Reinsurance payments being made by the top homeowners insurance carriers in California should be regulated, the Consumer Watchdog advocacy organization says.
"Regulators get no look into the books of these companies, or they don't even get to see the terms of the contract," said Carmen Balber, executive director of the group. "They have no idea what the terms of the deals are."
Homeowners insurers in California contract with reinsurance companies to protect against large numbers and amounts of claims at the same time, as happens with wildfires in the state. This first became a big issue with the number of wildfires in 2017 and 2018.
Balber singled out State Farm as having made bad reinsurance deals. The carrier has applied to the state's regulator, the California Department of Insurance (DOI) for a 30% rate increase.
"State Farm is claiming financial crisis, and there are two big reasons that their surplus has been reduced. One is the huge reinsurance payments they're making, and those reinsurance payments are primarily to their parent company, with some affiliate purchases sprinkled in," she said. "Those payments aren't really giving State Farm good return on their investment. State Farm is getting less than 20% back from the $2.2 billion it spent on reinsurance over the last decade."
In short, according to Balber, State Farm paid more for reinsurance than it would have had to pay out in claims.
State Farm is the largest homeowners insurer in the state, followed by CSAA, CAIC and the Fire Insurance Exchange. These other insurers' reinsurance payments are not justified either, Balber said, because the reinsurance transactions are unregulated.
Consumer Watchdog has raised these issues about reinsurance with DOI, as part of its objections to State Farm's rate request. The
The office of the commissioner and DOI did not respond to a request for comment.
