An In-Depth Analysis of Nature Phenomenons in California

The area of study that was chosen for this assignment is the jurisdiction of California. The focus of this essay will include an in-depth understanding of the nature and approach to the underwriting style in this jurisdiction. The California Department of Insurance (“CDI”) is the main body which regulate insurance in California, created in 1868 and coincides with the American system. It is extremely evident that over the past decade and even century, the insurance market has seen an extensive alteration, however the California Department of Insurance focuses on consumer protection and to “ensure the integrity, health and vitality of the insurance marketplace as the mission of the ‘CDI’ is insurance protection for all Californians” (CDI Annual Report, 2016). Other functions include; ensuring all companies are solvent, licensing both agent and brokers, investigate fraud and complaints and conduct market reviews. The CDI ensures that all insurance companies are compliant with the California Insurance Code (“CIC”). Over the past decade, the number of fraud cases along with other criminal investigations has increased significantly to over 100,000 in 2017, this leads to countless number of arrests each year. It is evident that with over 1,400 employees to oversee the insurance market, that the industry in California is significant. It is the largest market in the U.S, and the sixth largest market in the entire world. The people of California passed the Proposition 103 in early 1988 whereby the CDI authority has expanded including the ability to ensure all insurers are abiding the law along with how they conduct business, this amendment was citizen led which also stated the Commissioner of the CDI would also be elected rather than appointed by the Governor.

Current Governor:

The Commissioner of the CDI is Dave Jones, Jones was originally elected as the Insurance Commissioner in November 2010 and followed on by being re-elected in 2014. His main role is to regulate and ensure all insurers are compliant with the state of California and reports to Governor Jerry Brown. As previously stated, the insurance market in California is significant, this is evident as insurers take in over $289 billion every year in premiums throughout the state. While ensuring that each insurer is abiding the law, Jones has also achieved many goals for his state which he is admired for, these include; saving consumers over £3.11 billion in premiums, implementing strong and stricter regulation in health insurance, provided help for small businesses to have a longer time period to comply with the Affordable Care Act, reduced the medical malpractice insurance rate which is saving all providers over $64 million every year, arresting just under 6000 people for insurance fraud. Jones also established first in the nation insurance diversity initiative along with the nation climate risk financial disclosures for insurers. This is where the insurance industry has been asked to refrain from investing in areas such as coal and whereby insurance companies are collecting more that 100 million dollars in premium, they must fully disclose all investments such as coal, oil and any other power-generating commodities. In 2017, he was awarded the Dr Nathan Davis Award for his work and effort, especially his outstanding Government service and his determination to achieve greater standard in the public health system. As a legislator, Dave Jones has passed and signed over 70 bills which are now law.

Regulation in California:

NAIC:

The National Association of Insurance Commissioners (“NAIC”) was founded in 1871 and has the authority to regulate the insurance industry within the U.S. The NAIC provides assistance to all state regulators, and in this case CID, for the state of California. Their main objectives coincide with the objects of the CID which include solvency of insurers, protect consumers, and promote competitive markets and to support and improve state regulation of insurance (Frost Brown Todd, 2006). Over the last decade, additional work has been placed on the NAIC including the coordination and effort to ensure there is sufficient resources to deal with major natural disasters along with terrorist activities.

Size of the Insurance Industry:

The insurance market consists of 1,300 insurance companies throughout the state, with around 800 companies licensed in the non-life industry while just under 500 licensed in the life, long term care and disability industry. (CDI, 2017) There is also over 400,000 licensed agents, brokers and business entities throughout the Californian State (Insurance Journal, 2011). The whole insurance industry created over 230,000 jobs within the state accounting for 16.8 billion dollars in wages. The non-life industry paid out over 50 billion in compensation to claims during the year 2009 while the life industry also had claims over 43 billion dollars, therefore it is obvious that this industry pumps a colossal amount of money into the state’s economy by providing jobs, paying tax (1.9 billion) and investments, which Brad Wenger, president of California Life and Health Insurance Companies stated in his interview (PCI, 2009). All Californian insurers worked beside the California Organised Investment Network whereby their focus was to improve the amount of investment in poor communities. Since the collaboration there has been over 6,000 separate investments with 19 billion dollars invested into this project (Insurance Journal, 2011). In the life industry alone, “insurers own over 5 trillion dollars in stocks, bonds, mortgages, real estate and assorted other investments in the U.S” with life insurers in California owning 546 billion (IFAwebnews, 2011).

Demographics in the Life & Health Insurance Industry:

During a study in 2015, it was stated that individuals in California had over 24 plans to choose from. Within the insurance industry in the U.S, smoking can be used to increase people’s premiums, however California prohibit insurers from doing so. Individuals can choose the coverage from 4 metal tiers which include gold, silver, bronze and platinum. While individuals under the age of 30 have the option to purchase a cheaper and basic plan known as catastrophic plans. A penalty may be imposed on individuals who do bot purchase insurance which was slowly implemented between 2014 & 2016. Initially the penalty was $95 and 1% of an individual’s income, this has increased significantly to $695 and 2.5% of people’s incomes (Saltzman, 2017). Like every plan, there are exemptions for individuals below a certain income threshold. It is obvious that the silver coverage is mainly used as individuals can receive subsidies from this coverage. During the year 2015, women had a higher percentage than men in coverage. There was a decline in those uninsured from the period previous to the Affordable Care Act which was 15.5% to 9.5% in 2015 and a further decrease was found in 2016 where it fell to 8.5%, of this 60% of those uninsured are Latino race and have always been identified at the bottom of the pyramid in regard to healthcare (Medical Express, 2017). The overall health status remains high, with 4 out of every 5 adults stating very good health. With 85.9% white people reported good health, 69.9& Latino and 77.5% African-American stating the same.

Climate Change & Weather in California:

Fire:

2017 has been one of the worst years on record, in regard to the number of fires which effected both northern and southern California. These fires have caused billions of dollars in claims and it is now unpredictable when these fires may occur. Previous to the year 2017, the state often saw wildfire during the summer and lasting until mid/end of October, however it is obvious that climate change is having a detrimental effect as wildfires are lasting until mid-December, this was usually a time where California prepared itself for the rain season. Wildfires are becoming increasingly powerful as several of them are relying on vegetation from previous wet weather and then drying out to an extent where it is fuelling fires greater than before (Madera Tribune, 2018). 90% of individuals who own houses in California buy coverage along with over 40% of renters insuring their property. The concerning issue arising from these events is the significant drop in fire cover for homeowners throughout California. Insurers like All State have ceased writing new policies and other big insurers, Farmers and State Farm have become extremely picky with regards to which homes to cover in high-risk areas. It provides a view of the effect lack of coverage is having on homeowners, as over half of the total losses are not covered by insurance companies. The number of events arising from fires has increased rapidly over the years, with houses in Nevada being unable to attain coverage and this problem is increasing at an unprecedented rate, with homes in North California now being dropped in coverage. Dave Jones announced in an interview that the level of coverage will further decrease in years to come, law forbids insurers to drop coverage after the first year, however once the following years coverage is up, and then insurers have the ability to discontinue family’s fire coverage. Many families are left with purchasing insurance from specialty insurers also regards as “surplus lines carriers” (Suzanne Barlyn, 2017), however these policies nearly double the cost of those by a well-known insurer. It is clearly evident that with costs of claims rapidly increasing, insurers will have to be extremely cautious when deciding the number of homes within an area to cover. Janet Ruiz from the Insurance Information Institute stated that insurers “tend to speak their risk so they can pay claims”. Insurance claims for the wildfires which took place in October in north of the state have reached over 9.4 billion dollars. These claims included over 21,000 homes which were damaged or destroyed and further to this, over 2,800 businesses were affected. With the blazing wildfire which occurred in South California, insurers are facing substantial losses this year. S&P have announced that they believe that losses will amount to over 12 billion dollars for the wildfire which caused significant damage to Bel Air in Los Angeles, whereby some properties were marketed at 100 million dollars (CNBC, 2017). However, under the proposition 103, which was mentioned above, insurance providers cannot place the losses from one event and place them in next year’s premiums. Regulation requires that these losses are spread over a longer term (usually 20 years) instead of having insurance which is unaffordable for 1 or 2 years. Since early 2018, the insurance regulator has been having lengthy debates and discussions to ensure the insurance market will remain healthy in years to come, as due to climate change, the likelihood of increased wildfires is inevitable.

Similar to the CEA, an agency was introduced known as Fair Plan. Created and legislated in 1968, it is a fall back for any individuals who are unable to retain insurance from providers, however this plan is costly and will be shown in premiums to customers, especially for those in high risk areas. All property insurers are members and Fair plan issues policies on behalf of the insurers. All members will share the profits, losses and expenses, this is divided in relation to the businesses market share within California. Within this plan, Fair provides cover up to a limit of 1.5 million dollars, this includes both the structure of the house and its contents. Fair plan will only insure property owners within the state if they are meeting the guideline submission. Insurers like Pure are taken it upon themselves to reduce the number of claims they receive. Pure have employed private firefighters who ensure that houses that have high values are protected. They do not interfere with public firefighters and their job is not to stop the fire, but stop the fire burning a house down. Preventative measures are put in place such as spraying the house with water/foam in the case a fire is nearby. This has caused a lot of controversy as many individuals, including executive direct Amy Bach, believe this preventative measure is unfair as one policyholders home could be saved due to the fact the value of the home is higher than another policyholder. (Wall Street Journal, 2017).

Mudslide:

Every year, there are thousands of houses which are affected by mudslides, sink holes and landslides with many homeowners realising that some of the damages are not covered in their insurance policy. Within California, homeowners need to purchase a landslide policy which has become available by Lloyds in recent years while mudslides are only covered by the federal government under flood insurance. Lloyds have proclaimed that they will only provide cover for areas which have not been affected by landslides previously. Landslides have been recognised and implemented in the new commercial policies, with every positive there is a negative, whereby these policies are costing people 40 cent for every 100 dollars covered which is extensive (SFGate, 1998). Between 1990-2000, landslides caused over 100 million worth of damage to the structure of homes alone. In recent times mudslides have destroy and created havoc in California, leaving several people injured and over 15 people dead. After such destructive wildfires, many areas are left without any vegetation and therefore there is nothing there to hold up the extent of rain which is falling. During the year 2017, Dave Jones made it aware to all insurers that they had a duty to cover all damages from the mudslides because the reason for such destruction was due to wildfire Thomas and thus the fire was the proximate cause of the destruction. As of recent years, Jones made it his goal to include in the California Insurance Code that if an insured peril was the cause of the damages from the mudslide then the homeowner will be covered under their policies (Insurance Journal, 2018). The onus, is on the insurer to determine that the damage was caused by an excluded peril.

Earthquake:

After the severe Northbridge temblor in 1994 there has been extreme steps in changing insurance coverage for earthquakes in California. Over 12 billion dollars were claimed in 1994 whereby insurers stated they were unable to withstand such claims and these claims were higher than all premiums ever collected. To help the industry, the state created the California Earthquake Authority also known as the “CEA”, which is an insurance pool ran by the state. Since the CEA was created they have seen demand sky rocket for earthquake policy with over 900,000 buying a policy. However, in recent time, individuals have decided not to purchase this cover with 5 out of every 6 homeowners deciding against the purchase. Many believe they will not be hit, while others are financially strong, and can walk away from their homes if such an event was to happen.