Homeowners Insurance Is Focus Of California
Tuesday November 26, 3:21 pm ET
By Pat Maio and Chad Bray, Of DOW JONES NEWSWIRES
LOS ANGELES -(Dow Jones)- Trouble may be brewing for companies in California's homeowners insurance market.
The state's insurance department, which is in transition after Democrat John Garamendi was elected commissioner earlier this month, is looking into whether major insurers have created an artificial crisis in the homeowners market as a way to raise rates.
Worries have surfaced in recent months as the commissioner's office has been swamped with consumer complaints about nonrenewal of homeowners policies and troubles in finding replacement insurance. Applications to a quasi-public " insurer of last resort" in California have nearly doubled since last year.
The problem seems to have escalated after privately held State Farm Insurance Cos., the largest home insurer in California, placed a moratorium on underwriting new policies effective May 1. State Farm, which lost $5 billion nationally last year, has taken similar moves in other unprofitable states.
In separate interviews with new commissioner Garamendi and outgoing head Harry W. Low, the agency chiefs disclosed that the initial stages of a probe are now under way to see if the insurers are unfairly targeting policyholders with too many claims.
The department heads worry that the industry may be using a little-known database originally designed to monitor fraudulent claims to penalize homeowners, particularly those who have filed too many mold and water damage claims. Mold claims have been a growing concern for home insurers in recent years.
"We are looking into whether the database is being used unfairly, or whether misinformation is being stored in there," Low said.
The agency heads said they may want to impose regulations over how the Claims Loss Underwriting Exchange, or CLUE, is used, a process that could take several months to implement. "It is a very complex and troubling situation," Low said.
The database is run by ChoicePoint Inc. , which says that the agency doesn't understand the purpose of CLUE. James Lee, ChoicePoint's chief marketing officer, said the purpose of CLUE is to give the insured and insurers an "accurate reflection" of the claims on the insured property itself as well as the individual.
Mold and water damage claims are the main reason insurers have tightened up their homeowners underwriting guidelines in California in recent months.
Water Damage Losses
Since 1997, the cost of water damage losses have risen dramatically in California, while the number of claims has risen as much as 15% depending on the company. For example, Farmers Insurance Group, a unit of Zurich Financial Services Group, has seen water claims rise to 36.6% of all homeowners claims in 2001 from 21.5% in 1998.
It's unclear how much claims have risen this year, but the general consensus is that they are up in California.
Despite the negative publicity that might surround such a probe, several insurance officials said in interviews that they would embrace the investigation because it would point the spotlight on an out-of-control system where a rising tide of claims has hit them hard in the pocketbook.
Bill Sirola, a State Farm spokesman in California, said the insurer welcomes an investigation by California authorities into the rates and difficult insurance market in the state. However, he said the investigation should be driven by facts, rather than by politics.
Kevin Kelso, president of Farmers' personal insurance unit, had similar thoughts. "We are looking at prior loss history in underwriting guidelines. Two to three years ago we were doing this, but we are probably doing it more carefully now because of the rate of increase in water claims," Kelso said.
Garamendi said he has begun working with Low to begin collecting information about the problem from the state's top eight insurers, which have about three- quarters of the homeowners insurance market in California. He also plans to take a sampling among the state's smaller insurers.
"It's a real serious issue. The solution begins with finding out what is going on," said Garamendi.
Generally, homeowners insurance has been unprofitable for insurers in recent years. Higher construction and replacement costs have cut into profits. Also, the industry has been hit by weaker investment returns as equity markets have sagged.
In addition, insurers have been hit both by several high-profile celebrity cases involving mold-related claims that have cost them millions in California and by a surge in water damage claims in Texas.
Problems In Texas
The Texas situation is causing spill-over effects in the California market, insurers said.
Texas has been a hotbed for mold and water damage claims in the U.S., in part due to a state-mandated policy form that didn't allow mold exclusions and in part due to aggressive lawyers. Texas accounted for 70% of new mold claims last year, according to the Insurance Information Institute, a trade group.
According to an August report by the group, water damage claims have skyrocketed in Texas since 2000. Paid losses from water damage claims were $700 million in 2001, more than double the $300 million paid out in 1999.
Insurers have since convinced the Texas Department of Insurance to change the policy form, allowing the exclusion of some mold claims. Insurers expect most of the mold issues in Texas will be behind them within the next two years as policy restrictions are phased in upon renewal. They also have sought similar restrictions or limits on mold claims in most states.
The report also found that the institute's Insurance Information Network of California had uncovered a doubling of water damage claims in California since 1997.
Insurers here paid $430.6 million in water damage claims in 2001, accounting for 32% of all homeowners' paid losses, according to the institute. In 1997, insurers paid $206.1 million in water claims, accounting for 24% of all homeowners' paid losses. "It's headed toward a crisis if left unchecked," said Candysse Miller, executive director of the California network.
Behind the California Insurance Department's probe of the homeowners insurance market is a rising tide of consumer complaints that have made their way to the agency's fraud hotline in recent months, according to Low.
The issue for many consumers is nonrenewal of homeowners insurance policies, forcing them to shop for a replacement. Many can't find an affordable policy or, worse yet, can't find any at all.
Those who can't find insurance end up with California's Fair Access to Insurance Requirements (FAIR) Plan, a quasi-government insurer of last resort. In many cases, they pay double for less coverage than they had previously.
Applications with the FAIR Plan have shot up in recent months, said Mike Harris a spokesman for the Los Angeles-based organization. Currently, the FAIR Plan takes an average of 450 applications for homeowners insurance daily, up from 200 daily a year ago, Harris said.
Meanwhile, California state senator Jackie Speier, a Democrat who chairs the state's Senate Insurance Committee, plans to hold a Dec. 4 hearing to investigate the CLUE database and determine whether the insurance industry is " gaming" the marketplace to its advantage by engaging in a pattern of not renewing policies.
Since the industry underwrites insurance offered by California's FAIR Plan, they share in the profits and losses of the group, Speier said.
She said the insurance industry may have created an "artificial crisis" in order to raise rates and increase their profits by forcing consumers into the more expensive California FAIR Plan.
"I'm not convinced that there hasn't been some manipulation of prices, kind of like what happened with the energy crisis here in California," she said.
Today's policies have so many exclusions that "they resemble Swiss cheese," she said. "What are we really paying for?"