SACRAMENTO—An unsung hero is someone who takes noteworthy actions, but gets little credit for them. I can’t believe I’m writing this, but Insurance Commissioner Ricardo Lara qualifies as one as he helps the state navigate an insurance crisis in the face of harsh criticism—and in the wake of the devastating Los Angeles wildfires. Sometimes an unexpected person rises to the occasion.
The root of California’s insurance mess is the 1988 ballot initiative, Proposition 103. It made the insurance commissioner an elected position and gave that office power to approve and roll back rates. This price-controlled system has made it difficult for insurers to set prices that reflect risk. As wildfire costs soared, insurers have been exiting the market.
Even before the latest wildfires, California property owners have struggled to find insurance policies, leaving many dependent on the insurer of last resort. As a result, the FAIR (Fair Access to Insurance Requirements) Plan has insufficient reserves and is teetering on insolvency. California’s economy will falter without a functioning insurance market.
Instead of collapse, consider this March 11 news from Insurance Insider U.S.: “Carriers that have said they will expand coverage in the state include Farmers, Mercury, AAA SoCal, USAA, Nationwide, CSAA and Allstate.” The state’s largest property insurer, State Farm, will stop its cancellations and non-renewals after a recently granted rate hike. There’s still a long way to go and much trouble along the way, but this is progress.
This did not happen by accident. Lara developed the Sustainable Insurance Strategy, which went into effect in December. It allowed insurers to use catastrophe models in determining rates, which makes sense if climate change leads to greater losses. It allowed insurers to factor rising reinsurance rates into their rate setting. Reinsurance is the insurance that insurance companies buy. The more they buy, the more policies they can write.
Lara is speeding up the rate-review process, which has become a time-consuming, costly and frustrating mess. He’s pushing for a 60-day review timeline—and came up with a realistic plan that forces insurance-department officials to provide detailed reasons if they can’t meet that timeline. He’s the first commissioner to embrace these common-sense reforms.
Lara’s also detailed how insurance companies are assessed if the FAIR Plan goes belly up. Now they can prepare accordingly. Lara has approved every requested rate hike (although not always for the full amount or as quickly as insurers would have liked). No consumer likes higher prices, but this is imperative to keep insurers from leaving. Better a pricier policy than no policy—or one with the bare-bones state-created plan.
Prop. 103 not only forbids excessive rates, but it also forbids inadequate ones. In the past, every commissioner’s obvious goal was preventing “excessive” ones. During a crisis caused by government-mandated price caps and wildfire catastrophes, assuring adequate rates to stay afloat is the most important directive—albeit one that results in more brickbats than attaboys.
Insurance commissioner is a less-than-glamorous job. Office seekers often view it as a stepping stone. Sure, that’s on them, but the political pressure is to keep a lid on prices and rail against the insurance industry or blame climate change. The last commissioner, Dave Jones, adopted the latter strategy, thus starving the industry and causing it to limit coverage.
The trial-attorney/consumer-activists at Consumer Watchdog have been hammering Lara, but it’s easy to understand their motives. The former head of that group’s predecessor, Harvey Rosenfield, authored Prop. 103. It required insurers to pay “intervenors” who, well, intervene in the rate-review process to oppose hikes. They get paid millions of dollars and gum up the works. Consumer Watchdog is the state’s main intervenor.
But after the media reported Lara was in the “Caribbean” to attend an insurance event and therefore missed a legislative hearing in Sacramento, other critics jumped on him. Actually, he attended the influential Bermuda Risk Summit. It is not the Caribbean, but whatever. It’s not a junket, as the world’s reinsurance market is headquartered in Bermuda. The ill-defined Sacramento insurance hearing was hastily convened long after Lara agreed to the Bermuda gig.
While there, Lara announced he would take on intervenor compensation and no longer let consumer activists hold rates hostage. This should be music to any free-market person’s ears, yet some conservatives compared his attendance to Gov. Gavin Newsom’s COVID dinner at the French Laundry. That’s an unfair take. It’s easy to see who benefits most from this negative coverage—activists who love current price controls.
I understand not liking Lara because of his time in the Legislature, where he co-authored an atrocious single-payer healthcare bill. I’ve often criticized him for taking too long to act. He also imposed a foolish two-year moratorium on automobile rate hikes after COVID. But he’s making all the right moves now. He took political risks to save the state’s insurance market, so I’m singing his praises anyway.
Steven Greenhut is Western region director for the R Street Institute and a member of the Southern California News Group Editorial Board. Write to him at sgreenhut@rstreet.org.