California’s insurance commissioner is spearheading a plan this year billed as the “largest insurance reform since Proposition 103,” but consumer advocates dismiss the reform as a fast track to price gouging.
In recent legislative hearings, Commissioner Ricardo Lara rolled out elements of the reform plan. A key component is to allow insurance companies to use algorithms and computer modeling to better track future risks due to climate change and other factors – which reform supporters say would encourage insurers to write more policies in the Golden State.
"Since last September, my department has been working diligently on ambitious reforms designed to stabilize our state’s insurance marketplace,” Lara said in remarks during a hearing earlier this month. “... We will finish our regulatory work this year, and Californians are already seeing benefits."
Other proposals include an effort to expedite rate filings in conjunction with the provisions of Proposition 103, which voters approved in 1988. The group Consumer Watchdog, however, sees the proposals as secretive and subject to machinations of the insurance industry’s “disinformation apparatus.”
“The commissioner`s plan is based on a secret agreement with the insurance industry that if he relieves them of having to comply with the consumer provisions of Proposition 103 this year, they will return to the marketplace and start doing business again in California,” Consumer Watchdog’s founder, Harvey Rosenfield, told the Southern California Record. “No insurance company has actually signed off on that deal officially, but there are a lot of problems with that.”
Central to the proposed reforms is a plan to allow insurers to project future policy costs through the use of artificial intelligence and “secret algorithms,” which would short-circuit the state’s public review system, according to Rosenfield.
“They want to use mathematical models,” he said. “We have no objections so long as the public and consumers can carefully review these models … to make sure they're not biased.”
But Lara’s proposal will not require insurers to prove to the public that the computer models are reliable – something that could lead to “unlimited price gouging,” according to Rosenfield. Only the commissioner, his staff members and private consultants hired by the Department of Insurance would gain access to the insurance algorithm, he said in a recent blog post published by Consumer Watchdog.
“Perhaps it is no surprise that his new proposal exalts the wizards in the increasingly tech-oriented insurance industry, placing them beyond the reach of the public,” the article states.
The proposals would allow car and property insurance rates to skyrocket in the state, Rosenfield said. He added that Lara made a deal in which rate-calculation changes would lead to insurers returning to the California market and selling insurance policies to 85% of residents living in higher-risk areas. But Consumer Watchdog contends the plan is problematic.
“We later discovered that the ‘85% commitment’ to re-enter the market was itself a deception: Companies would be allowed to sell bare-bones policies like the California FAIR Plan, not the standard comprehensive home insurance coverage that most people want,” Rosenfield said.
The California FAIR Plan is the state’s private insurer of last resort that was set up by the governor and state Legislature.
Insurers have complained that under the current review process, companies face long delays to gain approval of rate adjustments, but Rosenfield said the delays were often the result of the actions of the insurance companies themselves.
“We found out that delays are almost always caused by insurance companies refusing to provide the data … needed to analyze rate applications,” he said.
Consumer Watchdog’s challenges of rate hikes from 2002 to 2023 have saved Californians $5.51 billion in insurance costs, according to a recent study published on the group’s website.