Insurance reform: More competition or higher rates?

SACRAMENTO, Calif. - California is considering whether to allow insurance companies to use computer models to justify their rate hikes. 

The goal is to try and stop these companies from leaving the state entirely. 

Since you can't finance a home without insurance, California finds itself as a growing insurance desert choking off a big part of the economy. Though, activity in Sacramento, aimed at freeing the market up is underway, it will be a fight and consumers may not like the ultimate results.

By their own conduct, raising rates, canceling policies and refusing to sell new policies, insurers have laid down the gauntlet, "Change California's insurance laws or we're outta here." The California Insurance Commissioner says he's responding to the challenges by insurers to create calls reliable, competitive and available homeowners' insurance by the end of this year.

Key to that, adopting insurance industry-created algorithms that will allow insurers to predict the fire risk, down to individual homes. From that they will set individual rates, based on what might happen.

New houses line the street. (Credit: David McNew/Getty Images)

Under the current system, insurers must justify proposed higher rates based on real loss claims they have or soon will pay. 

Karl Susman is an independent agent who sells insurance from many different insurers. "The carriers are signaling that they're cautiously optimistic. They're happy with the first set of regulations," said Susman.

Under this new plan, homeowners could earn discounts for hardening their homes and landscaping against wildfires. "It's going to be: what have you done to make your home safer from wildfires?" said Susman.

Susman says, currently upwards of 90% of traditional insurers are writing few if any new policies at all. So, the FAIR Plan, often called the insurer of last resort, has become the insurer of first resort as availability of private insurance collapses. "They are, by far, the largest insurer that is currently writing insurance policies. They've gone from 7,000 brokers to over 52,000 brokers in the last three or four months," he said.

Consumer advocate and lawyer Harvey Rosenfield is head of Consumer Watchhdog and author of insurance reform Prop. 103 passed by voters in 1988. "These software programs will inevitably allow them to seek far higher rates than are justified. That specifically would allow the insurance companies to propose these models without public scrutiny," said Rosenfield.

"There's nothing in this regulation that the Commissioner issued yesterday that requires the insurance companies to reduce anybody's rates, to sell insurance to people they won't sell it to now," said Rosenfield.

Insurers argue that these rules are necessary and that the Commissioner will have the authority to protect consumers.