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Changes Coming to California's Property Insurance Marketplace

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A home burns as the Oak Fire moves through the area on July 23, 2022 near Mariposa, California. (Justin Sullivan/Getty Images)

View the full episode transcript. 

Marisa and Scott discuss the moves by Governor Gavin Newsom and Insurance Commissioner Ricardo Lara to shore up California’s home insurance marketplace in the face of growing wildfire risk with Michael Wara, director of the Climate and Energy Policy program at Stanford University’s Woods Institute for the Environment. Then, KQED Labor Correspondent Farida Jhabvala Romero joins to talk about the wins for organized labor in this year’s legislative session. 

Episode Transcript

This is a computer-generated transcript. While our team has reviewed it, there may be errors.

Marisa Lagos: Hey, everyone from KQED Public Radio, this is Political Breakdown and I’m Marisa Lagos.

Scott Shafer: And I’m Scott Shafer. Today on the Breakdown: California’s home insurance crisis. We’ll examine a plan from Governor Newsom and Insurance Commissioner Ricardo Lara to stop the exodus of major insurers from California and hopefully help stabilize the market for homeowners insurance.


Marisa Lagos: And then we’re going to examine the big legislative wins for organized labor at the state capitol this year that are now leaving Newsom with some tough decisions over the next few weeks. But first, Scott, as you mentioned, the governor did issue this executive order Thursday directing the insurance commissioner to take regulatory action and address this issue. Joining us to talk about it, hopefully explain it to all of us is Michael Wara, he’s director of the Climate and Energy Policy Program at Stanford University’s Woods Institute for the Environment. Michael Wara thanks for joining us.

Michael Wara: Always a pleasure to talk to you.

Marisa Lagos: Well, you are often called upon by folks in our role to explain a lot of this stuff, honestly. And so let’s start at the top. What did the governor do when he stepped into the crisis with this executive order? What does it say? Why is he doing this?

Michael Wara: Well, many of your listeners may have heard that there was an attempt to pass legislation this session to address what folks that live in higher fire risk areas of the state are experiencing, that it’s getting harder and harder to find insurance. And there’s a complicated set of reasons that boil down to the fact that the risk is increasing and the prices of insurance have not increased enough to match that increased risk. And we could get into like reinsurance and all these.

Marisa Lagos: We probably will. [laughs] 

Michael Wara: That’s the bottom line. Right? The price doesn’t match the risk. And so the insurers, these people who constantly advertise at you on the radio and on TV trying to get new customers are all of a sudden saying, ‘nah we don’t want new customers anymore because we can’t make a profit in California.’

Scott Shafer: Go ahead, finish.

Michael Wara: So that’s a that’s a huge problem for homeowners. And the legislature tried to get a fix done, didn’t work out at the last minute. And now the governor has stepped in to ask Commissioner Lara, the commissioner of insurance, to take kind of emergency regulatory action to do a lot of the things that were apparently,  I mean, I haven’t seen the language, but were apparently a part of the legislative conversation. So to reinterpret the law, which isn’t going to change from this action, but to reinterpret it to allow a law, a set of steps that will hopefully stabilize the insurance situation in California.

Scott Shafer: And so why was an executive order necessary? I mean, is this going to do what the legislation might have done if it had passed, or is this sort of a temporary measure?

Michael Wara: Well, I think this could be a permanent measure. You know, the executive order directs the insurance commissioner to write regulations. Right? So it doesn’t actually change things yet, but it does give the commissioner, you know, kind of air cover to take steps that are going to be, that are politically controversial. There’s no reason to hide the ball about this, insurance, home insurance costs in California will go up modestly if these steps are taken. What will also occur is that insurance will be available to people in a way that it is currently not. And so it’s not you know, it’s not a question of sort of, you know, is it the price higher or lower? It’s can you even get insurance?

And and there’s a there’s another issue that relates to there’s  kind of an insurance of last resort called the FAIR Plan. And the FAIR Plan has gotten itself into real trouble because as people have been kind of ditched by their normal private insurers like State Farm, for example, they have to go to this other plan, which is much more expensive,  the coverage is not as good, and that plan is actually undercapitalized. And so if there were to be a big fire in California, which hopefully there will not be, and we’ve had really good luck this year, and let’s hope that luck sticks through October, November, December. But if it were to be a big fire, that plan could essentially go belly up.

Marisa Lagos: Okay but I mean, what I’m hearing you say is that this was maybe not as legally necessary for the governor to direct this as it was politically expedient for him to sort of direct. So I don’t know, it feels like what the insurance commissioner is being asked to do, he maybe had the power to do already. But as you said, a lot of this stuff is not very popular. And my understanding of it is it might kind of supersede some of the proposition that has, you know, dictated how we do this. So in the past, so you mentioned reinsurance. This is essentially insurance companies, they go and get their coverage covered by bigger companies, bigger insurance companies. There’s also the question of like, how do they model this stuff? Right. So are we looking back in time at what has already happened or are we predicting into the future? Currently, they can’t predict into the future with these algorithms and models, Right. Are they going to be able to do that now? Like, does this just say, hey, go ahead, do these things that before you couldn’t do?

Michael Wara: Well, so let me answer your first question first, Marisa, which is, does this change Prop 103? Arguably, it does not. And the commissioner is not allowed to do that. The provisions of Prop 103 are part of the constitution, you can’t just decide by a regulation to modify that. What this does is change how the words in Prop 103 are interpreted. So Prop 103 says set a rate, a cost of insurance for premiums that reflects the risk. In plain language, that’s what it says. So what does that mean? Well, the way it’s been interpreted over the years in the homeowners context is look backward and take the average of the losses over the last 20 years. And that worked fine when losses weren’t increasing rapidly because of climate change. Of course, the governor, and I don’t know if the insurance commissioner is in New York right now for Climate Week, but the governor’s in Climate Week making all kinds of announcements about climate change and how California’s leading. The funny thing is that our insurance system kind of pretends that climate change doesn’t exist, and that’s not workable anymore. And so it’s not so much forward-looking climate models as climate models that estimate the risk today, to the average of the risk over the last two decades. And if you think about it like fire risk in 2003 —

Marisa Lagos: Or even ten years ago.

Michael Wara: Or even ten years ago. So we live in a different world and unfortunately and climate change is a big part of it, their are other causes it’s complicated problem. But allowing the insurers to use a model is also something that happens in other kinds of insurance. So, for example, earthquake insurance uses CAT models and that’s been okay for a long time, even after Prop 103. So this is not unprecedented in California, but it’s not traditionally the approach has been taken.

Scott Shafer:  And you mentioned that, you know, rates are going to go up, but it will be available to everybody. Are rates going to go up equally across the board or will people in high risk areas be paying, you know, the bulk of the increase?

Michael Wara: That’s a great question, Scott. And I think the answer is this is more the second than the first. It’s likely that this might California has rates, insurance rates that are among the lowest in the country. And a lot of that, the credit for that is due to Prop 103. And it’s probably the case that these changes will cause rates to go up modestly in low risk areas and more in high risk areas. But what it will mean is you can actually buy insurance in the high risk rates, which is something that is going away very quickly.

Marisa Lagos: Well, which is different than earthquake insurance, because people, if they have loans, are required to have basic homeowner’s, they’re not required to have earthquake. And a lot of people opt out because it’s really expensive. Before we get into that, I mean, you mentioned at the top that there was this attempt at a legislative deal. It did fall apart. There was a conversation taped on a plane that leaked with lobbyists. I mean, there’s a lot of drama around it. But the bottom line is consumer advocates have really been feeling like they’ve been shut out of these conversations. And it feels like if they’re taking this action at the insurance commissioner level to kind of go around or change the way Proposition 103 is interpreted, that feels like a lawsuit waiting to happen. Like, is this about to be a big legal battle?

Michael Wara: Well, I think it’s going to depend on how, the skill with which Commissioner Lara and the Department of Insurance can navigate a new regulatory process. So the proof will be in the pudding. I think that the insurers, they’re happy, I imagine, with this announcement. But what they really care about is a regulation that is finalized and survives court challenge because that’s what’s going to affect their business environment, not, you know, a press conference. And so we really have to see, you know, how fast can this get done. Time also matters. The situation is deteriorating rapidly in California. And so if this takes a year or 18 months, that’s too long. So we’ll have to see how fast they can move. And then also what the response of Consumer Watchdog in particular, which is the main consumer advocate and insurance space in California, what their response is.

Scott Shafer: You were advising Senator Dodd as he tried to pull together a compromise on this in the legislature. Time ran out. Was it because this was a difficult vote politically, or could the various sides not come together on an agreement that they could vote on?

Michael Wara: Well, I’m not privy to the exact internal dynamics of the negotiation that occurred. But what I would say is that this is a super complicated issue and it requires elected officials to take a hard vote. And I think we just ran out of time. You know, it requires a lot of education. And, you know, just like for regular folks, like what is going on, you don’t need to know about re-insurance, you just want your home insurance policy so you can have your mortgage. And the there’s a lot of complication. And the consumer advocates were able to really effectively say, look, this is going to raise insurance costs. So and maybe it’s going to raise insurance costs for people in urban areas to benefit people in rural areas, kind of a two Californias sort of vibe. And that was effective in pulling apart, you know, what would have had to be in the legislature, a two-thirds vote. So I think the decision was taken not to bring this up, not to try to get a two-thirds coalition in the three days that were available at the end of the session.

Marisa Lagos: Yeah. I mean, you mentioned Consumer Watchdog. They’ve been very critical of Insurance Commissioner Lara. And I know that the insurance companies have also complained about the the speed or lack thereof that the commissioner’s office takes in reviewing rates and approving hikes. Do you have confidence that this office is up to the pretty steep task that you’ve laid out of creating these regulations and kind of doing so in an urgent manner?

Michael Wara: I think it’s a tall order, and the challenge is going to be that there are relatively straightforward ways to issue an emergency regulation that makes these changes. And of course, emergency regulations only last for six months. So as soon as you issue the emergency reg, you then start a process to do the normal regulatory process. I don’t know if Commissioner Lara intends to take that path. Certainly on some of these things, like the inclusion of these catastrophe models in an insurance premium rate setting, he’s wanted to have a much more kind of transparent, sort of a lot more elaborate process, and that will slow down what happens and I think also potentially increase its risk. I don’t know. But, you know,  there are real tradeoffs here between speed and kind of allowing everyone to comment on every issue that they think is important.

Scott Shafer: Well, to what extent do you see this as a placeholder, You know, something to kind of stabilize the market while the legislature can reconvene next year and pick this back up?

Michael Wara: I think this is more than a placeholder if CDI is successful. But what I would emphasize is that this whole situation is fundamentally unstable because of climate change and the growing risk of wildfire. And the step that we really need to take and that we have not done as effectively as we need to, is to really dramatically reduce the risk that homes burn down in wildfires. And there are known ways to do that. And we’ve done some of them. And, you know, the governor’s team has made a lot of efforts in that space over the last five years, six years, I guess. But there’s a lot more we need to do, especially when it comes to structures and not losing, like not having what happened in Santa Rosa occur or Paradise or Lahaina more recently. And so the real way out of this is a combination of financial engineering, which is what a lot of this is about, and real physical engineering in the world. And we have to do both or there’s no there’s not a long term fix.

Marisa Lagos: And Newsom and Larra can’t do all of that by themselves. A lot of it’s up to the rest of us. That’s Michael Wara, he’s director of the Climate and Energy Policy Program at Stanford University’s Woods Institute for the Environment. Thank you for unpacking this for us. We really appreciate you.

Michael Wara: It’s great to talk to both of you.

Scott Shafer: Thanks, Michael.

Marisa Lagos: We are going to take a short break. When we come back, we’ll talk about a Hot Labor Summer at the state capitol. You’re listening to Political Breakdown from KQED Public Radio.

Marisa Lagos: Welcome back to the Political Breakdown, I’m Marisa Lagos here with Scott Shafer. Well, the legislature wrapped up its work in Sacramento about a week ago, but not before passing some landmark bills for labor in California. They included higher minimum wages for fast food and health care workers, more paid sick leave for California employees, unemployment for workers on strike and more. It’s all on Governor Newsom’s desk now and here to unpack it with us is KQED labor correspondent Farida Jhabvavla Romero. Farida, thanks for being here.

Farida Jhabvala Romero: I’m happy to be here.

Marisa Lagos: So we said, you know, the line, Hot Labor Summer, This is not just happening in Sacramento. There’s been labor actions nationally, UAW strike, you know, ongoing Hollywood strikes. Is that what accounts you think for this action? This success in Sacramento, is it this bigger kind of political culture right now?

Farida Jhabvala Romero: Yeah, I mean, I think it definitely has played a big role, just this awareness about the struggles of working people in our state, certainly. And then more pressure, you know, just in the form of strikes or people threatening to strike. And, you know, all of that goes to the high cost of living in the state, but also like bigger trends, like surging inflation, you know, like with the price of groceries going up. And then like we had like the almost record pretty much record gas prices not too long ago. And then, you know, coming out of the pandemic, a lot of discontent. And, you know, workers feeling really disgruntled and underappreciated, especially in sectors like health care you know, and other essential jobs are people felt like they really suffered and they’re not seeing their employers, you know, increase their wages the way they would or improve working conditions. And then there’s just like income inequality. I think a lot of people are just thinking more about that. And, you know, like today there was a new report by the Economic Policy Institute and they say that CEO compensation has really skyrocketed from the 1970s and that now CEOs on average make about 344 times more than what a typical worker makes. And so, you know, those are some big issues that I think legislators are, you know, trying to intervene and take steps on.

Scott Shafer: Well, and among the big winners in the session, fast food workers, a deal was struck between the legislature and the restaurant industry that’s going to guarantee them a raise of up to $20 an hour from the current 1550. And as part of that deal, a referendum on a new law with even higher, higher hourly wage is going to get pulled. But I’m wondering, you know, from your reporting, who who makes up that population of fast food workers and how big a deal is this for them?

Farida Jhabvala Romero: Yeah, I mean, that’s it’s a huge deal. And I think it’s something where we saw the industry really, you know, come out and say it was going to cause, you know, they thought it was going to cost them this referendum fight, was going to cost them more than $100 million, you know, And that wasn’t it. There was another bill in the, you know, moving through the legislature that would have made corporations, fast food corporations liable for violations at their franchisees, you know, by their franchisees. And they said that was going to really, you know, change the franchise model. So it was becoming like a tit for tat is the way, you know, some people —

Scott Shafer: So they had some incentive to come to the table.

Farida Jhabvala Romero: Yeah, they really did, you know, And so they came out with this deal, which, you know, like your original question, it’s more than 500,000, half a million workers in the state in the industry. A lot of them, you know, we think of them before, you know, it was like teenagers, you know. But now it’s a lot of adult immigrant, you know, people with families and a lot of them women, people of color.

Scott Shafer: Retirees, even sometimes.

Farida Jhabvala Romero: Yeah. And many of them, you know, making pretty close to minimum wage. And I think a union representative was telling me the average is around $16 an hour. So this jumped to $20 an hour is going to be a big, big significant change.

Marisa Lagos: Yeah, I mean, that one is so interesting because it does pull in so many other kind of factors when you think about the referendum process and the leverage that they had there. There was another bill passed that actually allowed it to be pulled off. I think there was threats that they could kind of do some of what they wanted to do with the fast food council through the administration, the governor’s administration. So there was a lot of things happening there. I am curious, though, I feel like some of the other bills are a little more straightforward. Right. So like, let’s talk about unemployment insurance for striking workers. That seems like that’s a big hot potato for the governor. A lot of pushback. I mean, what did you hear in terms of the arguments for it and how realistic do you think it is that we actually see it signed?

Farida Jhabvala Romero: I mean, that’s super controversial.  I’ll definitely answer your question about, say, you know, it’s very unclear how many striking workers could actually get unemployment benefits because the bill basically just expands eligibility to who can apply for unemployment to people who are on strike for more than two weeks. But you still have to meet all of the other requirements, like proving that you’re looking for work. So it’s unclear to me, at least at this point, you know, how many people will, you know, be able to —

Marisa Lagos: And I know EDD is really crack down on that. They’re like doing interviews now with people because of all the fraud we’ve seen.

Farida Jhabvala Romero: Right, so there’s heightened, you know, vigilance on that. But I mean, the proponents for the bill, what they were saying is that this would send a really clear message, you know, to especially wealthier, bigger companies that they, you know, should come to the table to negotiate in good faith. Because what we saw, especially with the Writers Guild, there were stories about, you know, executives at the studios saying that they were just going to wait out, you know, people until they started losing their homes or couldn’t pay rent. And then they have to come and, you know, bargain, you know, on what they want. So I think it was this concerted effort from the legislature, or at least this wish and this concern that negotiations are not super, you know, protracted and last forever and that both parties come and negotiate in good faith.

Scott Shafer: It does seem like the governor is maybe laying the groundwork for a veto of that legislation. He was saying in an interview with Politico a couple of weeks ago that the unemployment insurance fund is running kind of low.

Farida Jhabvala Romero: Yeah, yeah. And that was one of the main arguments against it that, you know, California already borrowed billions of dollars from the federal government to keep the unemployment insurance fund solvent and that, you know, employers are paying that because the unemployment insurance fund is funded, is financed with the taxes on employers per employee. And so it just you know, that’s another concern with this.

Marisa Lagos: If you’re just joining us, you’re listening to Political Breakdown from KQED. I’m Marisa Lagos, here with Scott Shafer We were talking about labor’s big wins in Sacramento this year. This is a fund raising period for KQED Public Radio. So for more information about how to support KQED, go to KQED.org

Scott Shafer: Farida, you’ve done a lot of great reporting on wage theft and how well the state labor commission deals with that. There’s been huge backlogs. It seems like, you know, based on what you’ve learned and reported, it seems like that would be a really important thing to be pressing on, if you’re the legislature, make sure that that agency is functioning properly and that there isn’t such a long wait time. Have you seen any movement along those lines that workers who are waiting for some kind of, you know, judgment or answer?

Farida Jhabvala Romero: Yeah, yeah. I mean, it’s a really interesting question. I think there’s just more awareness that, like you said, I mean, there’s this agency, the labor commissioner’s office, and, you know, charged with investigating wage theft and other labor violations. But there’s also Cal/OSHA, you know, like the state regulators on occupational health and safety, which is having the same problems. They’re understaffed and it seems like a lot of the problem is sort of this like bureaucratic internal situation, you know, where the state is, you know, having similar issues to other employers where there’s a labor shortage, you know, their wages may not be as competitive. There’s a big problem, at least from people inside of these agencies, you know what they’re saying with just like the length of time it takes to get, you know, candidates vetted and and hired. So there seems to be a lot of bureaucratic stuff inside the agency that I’m not sure if, like legislation is the way to do it and it seems like that’s maybe lawmakers agree because you don’t see many bills on that. But I do have to say there is an audit. The state auditor is looking at the labor commissioner’s office and a big emphasis of the of the audit, is looking at these processes for why the agency is so understaffed because they have the money. The governor has been giving them more money to hire more people and then what just happens is like the vacancy rate increases or that you know, the proportion of how many positions are filled because actually have more positions available and they’re not able to get people in there.

Marisa Lagos: Interesting. All right. Well, I want to hit a couple other bills I know that you’ve been following. One is one by Senator Maria Elena Durazo, who is a big labor leader, which, which if it’s signed, would include about 300,000 domestic workers in workplace health and safety laws. And we’re talking people who generally tend to work for individuals, right? House cleaners, nannies, other care providers. Yeah. So how would that work? Like, what is the bill do and how and would it actually help those domestic workers?

Farida Jhabvala Romero: Yeah, so that’s a really interesting one because domestic workers are completely excluded from California’s workplace safety and health protections that other workers enjoy. And if you go look at the California labor law, they don’t consider domestic work employment. It’s like in the law. And that’s why Cal/OSHA has no jurisdiction over these types of complaints by these workers. And so what the bill would do is sort of like include them, you know, like just with everybody else. But Governor Newsom vetoed a similar bill a couple of years ago because he was concerned about what, you know, the requirements are for employers to keep workers safe. You know, they have to have like this injury illness prevention plan —

Marisa Lagos: And like worker’s comp and other insurance, right?

Farida Jhabvala Romero: And that it was going to be just too, you know, too difficult, you know, for people who own homes and are employers because they have a nanny, for example. So  that’s a balance that we’re going to see, you know, what’s going to happen this year. Since then, the governor did approve a bill that set up this advisory committee to study the issue

Scott Shafer: Always a good way to punt

Farida Jhabvala Romero: Yeah like delay a little bit. But now they have, you know, more ammunition in a sense, like the people that support this proposal, because the advisory committee, which included employers, you know, also came up saying that California should get rid of this exclusion of domestic workers.

Scott Shafer: One of the other bills that the governor is going to have to decide on is allowing the legislative staff to unionize. I would imagine he’ll defer to the legislature on that and probably sign it. And another one that would require a human to be in a truck that is a quote unquote, driverless truck. We’ll have to see what the governor does in that. He’s you know, he’s often been, you know, very sympathetic, I think, to the tech industry. And it does kind of like, yes, it would save a job, but it would also it was kind of stunt that that technology in a way. Yeah.

Marisa Lagos: I think these are a lot of a lot of hot potatoes for the governor. I’m curious, we only have like a minute and a half left. Do you think that this bill to expand the number of paid sick days from 3 to 5, is that a hot potato or is that kind of post-COVID it feels like not as controversial.

Farida Jhabvala Romero: Yeah, not as big, right? Yeah. I mean, there’s a number of states that have more minimum paid sick days than California, a lot more actually. And so California has sort of fallen behind, you know, in that sense, you know, compared to other states. That bill was originally proposing, seven days of paid sick leave and then on down to five, you know, in negotiations, it is you know, it would be difficult for a lot of small businesses especially is what I’ve heard you know because they do have to front those costs. And there was a really interesting survey of hundreds of small business owners in California where the business owners said, hey, we agree, you know, with having more paid sick days off because we don’t want people to come in and like make us sick or, you know, we want them to recover. But we do need help from the state to pay for it. So, you know, we’ll see what happens.

Scott Shafer: Very short time left, but lots got through the legislature. What would you say, one or two things that you think they may come back with in the in the session? What was left undone? Real quick, if you could?

Farida Jhabvala Romero: Um, I don’t know. I can’t think of it at this point.

Marisa Lagos: I think it depends on what the governor does or doesn’t sign.

Scott Shafer: And he can certainly say, Look, we did a whole lot this year and don’t send me anything for a while.

Farida Jhabvala Romero: I don’t think they’re going to stop. No, no, no. These bills are coming.

Scott Shafer:  A very pro-labor speaker as well, Robert Rivas.

Marisa Lagos: And a lot of polling that shows the public supports labor so we’ll see. That was KQED labor correspondent Farida Jhabvala Romero. Thanks for coming in.

Farida Jhabvala Romero: Thank you.

Marisa Lagos: That’s going to do it for this edition of Political Breakdown. We are a production of KQED Public Radio.

Scott Shafer: Our engineer today, the one and only Christopher Beale. I’m Scott Shafer.


Marisa Lagos: And I’m Marisa Lagos. We’ll see you next time.

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