedness Rating”). The Community Fire Protection Preparedness Rating standards will be established both to prevent a repeat of the sort of abject failure to provide even the most basic fire protection that led to the destruction of Pacific Palisades but also to encourage communities to step up to the higher levels of thoughtful fire protection required by the increased fire risks be driven by climate change. The data and methodology used by CAL Reinsure in setting rates for the Community Fire Component and determining Community Fire Protection Preparedness Ratings are to be made publicly available.
How it Works
Insurance carriers write homeowner policies as they normally do today, covering the broad set of risks homeowner and renter insurance policies generally cover.
Within the cost of coverage charged by the insurer is the fee for the Community Fire Component specified by CAL Reinsure.
100% of the risk of total loss and constructive total loss under the Community Fire Component is reinsured by CAL Reinsure – relieving the insurance carrier of 100% of the risk of loss under the Community Fire Component.
90% of fee paid to the insurance company by the insured for the Community Fire Component is passed on to CAL Reinsure by the insurance company to build the CAL Reinsure reserves necessary given its exposure. The insurance company retains 10% of the fee as a fee for writing and assisting with the administration of the coverage.
If necessary to insure the adequate and timely establishment of appropriate CAL Reinsure reserves, consideration will be given to adding a small percentage tax on all insurance policies sold in the state of California (other than medical insurance).
In the event an insured’s home is completely destroyed or constructively completely destroyed by a Community Fire, the insured is entitled to a 100% payout to policy limits directly from CAL Reinsure for each of the three Property Loss Components within 30 days of loss (provided that the 30 day period can be scheduled out by CAL Reinsure over a 6 month period if required due to CAL Reinsure liquidity concerns). In this sense, the Community Fire Component functions under a parametric insurance model in which a trigger (in this case total loss of a home due to Community Fire) give rise to an immediate right to payout in a pre-set amount (in this case the dollar amount of coverage the insured signed up for).
The obligations of CAL Reinsure to insureds are underwritten by the State of California. In the event CAL Reinsure lacks sufficient funds to pay out on claims, the State of California is obligated to make interest bearing liquidity loans to CAL Reinsure. The loans are to be in amounts required to ensure CAL Reinsure has the liquidity it needs to meet its obligations to insureds who have lost their homes.
The plan moves risk of loss due to community fire away from insurers, allowing insurers to write insurance coverage throughout the state, including in wildfire risk zones.
The plan consolidates risk statewide, allowing the risk and cost of coverage to be shared by all California homeowners.
Plan Refinement
The foregoing plan, while detailed, should be understood to be in need of drill down and refinement in each of its components.