As Kemper exits California home insurance market, some fear last-minute talks in Sacramento will lead to ‘bailout’

As the number of home insurance companies leaving California continues to grow, lawmakers in Sacramento are contemplating a last-minute bill that some critics worry could serve as a bailout for the industry.

Kemper Corp., which has home and auto insurance customers in the North Bay, is the latest company to pull out.

The Chicago-based publicly traded company that does business under various names said last month it is immediately leaving the preferred home and auto insurance market. This affects all states it serves, not just California.

The move comes as insurance companies and their lobbyists press for fundamental changes in how they are allowed to calculate risk — reforms they say are necessary to continue to operate California.

The industry, among other changes, is pressing for the adoption of predictive modeling in rate setting, which can factor in future risk of escalating disasters like wildfires stoked by climate change. Unlike the rest of the nation, California doesn’t use predictive modeling, instead relying on past experience for its rate setting.

Leaving California

Multiple insurance companies have stopped writing homeowners policies in California or have limited how many customers they will have on their books. They include giants Allstate, State Farm, Farmers, and AIG, as well as AmGUARD Insurance, Falls Lake Insurance and Chubb Ltd.

United Services Automobile Association — commonly known as USAA — also announced this year it would be imposing stronger wildfire safety demands for all new home policies, a move expected to narrow its market share. It was the seventh-largest provider of homeowners insurance in California in 2022, according to the Insurance Information Institute, an industry group.

For California homeowners, the exodus has narrowed options in the home insurance market by as much as 20%, according to reports.

The departing companies mostly cite the worsening wildfires in the Golden State. Since 2017, more than 34,000 structures have been destroyed in wildfires in the state, according to Cal Fire.

The North Bay and surrounding region has suffered billions of dollars in losses, starting with Lake County’s Valley Fire (2015), the 2017 firestorm that included the Tubbs, Nuns, Atlas Peak and Redwood fires, plus the Mendocino Complex (2018), Kincade (2019), Glass (2020), and LNU Lightning Complex (2020) fires.

The announcement by Kemper comes on the heels of a resolution reached in March between the company and the California Department of Insurance in which Kemper Independence Insurance Company had to refund nearly $1.6 million to 2,402 California homeowners because the state discovered the company overcharged policyholders for wildfire risk.

In addition, Kemper and its affiliate insurance company, Unitrin Auto and Home Insurance Company, had to pay a $617,200 settlement that went to the state’s general fund.

Kemper says it has approximately $13 billion in assets and serves more than 4.9 million policies. How many of those policies are in the North Bay is unknown.

Kemper’s customers

At least one Santa Rosa household has been left wondering who its next insurer is going to be.

That Kemper customer, a 65-year-old woman who asked to withhold her name while she and her husband pursue their next steps, has had auto insurance with Kemper since she was 18. The couple also has their home insurance with the company.

Under state law insurers must give customers 75 days’ notice prior to the renewal date that they are being dropped. The renewal date for the Santa Rosa couple is Nov. 15, making Sept. 1 the deadline for notification.

She placed a call to her insurance agent on Sept. 1 and was told Kemper is going to continue its coverage for her for another year.

“I’m not sure how I got lucky — maybe because of what is going on in Sacramento right now,” she said.

They received a posting in their online insurance portal dated Aug. 30 with a nonrenewal disclaimer for Kemper: “The Commissioner of Insurance finds that the exposure to potential losses will threaten our solvency or place us in a hazardous condition.”

The couple is considering doing everything possible to their home to make it as insurance friendly as possible, including possibly getting an electric heat pump.

“I just got a paper mailing from AAA to call us for your homeowners’ insurance. God knows what the costs would be,” the Santa Rosa woman said. “Right now we have earthquake insurance (through Kemper). We’ll probably never get that again. We are in the Santa Rosa WUI (wildland urban interface).

“It will probably be more expensive and much worse coverage,” she said of future insurance policies.

Officials from Kemper did not return messages seeking comment.

When Kemper announced its exit in early August, CEO Joseph Lacher said in a news release that decision “was made after thoughtful evaluation of our options and considered the most effective and efficient way to support our stakeholders. It enables us to release capital and increase the resources available to support our core specialty auto and life businesses.”

Shakeup in Sacramento?

Insurance Commissioner Ricardo Lara, whose office is the consumer protection agency for the nation's largest insurance marketplace, acknowledges the system is broken.

As a recent guest on state Sen. Steve Glazer’s latest podcast, Lara was adamant that change in the homeowners market is necessary. Glazer, D-Orinda, is on the Senate Insurance Committee and used to chair it.

“We need to modernize how we price insurance. Traditional models on how we look at pricing are out the door. Climate change has forced us to rethink that,” Lara said on the podcast. “We need to amend Prop. 103 to allow us to look at the use of data, the use of catastrophic models that currently we don’t have. We have this statute that quite frankly needs to be modernized.”

Proposition 103 is the 1988 voter-approved ballot measure that mandates the California Department of Insurance approve rate hikes for property and casualty insurance. Rates at that time also had to be rolled back 20%.

Lara added, “We need to make sure insurance companies have enough revenues to payout claims of their entire portfolio.”

He pointed to inflation, supply chain issues, the coronavirus pandemic, the escalating cost of vehicle repair, wildfires, flooding, extreme heat, and the overall costs of doing business as reasons insurance companies are struggling and in some cases operating at a loss.

There is talk in Sacramento of allowing insurance companies to set rates based on climate projections. Rates would inevitably go up, with reports signaling a hike as high as 30%, raising immediate affordability challenges.

Harvey Rosenfield, one of the state’s most prominent insurance industry reformers, and other consumer advocates have criticized talk of easing insurers’ path to wide and steep rate increases.

Rosenfield, on his Consumer Watchdog website wrote Aug. 28, “The proposed legislation would relieve insurance companies of responsibility for covering fire claims under the California FAIR Plan, which insurers control, and put it on the backs of all property insurance policyholders as an added surcharge on insurance bills.”

Rosenfield, who authored Proposition 103, has called potential alterations to current regulations a bailout of insurance companies.

“The Legislature and governor should reject this eleventh-hour plan. Insurance companies are trying to exploit a crisis to get deregulation they have sought for 35 years and a bailout of their current responsibilities to California homeowners,” Rosenfield wrote on his website.

The state Department of Insurance didn’t respond to questions about Rosenfield’s assertions.

The Legislature is scheduled to adjourn Sept. 14, so whatever might be culled together will have to be fast unless a special session were to be called.

State Sen. Susan Rubio, D-Baldwin Park, chairs the Senate Insurance Committee. No one from her office responded to inquiries from the Journal.

Those who are dropped from traditional insurance companies have the option to sign up with the FAIR Plan.

The Department of Insurance describes the FAIR Plan, or Fair Access to Insurance Requirements, as the “the insurer of last resort.” It usually costs more than a policy from a private company and covers less.

The FAIR Plan was designed to be a temporary option, but the latest figures from the state show it is becoming the insurer for more and more Californians. On Glazer’s podcast, Lara said the number of people using the FAIR Plan has doubled, making up 3% of the homeowners’ insurance market.