Regulators in California
made it difficult for insurers to raise rates despite increasing risks. So the
insurers stopped writing policies, which is logical. But they’ll get blamed and
shamed anyway.
EXPERT OPINION BY HOWARD TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH INVESTORS @HOWARDTULLMAN1
JAN 21, 2025
In the tragic, painful aftermath of
the latest California fires, there are plenty of lessons to be learned and lots
of blame to spread around. And spreading blame may be the one thing that all
the local government officials are truly best at. We’re not even counting the
clods in Washington D.C., like Speaker Mike Johnson, who are also foaming at
the mouth to spread some slime and flex their “conservative” credentials
through extortionate demands for funding conditions while the fires are still
burning.
We can expect the typical months of
conversations, criticisms and complaints and ultimately, after all the
grandstanding and garbage slinging, no concrete actions or improvements.
Then-President Biden made an immediate
and kind gesture of promising millions in aid to the victims, but he’s already
out the door. This generous offer was reminiscent of the bankrupt guy who takes
a cab to the courthouse and then invites the cabbie inside as his newest
creditor.
Someone else is going to have to pay
the piper and the crook now in charge hasn’t paid a creditor for decades.
Hopefully, the federal government will eventually step up and meet at least a
portion of the massive support costs, property losses, and rebuilding expenses.
Let’s Blame the Insurers
Certainly, the insurers who are still
active in California will take a huge hit. But beyond that, there’s going to be
an enormous funding gap, which will adversely impact hundreds of thousands of
lives. Still, I’m sure that we’ll hear that the ultimate villains turn out to
be the insurers and the insurance industry. They represent such attractive and
low-hanging fruit, and it’s so easy to blame someone else for the problems.
The reality of the wildfires is that
we’re seeing one of the worst cases in history of “what comes around goes
around”.
First, millions of California
residents are (and have been) uninsured or underinsured for many years. To save
some money, they made very bad bet that their property and lives would be
spared from the annual California catastrophes. This time around they lost.
Big. As Warren Buffett said: “Only when the tide goes out do you discover who’s
been swimming naked.” And contrary to the stupid suggestions of
Senator Rand Paul (R-KY) in this case, the tide and, in
fact the entire ocean, was no help. The only thing that sucked was him. As an
aside, thousands of new businesses, especially startups, make exactly the same
kind of mistaken short-term decisions and don’t protect their businesses or
their investors with appropriate insurance.
Why the Regulators Deserve the Real
Blame
Second, the reason that so many
residents were under- or uninsured is because for several years major insurers
like State Farm have been reducing or eliminating coverage in California. Why?
Because the insurance regulators have been unwilling to let them to raise
rates despite the higher risks of recurring natural disasters. Unfortunately,
from a timing standpoint, many existing homeowners’ policies from multiple
insurers were not renewed at year end– right before the fires hit.
While California is a huge and
generally attractive market for insurers, much like Florida, as the
underwriting risks and claims losses grow, it’s reasonable to expect less or
even zero coverage in these states. The math can no longer add up; even extraordinary
rate increases are unlikely to cover historic-sized losses.
Third, the alleged fallback protection
for residents in California is a state-backed fund, the FAIR plan, which
provides last-resort insurance coverage for all comers. Which is why the number
of FAIR policies has exploded over the last several years. This sounds like a
form of protection except that FAIR is undoubtedly insolvent given the expected
losses from the fires—which are yet to even be fully contained.
In a marvel of circularity, FAIR is
replenished when needed by taxing the insurers doing business in the state
based on their relative size. While the timeframe for the insurers to re-fund
the FAIR coffers is not clear to me, it’s another obvious reason why the major
insurers continue to shrink their book of business. They face the prospect of
essentially paying twice for enormous losses and not receiving any premiums to
offset the second tier of taxes. None of these plans in any of the states
subject to floods, fires or hurricanes is sustainable over time.
Don’t Think It Can’t Happen to You–Do
an Insurance Checkup
And, while the West Coast and its
weather and water problems may seem many miles away from your own business and
day-to-day operations, insurance availability and pricing in all respects are
areas of concern and exposure that are going to impact all of us. Now’s the
time to at least start thinking about it, asking questions of your own advisors
and vendors, and taking whatever steps you can to best position yourself and
your company for the future.
Everyone’s circumstances are
different, but in my experience working with hundreds of companies over many
years as well as with all the major insurers, here are a few things to ask
yourself.
·
Who is helping you address these
exposures and risks.
Remember that an insurance agent works
for the insurer and not for you. Their objectives and incentives are quite
different from yours. It’s not dissimilar from both parties to a divorce
proceeding who are foolish enough to think that their attorneys are
representing them when in fact the attorneys are only representing themselves.
As noted above, the insurers fully understand the growing risks and are more
than incentivized to exclude, omit or otherwise avoid liability in as many
instances as they can.
·
Do you ever read the provisions and
exceptions in your policies?
Be honest. Every time there’s a
renewal, it’s accompanied by changes, updates and additional exceptions and
limitations to coverage and you never even look at those pieces of paper. This
is exactly like the “terms and conditions” which every tech vendor loads into
their documents and asks you to consent to without any understanding.
·
Do you even understand the new kinds
of damage to your business and livelihood that are out there today? Are you
covered?
Business interruption insurance has
more holes and outs and exceptions than the finest chunk of Swiss cheese.
Cybercrimes including scams, identity thefts and ransom demands are
skyrocketing. Are you covered? One new area here is litigation by your own clients
and customers for injuries they have allegedly suffered through their own fault
or negligence but nevertheless want to blame on you. It doesn’t generally cost
any less in litigation if you happen to be found not culpable. How about
coverage for area-wide power and grid outages?
Bottom line: You don’t want to be
asking these questions and getting the wrong answers after the fact. The time
to build your boat is before the flood. Take the time now to have someone take
a look at your own company’s situation.
