Last week, Governor Gavin Newsom of California unveiled a new series of actions aimed at reducing the state’s significant budget shortfall. Initially projected to exceed $70 billion due to previous financial mismanagement, the deficit is now expected to be just under $28 million, thanks to Newsom’s stringent measures. These include eliminating various tax breaks, reducing expenditures, and cancelling numerous projects and grants previously proposed by his administration. “We have to be responsible. We have to be accountable,” Newsom stated last Friday when he introduced his latest strategy.
Reducing spending
At a time when California is grappling with other major issues, Newsom has moved to address the state’s looming fiscal crisis. Persistent inflation and rising prices have been exacerbated by an influx of undocumented immigrants at the southern border, demanding additional state resources and financially impacting local communities. Moreover, the state is currently facing the worst crisis in home insurance in the nation, driven by an increasing exodus of insurers from the market due to unprofitability.
The most serious housing crisis in the nation
The frequent and increasingly severe wildfires in California have prompted major insurance providers to withdraw from the market or scale back their operations. Earlier this year, Texas-based American National announced plans to cease selling home insurance by the fall, informing customers of non-renewal starting in August. Shortly after, State Farm General declared it would not renew policies for over 70,000 residential and commercial clients, intensifying the crisis. These developments have compelled California’s leaders to confront the escalating home insurance issue directly.
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Newsom proposed solution
On Friday, Governor Gavin Newsom revealed a proposal aimed at expediting the process for approving insurance rate increases, a step that insurers deem vital for coping with the surging number of claims in California, primarily due to wildfires and other climate change impacts. Newsom is preparing a “trailer bill” that would shorten the approval timeline to 60 days. He believes this reform will prevent insurers from abandoning the California market and alleviate residents’ concerns over policy cancellations.
Prices are going up
Currently, the approval process for rate hikes by the Department of Insurance can extend up to 84 days, and it may take even longer if consumer advocates or other groups request a public hearing
“We need to stabilize this market,” Newsom said during a Friday press conference about his revised budget proposal. “We need to send the right signals, we need to move.”
Although this adjustment may result in increased costs for consumers initially, proponents believe it will enhance the accessibility of home insurance. By providing more choices, it could prevent residents from depending on California’s “FAIR Plan,” the state’s “insurer of last resort”, which is known for its steep premiums and is close to insolvency.
Old rules that cause current problems
Last fall, California Insurance Commissioner Ricardo Lara began working with Governor Gavin Newsom to update and overhaul state regulations that have been in place for three decades. These reforms include permitting insurers to use catastrophe models for setting rates and allowing them to pass on reinsurance costs to consumers. Lara expressed his gratitude to Newsom in a post on X (formerly Twitter) for his dedication to providing the necessary support and resources for the Department of Insurance staff to stabilize the market.
However, these changes are not expected to be implemented until December, a timeline Governor Newsom finds too slow. If his proposed bill is incorporated into the 2024-25 state budget, it could take effect as soon as July 1.
Denni Ritter, the American Property Casualty Insurance Association’s department vice president for state government relations, praised the news about expedited approvals Friday afternoon.
“We appreciate the Governor highlighting this critical issue,” stated Denni Ritter, APCIA department vice president for state government relations. “Expediting the rate review process is a vital component to addressing California’s insurance crisis. We look forward to working with the Administration, Legislature and Department of Insurance on this crucial reform and other reforms necessary to fix our broken regulatory system and increase the availability of insurance for California homeowners, drivers, and businesses.”
