After running a solid campaign that was a credit to her and her team, Republican Stacy Korsgaden conceded in the Insurance Commissioner’s race. As of today, with all precincts in the state partially reporting for the June 2 primary vote, Democrat Jane Kim has received 2,323,460 votes (27.4%), with Democrat State Senator Ben Allen receiving 1,646,075 votes (19.4%), and Korsgaden receiving 1,318,225 votes (15.5%).
These results pave the way for a Dem-on-Dem runoff in November between Ms. Kim (on a leave of absence as California director of the Working Families Party) and Senator Allen (completing his 3rd term as a State Senator representing west Los Angeles County).
Both Kim and Allen have made extensive public statements regarding their plans for serving as Insurance Commissioner. I’ll outline their proposals and then provide some analysis based on many years of dealing with these issues and similar promises.
Specifics on Jane Kim’s proposals
Jane Kim is campaigning on 1) lowering insurance premiums, 2) ensuring guaranteed coverage for all, and 3) fast and generous claims payments. The specific proposals include:
· Single-payer “disaster for all” state government insurance, covering wildfires, floods and earthquakes. Private insurers would sell both disaster and non-disaster property insurance, but the state would pay the disaster claims. Policyholder premiums would fund the state program, along with “corporate polluters.” Disaster insurance coverage would be “automatic and universal” regardless of how much money the state fund has or how concentrated it is in high hazard areas. There are no details about what happens if the state fund runs out of money, whether state taxpayers would bail out the fund, or whether claimants would receive partial payouts from an exhausted fund. There are also no details about how much taxpayer dollars the state would use to get the fund off the ground. One can explore the heavily-subsidized federal government National Flood Insurance Program to learn more about such approaches.
· Require insurers to sell a “guaranteed replacement cost” policy, meaning that insurers must pay to rebuild a totally destroyed home regardless of how much insurance a customer purchased in advance. This is similar to the insurance rules that were common prior to the Oakland Hills fires in 1991. Because policyholders would buy as little insurance as possible before a fire, but make claims demands well in excess of the total dollar amount of coverage they had purchased, insurers refused to continue doing business in high-risk areas until the California Legislature created the current law requiring customers to specify and pay for the total amount of insurance they would like to purchase and, if a customer purchases less insurance than required to rebuild a home, the insurance policy is only responsible for the purchased amount.
· “Close the loophole allowing insurers to charge higher rates to blue collar workers than white collar.” This sounds like a familiar Consumer Watchdog and Consumer Federation of America proposal that would limit the use of “affinity groups” where insurers can offer discounts based on group membership (e.g., occupations like teachers, nurses, accountants, lawyers; or, graduates of a particular college) under the “group insurance” provision of Proposition 103 (CA Ins. Code Section 1861.12). Critics of the current affinity group system focus on white collar groups, like the discounts available to members of the California Medical Association (CMA), but the CMA points out that the group discounts provide premium relief for young residents in their association. Insurers have previously pointed out the benefits of the current group insurance discounts in the market, including that most discounts go to blue collar groups. After reviewing this same proposal, each of the previous three Insurance Commissioners (Poizner, Jones, Lara) have rejected taking away the currently-allowed discounts authorized under Proposition 103.
· Change various provisions related to insurance claims in order to achieve higher insurance payments. Such proposals would include 1) financially punishing an insurer the longer they take to review a claim, 2) paying disaster claimants their maximum policy limits under the lost contents coverage regardless of how much they have actually lost, 3) prohibiting insurers from charging higher premiums to a customer that makes more claims than customers who make no claims. Her campaign does not clarify how these proposals are consistent with Proposition 103’s prohibition against insurers making low risk customers pay more to subsidize high risk customers, or how an insurer asking fewer questions about actual losses would work with the current anti-insurance fraud laws that require insurers to investigate and report to the Department of Insurance suspected fraudulent claims. The proposals make no reference to how increased claims payments will lead insurers to file for rate increases and whether candidate Kim would quickly allow rates to rise to fund these additional payments.
Specifics on Ben Allen’s proposals
Senator Allen is campaigning on: 1) reducing the “outrageous cost of insurance,” 2) forcing insurers to continue doing business with high-risk customers or “denying claims,” 3) stabilizing the insurance market to ensure “fair and affordable rates,” 4) requiring insurers to “provide timely, fair treatment,” 5) move people off of the California FAIR Plan “that drives up rates for everyone,” and 6) make the California Department of Insurance (CDI) “accessible and accountable to consumers.” The specific proposals include:
· Stabilize the insurance market by modernizing the insurance pricing system through a data driven implementation of the CDI’s “Sustainable Insurance Strategy,” speed up the CDI’s insurance rate review process, expand existing state property mitigation programs, stress-test insurer investments to ensure they are not in “risky fossil projects,” and seeking financial responsibility of fossil fuel companies for “climate damages that are driving up insurance costs for everyone.”
· Similar to a Kim proposal, require insurers to pay a higher percentage of contents coverage limits up front, without an inventory, to ensure “survivors aren’t dragged through the mud itemizing every lost possession.” Senator Allen would seek increased state control over the operations of the California FAIR Plan and require insurers to provide better explanations of claims denials. Lastly, he would seek rebuilding requirements at high fire-hardened levels to ensure that homes are more resilient against future fires.
· Make the CDI more transparent and accountable by hiring more CDI staff to handle rate requests and consumer complaints, while attempting to modernize CDI’s digital infrastructure; improving CDI’s communications with the public to demystify the insurance system and explain steps for effective home hardening; creating a consumer advocate with the CDI who would report directly to the Insurance Commissioner; and banning the Insurance Commissioner and senior staff from immediately changing jobs to go from the CDI to the insurance industry. The CDI is 100% funded by the insurance industry (with no taxpayer dollars), so the Legislature does not typically resist CDI requests to add staff positions in the state budget. It is not clear how this proposed consumer advocate would differ from the existing career staff at the CDI who work on consumer issues.
· Get people out of the California FAIR Plan, including restoring confidence in the private insurance market, supporting FAIR Plan solvency while improving governance, and focusing the FAIR Plan on recognizing property mitigation actions.
Analysis
At a high level, the biggest difference between the candidates seems to be that candidate Kim would prefer to replace some or all of California’s current private insurance market with a government-run, taxpayer-backed system. Having served as a San Francisco County supervisor, Kim seems less committed to existing state law frameworks and repeatedly mentions replacing private employers with government. She also refers to insurer unwillingness to do business at a loss as holding Californians “hostage.” She seems partial to coercion, forcing insurers to bend to her will even when losing money, and “calling their bluff” to leave the insurance market. Kim would presumably advocate for more government-funded insurance pools if she actually did force insurers to leave.
In contrast, Allen seems more committed to keeping the existing market-based system with incremental actions building upon the recent “Sustainable Insurance Strategy” regulation reforms instituted by Commissioner Lara. Having served in the California Legislature, sat through countless legislative hearings, and witnessed the many years required to build consensus on difficult issues, Allen appears more inclined to acknowledge the realities of trade-offs and economics, as well as to accept that today’s insurance system reflects decades of public debates about how to balance what we would like with what is achievable. This approach is consistent with how the state legislature works, where proponents of grandiose proposals bear the burden of proving that their solutions are achievable, effective and not just big talk. When they fail to do so, their proposals usually fail as well.
When someone promises utopia, shouldn’t they have to say how they’ll deliver?
Candidate Kim’s rhetoric brings to mind former NASA administrator Daniel Goldin’s promise to make the space program “faster, better, cheaper” – a promise revealed as false when experience showed that the government could only deliver two of those things at any one time, but never all three at once. When NASA wanted space projects to be faster and better, they became much more expensive. When NASA wanted space projects to be faster and cheaper, they certainly were not better.
The same limitation applies to Kim’s promise to simultaneously deliver lower rates (rating), more generous claims payments (claims), with guaranteed issue to anyone regardless of risk (underwriting). No system, whether government or private, can deliver all of those at once. If policymakers want higher claims payments by punishing insurers who try to prevent insurance fraud, plus underwriting rules like guaranteed policy issuance or renewal without any insurer assessment of risk, then rates are going to be sky high. Similarly, if policymakers want higher claims payments and lower rates, then insurers will get highly selective about their customers and refuse to do business in the highest risk areas (that’s basically the current insurance market). Trying to mandate all three at once will, without doubt, push insurers to a decision that they will likely, however hesitantly, make, which is to leave the market altogether and policymakers can pick up the pieces by creating taxpayer-backed pools like the National Flood Insurance Program which are chronically subsidized by the US Treasury, which is allowed to print money and go into limitless debt, unlike California.
Besides questionable viability, how are Kim’s proposals an improvement over today?
Interestingly, candidate Kim has not explained why the current California FAIR Plan (CFP) fails to accomplish her goals. The CFP is 100% financially backed by the insurance industry (no taxpayer dollars). The New Zealand catastrophe fund that Kim references that is 100% guaranteed by the national government. Do Californians really want taxpayer liability over private insurer liability? The CFP is required to issue a fire insurance policy to all applicants regardless of the location or condition of the property (like the New Zealand plan). The CFP offers $3 million of structural insurance protection (unlike New Zealand which offers $300,000). The CFP is subject to the California price control rules that prohibit the CFP from charging any rate that is not approved by the Department of Insurance and prohibits low risk customer rates from subsidizing high risk customer rates (unlike New Zealand where the government determines the rate level that each homeowner must pay without adjustment for a customer’s proximity to risk).
So, what is the improvement that candidate Kim is offering over the current rules? Is a taxpayer-backed fund with low-risk customers subsidizing high-risk ones what Californians are clamoring for?
Insurers continue to want to do business in California under reasonable conditions. This includes rates that reflect the risk of doing business and professional treatment by the California Department of Insurance, including commercially reasonable times for review of rate filings. Suggesting that a government program should displace a willing group of folks interested in risking private capital in California, despite California’s very strict terms, should lead to asking some tough questions about whether that is realistic or wise.
Back to the future? Are we really discussing Guaranteed Replacement Cost (GRC) policies again?
There is a reason that California law allows insurers to sell policies with a stated dollar maximum, instead of a guarantee to rebuild a home regardless of how much insurance someone purchases. Such a system would create the obvious incentives for mischief where consumers would buy as little as possible, knowing that the insurer must rebuild the home regardless of how much a customer would buy and, over time, the insurance system would collapse. Insurers are already permitted to offer GRC policies and there is a reason that they are not common. After a disaster, everyone involved in the rebuilding process charges more in that moment and, if a customer does not care about this price inflation because they can pass it along to the insurance company, then they will not care about price gouging and will blame the insurance company, not the gouger, for delays in reconstruction.
In today’s system, where the insurance customer chooses the maximum policy benefit, they are in the driver’s seat. If a customer wants to buy as little as possible because they think they will never have to use the policy and only need to satisfy the mortgage lender, that is their choice. If a customer wants to figure out prevailing prices per square foot in the area and buy enough insurance to rebuild a home to those cost levels, they can do that and will need to aggressively manage a contractor attempting to gouge them on the rebuild cost. What is untenable is to inject gamesmanship into the system where a customer buys as little as possible but then expects claims payments that, in the aggregate, will contribute to bankrupting the insurance system.
What should we watch in the rest of the campaign?
It will be interesting to watch whether the candidates will be forced to explain the viability of their ideas in more depth, or just say things with little pushback because that is the nature of today’s campaigning and shallow rhetoric. A big question about candidate Kim’s pitch to “blow up the boxes” is whether her ideas are so out of tune with what is achievable in the Legislature and the courts that she would largely be ineffective in obtaining reform and the current system would continue. Advocating for lower rates, higher claims payment, and guaranteed eligibility for insurance at the same time simply is not credible. And no amount of attempted bullying is going to force private insurers, whose executives and board members face fiduciary liability, to lose money indefinitely.
A big question about candidate Allen’s pitch to govern as an experienced leader who can be effective in incrementally improving the current system is whether he would actually govern that way, or be in line with previous Commissioners who were former legislators who worried more about politics than doing the job. Being a legislator is very different than an executive branch leader. The Insurance Commissioner’s statutory role is to ensure that rates are neither excessive nor inadequate. They must look out for both. But, legislators-turned-Commissioners who, then, want to run for a higher office generally focus much more on suppressing rates than ensuring they are adequate or creating a healthy market that benefits consumers. Insurance Commissioners rarely get criticized by the media for irresponsible attacks on insurers.
Certainly, former Commissioner Dave Jones was campaigning for Attorney General fairly early on during his time as Insurance Commissioner. Instead of balancing the conflicting responsibilities, he did the easy stuff of suppressing insurance rates and creating the circumstances for market meltdown. To his credit, Commissioner Lara has faced the difficult decisions that Jones would not. What would a Commissioner Allen do to manage the difficulties of politics and economic reality?
We still have many months to watch this campaign unfold. More to come…