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AB-2167 Insurance market action plan.(2019-2020)

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Date Published: 07/30/2020 09:00 PM

Amended  IN  Senate  July 30, 2020
Amended  IN  Senate  July 23, 2020
Amended  IN  Assembly  May 04, 2020


Assembly Bill
No. 2167

Introduced by Assembly Members Daly and Cooley
(Principal coauthor: Senator Rubio)
(Coauthors: Assembly Members Chen, Megan Dahle, Kamlager, Mayes, Medina, and Waldron)
(Coauthors: Senators Dahle and Jones)

February 11, 2020

An act to add Chapter 12 (commencing with Section 10109) to Part 1 of Division 2 of the Insurance Code, relating to insurance, and declaring the urgency thereof, to take effect immediately.


AB 2167, as amended, Daly. Insurance market action plan.
The Insurance Rate Reduction and Reform Act of 1988, an initiative measure enacted by Proposition 103, as approved by the voters at the November 8, 1988, statewide general election, prohibits specified insurance rates from being approved or remaining in effect that are excessive, inadequate, unfairly discriminatory, or otherwise in violation of the act. The act requires an insurer that wishes to change a rate to file a complete rate application with the Insurance Commissioner and deems the application approved 60 days after public notice of the application unless certain events occur, including that a consumer requests a hearing, or the commissioner determines to hold a hearing. The act requires hearings to be conducted pursuant to specified provisions of law governing administrative hearings. Existing law authorizes the provisions of Proposition 103 to be amended by a statute that furthers the purposes of the act and is enacted by the Legislature with a 2/3 vote.
This bill would establish the Insurance Market Action Plan (IMAP) program under which residential property insurance policies in a county may qualify for IMAP protection if the requirements of the program are met. The bill would require an IMAP filing submitted to the Department of Insurance by an insurer to include, among other things, a request for adequate rates, a plan for maintaining solvency of the insurer, and mitigation requirements. The bill would require an insurer that submits an IMAP filing to receive an expedited review of its rate filing, not to exceed 120 days, if the insurer uses an actuarial assumption for trend and loss development that is at the midpoint or less of rate impacts, or files for a rate increase based solely on increased reinsurance costs, and does not otherwise change any other aspect of its rate filing from its previous department approved rate. The bill would require the Legislative Analyst’s Office, on or before June 30, 2024, to issue a report outlining the effectiveness of the IMAP program. Under the bill, the IMAP program would be inoperative on July 1, 2026, and would be repealed as of January 1, 2027.
By providing for an expedited review and approval of residential property insurance rates, the bill would amend Proposition 103 and thus require a 2/3 vote.
The bill would provide that its provisions are not severable.
The bill would make its operation contingent on the enactment of SB 292 of the 2019–20 Regular Session.
This bill would declare that it is to take effect immediately as an urgency statute.
Vote: 2/3   Appropriation: NO   Fiscal Committee: YES   Local Program: NO  

The people of the State of California do enact as follows:


 (a) The Legislature finds and declares all of the following:
(1) Climate change has created a new reality in California. Fifteen of the 20 most destructive wildfires in the state’s history have occurred since 2000 and 10 of the most destructive fires have occurred since 2015. More people died from wildfires in 2017 and 2018 than in the last 10 years combined.
(A) Igniting November 8, 2018, the Camp Fire burned for 17 days, killed at least 85 people, and destroyed over 18,800 structures. It is not only the most expensive wildfire in United States history, but was the most expensive natural disaster worldwide in 2018. Insured losses reached $12.5 billion, while total losses were $16.5 billion.
(B) Also igniting November 8, 2018, the Woolsey Fire burned for 14 days, killed three people, and destroyed over 1,600 buildings. Insured losses are estimated at $3 billion to $5 billion of the $6 billion in total property losses.
(C) Igniting July 23, 2018, the Carr Fire burned for 37 days, killed eight people, including three firefighters, and destroyed over 1,600 structures. The fire caused over $1.5 billion in property damage.
(D) Igniting December 4, 2017, the Thomas Fire burned for 39 days, killed 23 people, including one firefighter and 21 people from a resulting mudslide, and destroyed over 1,000 structures. The fire caused over $2.2 billion in damages.
(E) Igniting October 8, 2017, the Tubbs Fire burned for 12 days, killed 22 people, and destroyed over 5,600 structures. Insured losses are estimated to be between $7.5 billion and $9.5 billion.
(F) Igniting October 8, 2017, the Atlas Fire burned for 12 days, destroyed 25,000 acres, and destroyed over 700 buildings. Insured losses are estimated to be between $2.5 billion and $4.5 billion.
(G) Burning for over three months in 2018, a less costly seventh fire, the Mendocino Complex Fire, became the largest recorded fire in state history when it consumed over 459,000 acres, more than the previous largest fire, the Thomas Fire, in 2017.
(2) Fire season in California has changed. In the western United States, the length of the fire season is over 80 days longer than it was in the 1970s. According to research from the University of California, Los Angeles, residents may no longer expect fire season to end in September. Instead, the onset of seasonal rain can be delayed into October or even November. These longer periods without rain, combined with the well-known, heavy wind patterns of autumn, have created increased likelihood of uncontrollable, severe fires that endanger life and property. The Camp Fire in Paradise is an example of a fire that started after the end of the traditional fire season.
(3) The impact of catastrophic fires is multifaceted. While the governmental costs of fire response and suppression are significant, research from Headwaters Economics indicates those costs are less than 10 percent of the total costs. Combined with suppression expenses, other short-term costs, including evacuation and aid relief, road stabilization, and home and property loss only represent 35 percent of the total wildfire-related costs. Longer term costs, including loss of property value, tax revenue, and business revenue, as well as landscape rehabilitation, infrastructure repair, loss of ecosystem services, and human casualties represent the remaining 65 percent.
(4) According to a Department of Insurance 2018 report on the availability and affordability of wildfire coverage, major insurers are pulling back from writing new policies or renewing policies in the wildland-urban interface (WUI) fire areas. Additionally, premiums are increasing in the WUI, and most insurers do not take into consideration wildfire mitigation conducted by the homeowner or the community. This is in part because no single insurer has loss experience in the WUI to validate the rates and premiums charged for each wild fire risk model score. The department’s report further states that a credible database for wildfire loss experience in the WUI is needed in order for insurers to use rating plans that impact rates in the WUI and suggests that the Legislature should create a framework within which insurers offer a mitigation premium credit for property owners that conduct proper mitigation.
(5) The National Institute of Building Sciences studied 23 years of federally funded mitigation grants provided by the Federal Emergency Management Agency (FEMA), the United States Economic Development Administration, and the United States Department of Housing and Urban Development, and found that hazard mitigation funding saves six dollars ($6) in future disaster costs for every one dollar ($1) invested. Further, the study found that designing buildings to meet the 2018 International Residential Code and 2018 International Building Code would provide a national benefit of eleven dollars ($11) for every one dollar ($1) of investment when compared to 1990-era building codes and National Flood Insurance Program requirements.
(6) Studying, developing, and incentivizing homeowners to actively participate in, actuarially sound wildfire mitigation measures is therefore a fiscally prudent policy with the potential to save lives and prevent billions of dollars in future losses from occurring. A regularly updated and secure central database of publicly held housing infrastructure information, deployed in support of a public catastrophic loss model, has the potential to significantly enhance statewide disaster planning and response efforts, as well as quantify the benefit of homeowners’ mitigation efforts. In order to accomplish this goal, it is important for the state to partner with insurers, insurance research organizations, and local agencies to develop easily and uniformly enforced defensible space practices and measurable mitigation efforts for future study.
(7) Research shows that homeowners’ risk reduction behaviors are influenced by the perceived effectiveness of the activities and their perceived ability to complete them. Public outreach, information sharing, and a communitywide collaborative process on wildfire protection planning have been found to build trust among residents and local fire agencies. It is the intent of the Legislature to partner with local agencies throughout California’s diverse wildfire risk regions in support of collecting regionally specific housing infrastructure information in support of developing regionally specific loss modeling.
(8) Residential property insurance provides essential financial security for California residents for both short-term and long-term costs. Insurance supports temporary needs for housing and transportation for fire victims, intermediate needs for debris and hazardous materials removal from fire-affected properties, and long-term rebuilding of structures and replacement of personal property. There is no governmental program that provides similar comprehensive assistance for California residents and it is, therefore, vital for the State of California to ensure the existence of a vibrant residential property insurance marketplace capable of serving all communities.
(9) Strains in the residential property insurance system are becoming evident. As the Senate Committee on Insurance noted in its 2019 informational hearing on homeowners’ insurance availability and affordability, California policyholders have “enjoyed a long spell of low insurance rates” but “climate change, drought, population movement, and other factors may be changing the fundamental nature of the homeowners’ insurance market.” Analysis of countrywide data from the National Association of Insurance Commissioners indicates that average homeowners’ insurance rates in California rank 32nd in the country and, when adjusted for differences in regional costs, rank 49th in the country, at less than one-half the cost for insurance in states exposed to other natural disasters, including hurricanes.
(10) As part of a similar 2019 investigation of the homeowners’ insurance market, the Assembly Committee on Insurance noted the acceleration of losses in this environment of relatively low rates, finding that a “study of the homeowners’ insurance market released in 2018 as part of California’s Fourth Climate Change Assessment found that insured losses through 2017 wiped out the entire underwriting profit insurers earned since 2000. The 2018 fires continued with another round of enormous losses.” The committee cautioned against a legislative response that “increases the likelihood of any policy change to generate unintended consequences” and guarding against the great risk that regulating some, but not all, of the important aspects of insurance could “significantly disrupt a homeowners’ insurance market that is effectively serving a great majority of California homeowners.”
(11) The final report of the Governor’s Commission on Catastrophic Wildfire Cost and Recovery attempted to reconcile the various competing interests associated with insurance availability, risk selection, and pricing. The commission noted that “while insurance is still largely available, it will become increasingly unavailable and/or unaffordable for many in the wildland urban interface in California.” In attempting to harmonize the various competing interests for California, the commission recommended preserving risk-based insurance pricing, while avoiding cross-subsidies of high-risk areas by low-risk areas, as well as developing incentives for parcel and community level loss mitigation efforts.
(b) Based upon this extensive investigation in both the legislative and executive branches, the Legislature determines that a state policy response is required to solve several issues simultaneously, including all of the following:
(1) Ensuring insurance rates are adequate to avoid insurer insolvencies and to permit insurers to operate in the state’s highest risk areas, while imposing restrictions on rates above actuarially justified levels.
(2) Reducing the number of residents that are required to rely upon the California FAIR Plan, which the State of California created to provide a market of last resort but which is a catastrophic insurance pool at rate levels far higher than the regular insurance market.
(3) Incentivizing insurers to seek cost-based rates in exchange for assurances that they will serve high-risk communities at levels similar to their statewide presence.
(4) Developing systems of accountability for individual and community-based loss mitigation efforts.
(c) Recent wildfires have contributed to a surge of residential property insurance policies being issued by the FAIR Plan in numbers approaching those seen after the Northridge earthquake. In order to monitor surges in new FAIR Plan policies and to create a standard threshold to indicate when admitted market residential property insurance availability in specified areas of the state has declined, the Legislature determines that it is necessary to do all of the following:
(1) Create a standard threshold for residential property insurance policies to qualify for the Insurance Market Action Plan (IMAP), established by this act, based on monitoring surges in FAIR Plan new business that indicate a contracting insurance market.
(2) Incentivize insurers to seek cost-based rates in exchange for assurances that they will maintain an adequate presence in specified high-risk areas of the state, and evaluate the effectiveness of these methods at reducing reliance on the FAIR Plan in eligible areas, thereby maintaining an adequate supply of admitted market insurance at a price more affordable to most consumers than that offered by the FAIR Plan.
(3) Establish a scientifically advanced probabilistic wildfire loss model for the purpose of providing property and casualty insurers access to a state of the art public tool that is accessible for comparison, evaluation, and analysis of modeled risk assumptions used in support of IMAP rate filings. In this regard, it is the intent of the Legislature to convene an advisory committee of public and private stakeholders to design standards for the use of probabilistic wildfire loss models in residential property insurance rate development, and to establish a database and computer model for that purpose.
(A) The Legislature finds these measures are necessary to limit the number of insurer-initiated nonrenewals that occur in response to changes in the understanding of wildfire risk and to limit homeowners’ reliance on the California FAIR Plan.
(B) The Legislature finds that such a model is an objective public tool that will promote precision in loss projection, and that decreasing the uncertainty of future losses in this state is necessary to stabilize large price swings in the residential property insurance market.
(C) The Legislature further intends that such a model be available to assist state and local governments incorporate a modeled understanding of the costs of wildfire risk in their planning processes.
(d) To the extent that a court may find that this legislation amends the Insurance Rate Reduction and Reform Act of 1988, an initiative measure, enacted by Proposition 103, as approved by the voters at the November 8, 1988, statewide general election, the Legislature has determined that this act furthers the purpose of Proposition 103 because the primary goal of this act is to increase statewide availability of insurance using risk-based pricing subject to the prior approval of the Insurance Commissioner, and seeks to prevent unfair discrimination in pricing or unjustified regional subsidies in high fire-risk areas.

SEC. 2.

 Chapter 12 (commencing with Section 10109) is added to Part 1 of Division 2 of the Insurance Code, to read:
CHAPTER  12.  Wildfire Risk Modeling and Mitigation
Article  1. Insurance Market Action Plan

 (a) The Insurance Market Action Plan (IMAP) program is hereby established.
(b) Residential property insurance policies in a county may qualify for insurance market action plan (IMAP) protection if the requirements of this article are met.

 (a) An IMAP filing submitted to the department by an insurer shall include all of the following:
(1) A request for adequate rates, as described in Section 10109.3.
(2) A plan for maintaining the insurer’s solvency as policy count grows in IMAP counties, taking into account, among other things, risks related to overconcentration in high-risk communities.
(3) Parcel-level and community-based mitigation and verification requirements, as described in Section 10109.2.
(4) A list of the areas within an IMAP eligible county in which the insurer proposes to issue residential property insurance pursuant to its IMAP filing, and a list of the areas within that county in which the insurer shall not issue residential property insurance pursuant to its IMAP filing.
(b) (1) An insurer shall commit in the IMAP to offer new and renewal residential property insurance policies in a set of IMAP counties until the insurer achieves a market penetration rate in those IMAP counties that is no lower than 85 percent of its statewide market penetration rate. The IMAP commitment shall be calculated based on the insurer’s residential property insurance policy count across the entire designated set of IMAP counties, but need not be met in each county individually.
(2) Notwithstanding paragraph (1), an insurer shall monitor and avoid overconcentration in any one particular area within an IMAP county or across a particular IMAP county in order to prevent a catastrophic loss that could impair its solvency.

 (a) An IMAP filing shall set forth community and parcel-level mitigation standards, along with any necessary procedures for verifying mitigation activities, including any required governmental or third-party certifications.
(b) The commissioner may periodically connect IMAP eligible county representatives with representatives from IMAP participating insurers and third-party fire protection or certification associations to promote collaboration between local governments and industry on local policies for IMAP filings made pursuant to this article.

 (a) A rate proposed as part of an IMAP filing shall not be excessive, inadequate, or unfairly discriminatory, and shall be actuarially sound so that premiums are adequate to cover expected losses, expenses, and taxes, and shall reflect investment income of the insurer.
(b) A rate requested as part of an IMAP filing shall be subject to the prior approval of the commissioner.

 A rate requested as part of an IMAP filing may be based on a complex catastrophe model, as follows:
(a) The complex catastrophe model shall be based on the best available scientific information for assessing the risk of catastrophic wildfire frequency, severity, and loss.
(b) The projected losses derived from the catastrophe model shall meet all applicable statutory standards.
(c) The complex catastrophe model shall consider both parcel-level mitigation and regional mitigation.

 (a) An insurer that submits an IMAP filing pursuant to this chapter shall receive an expedited review of its rate filing if either of the following conditions are met:
(1) The insurer uses an actuarial assumption for trend and loss development that is at the midpoint or less of rate impacts, and does not otherwise change any other aspect of its rate filing from its previous department approved rate.
(2) The insurer files for a rate increase based solely on increased reinsurance costs, subject to the requirements of Section 10109.6, and does not otherwise change any other aspect of its rate filing from its previous department approved rate.
(b) The time period for the expedited rate review shall not exceed 120 days, and the department shall not request that the insurer waive the 120-day requirement.
(c) If the department does not approve the filing within the 120 days, the IMAP filing is automatically withdrawn and the insurer may continue with its previously approved rate and the insurer retains the ability to select risks without meeting the requirements of subdivision (b) of Section 10109.1.
(d) Notwithstanding subdivision (c), if an insurer submits an IMAP filing to amend a rate level approved in a previous IMAP filing, and the department does not approve the filing within the 120 days, the insurer’s IMAP commitments, including the commitment required by subdivision (b) of Section 10109.1, shall be suspended until the department and the insurer reach agreement on the filing.

 If a rate requested as part of an IMAP filing includes the net costs of reinsurance, including internal or external reinsurance, the reinsurance agreement shall be entered into in good faith in an arm’s length transaction and at fair market value for the coverage provided. The reinsurance shall meet the department’s statement credit requirements.

 If an insurer submits an IMAP filing pursuant to this chapter and the department or an intervener objects to an issue other than the rate calculation, then the expedited IMAP rate filing shall be processed separately from the contested issue so that the contested issue does not delay the expedited rate filing. If, based on the contested issue, the department orders a nonconsensual change to the IMAP, the insurer’s IMAP requirements shall be suspended until the department and the insurer agree upon revised terms for the IMAP.

 On or before June 30, 2024, the Legislative Analyst’s Office, in consultation with an appropriate research organization, shall issue a report outlining the effectiveness of the IMAP program that includes, but is not limited to, all of the following:
(a) An analysis of whether the IMAP program achieved admitted market rates lower than the California FAIR Plan plus difference in condition policies.
(b) An analysis of the overall progress of the IMAP program towards achieving market penetration goals in IMAP counties and the impact on FAIR Plan enrollments.
(c) An analysis of IMAP participating insurers’ use of reinsurance in the IMAP program that considers both of the following:
(1) The impact of reinsurance on insurance availability in high fire risk areas.
(2) The impact of reinsurance on residential property insurance premiums.

 This article is inoperative on July 1, 2026, and, as of January 1, 2027, is repealed.

SEC. 3.

 The provisions of this act are not severable. If any provision of this act or its application is held invalid, all other provisions of this act shall also be held invalid.

SEC. 4.

 This act shall become operative only if Senate Bill 292 of the 2019–20 Regular Session is enacted and becomes effective on or before January 1, 2021.

SEC. 5.

 This act is an urgency statute necessary for the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the California Constitution and shall go into immediate effect. The facts constituting the necessity are:
In order to make homeowners’ insurance policies available to policyholders who are in need at the earliest possible time, it is necessary that this act take effect immediately.