Assembly Insurance Committee, Wednesday, March 18, 2026
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Assembly Insurance Committee California State Assembly
Follow its sittingsSpeaker 3
If there are any questions, then the questions can be emailed to the California Fair Plan. The fair plan added the clearinghouse program, or to the reasons the broker can select when they're canceling a policy. And the fair plan is reliant upon the broker selecting that reason when they're canceling the policy so that we know if it went to the clearinghouse. As far as options for future depopulation, This slide highlights how there are many factors that impact the Fair Plan depopulation. On the front end, in the first circle, there's a diligent search requirement.
However, in 2016, the commissioner issued an order that no longer allows the fair plan to require any evidence that a diligent search has been made. In second circle, as the law stands today, there is no direct marketing to consumers. They must go through the broker of record. If the legislature wishes to change that how it is today, one option would be to allow direct access to the consumers after a predetermined period of time. Then the third circle is beyond the clearinghouse.
There are other factors that impact the success of depopulation. We need a healthy voluntary market to make sure that there are options available to the consumers. And that concludes my presentation. I'll open it up to any questions.
Speaker 5
Good morning, madam chair and members of the committee. Josephine Figueroa, deputy commissioner and legislative director for the Department of Insurance under the leadership of insurance commissioner Ricardo Lara. I am accompanied today by miss, Melissa Werner, an attorney with the rate enforcement bureau in the legislative and legal branch for the California Department of Insurance to answer any questions. Technical issues may arise. Madam chair and members of the committee, thank you for the opportunity to speak with you today about the personal dwelling clearinghouse program and the department's role in its oversight.
I will address the four areas the committee requested, our statutory responsibilities, any complaints we have received, the obstacles we have identified, and potential improvements that could strengthen the program's performance. The department's oversight role is essentially in current law, which places responsibility for the flare plan to develop and operate the clearinghouse. The flare plan manages the process through which participating insurers may offer to write fair plan policies in the voluntary market. The department's role is to monitor the impact of the clearinghouse on the fair plane and the broader property insurance market. We are committed to transparency and accountability in the fair plans administration of the clearinghouse, but our involvement is limited to oversight since we do not manage the program directly and do not mandate which insurers must participate in it.
The department is not aware of any insurer or consumer complaints specific to the Clearinghouse program. We continue to monitor for issues, but no known formal complaints have been filed with the department alleging misconduct, noncompliance, or consumer harm arising from clearinghouse operations. Since the clearinghouse is set up as a transaction between Fair Plan and insurers, consumers would not be inclined to file complaints with CDI since they are not particularly aware or involved in the selection process by which an insurer makes or an offer through the clearinghouse. The consumer is not an active participant in the clearinghouse process unless or until the consumer receives an offer from participating voluntary market insurer. Although the department has not received any complaints, we have identified several obstacles that limit the clearinghouse effectiveness.
The most immediate challenge is limited insurer participation. Only 11 residential insurers have signed clearinghouse participation agreements, which significantly restricts the number of offers that can be generated. Another structural issue is the statutory requirement that offers be made through a broker or rec broker of record rather than directly to the policyholder. This can delay or prevent consumers from receiving offers and reinforces compensation structures that may not always align with, the depopulation goals. It also creates administrative challenges for insurers that sell exclusively through captive, agents.
Captain agents work exclusively for one insurer, selling only the insurer's policy, whereas an independent independent agents can represent and sell insurance products for multiple insurers to provide a wide array of insurance, options for their clients. Broker compensation under existing land presents additional complications. The fair plant's compensation rates are often higher than those in the voluntary market, and brokers may earn a second commission if they place a difference in conditions policies to supplement the fair plant policy. Although brokers have fiduciary and statutory duties to seek voluntary coverage, the compensation structure can create a perceived or actual incentives to keep consumers in the fair plan. There's also confusion about which compensation rate applies when a policy is moved out of the fair plan.
And insurers that cannot appoint independent brokers face barriers in participating in the clearinghouse because they are left without a viable pathway to remove policies from the fair plan. Beyond these operational issues, a significant obstacle is the admitted market's unwillingness to ensure many fair plan type risks. Therefore, the department's insurance, I mean, insurance strategy sustainable insurance strategy, excuse me, is designed to address this overall underlying market condition. Consumer affordability and coverage gaps also play a role. A fair bond policy alone does not provide full homeowners coverage and consumers may not be advised about or not be able to afford a difference in conditions policy.
This limits their ability to transact to to transaction back to the voluntary market even when an offer exists. I wanna talk a little bit about, CDI's report on examination of the fair plan a little bit. The California Department of Insurance 2022 operational assessment report, the most comprehensive review of the fair plan in decades, identified systematic problems with the fair plan's operation, including the clearinghouse. In 2022, the department recommended that the Fair Plan enhance and expand the clearinghouse program. The recommendations emphasized the importance of using the clearinghouse to help depopulate the Fair Plan as required by statute and encourage the Fair Plan to consider additional strategies similar to those used in states' residual market depopulation programs.
These strategies con included consumer education initiatives to help policyholders understand current market conditions, the purpose of the clearinghouse, and the advantages of returning to the voluntary market when possible. As of 2025, these recommendations remain only partially implemented as the department released an update to its 2022 operational assessment report just last month. The fair plan has taken steps, including expanding the clearinghouse to commercial policies in July 2024 as required by SB five zero five, of which commissioner Lara was in support. This inspection allows insurers to review information about commercial properties and consider offering offerings in in the voluntary market coverage. In addition, beginning in 07/01/2025, the fair plan identified began identifying with the residential and commercial policyholders in the clearinghouse who have completed mandatory or optional property level mitigation measures or who are located in communities that have that have received a mitigation designation.
This is an important development because mitigation is a key factor in improving insurability and supporting the transition back to the admitted market. Despite these efforts, the clearinghouse has produced limited results. The Fair Plan informed the department that only 730 residential risks have been placed by voluntary market coverage from the inception of the clearinghouse in June 2021 through our 04/30/2025. Participation among member insurers has remained low and essentially static even with aggressive efforts made during the rate application review by the department's rate regulation branch to many insurers asking them to enroll in the program. As the department has already noted, for an insurer to make an offer through the clearinghouse, the insurer must honor the policyholder's existing relationship with the agent or broker who plays the policy with the fare plan.
However, this obligation does not apply when a policy holder originally obtained the fare plan's coverage through an employee or without using a producer at all. These distinctions create an uneven pathways for depopulation and contribute to the limited number of successful placements. As previously noted, the most significant obstacle to date has been the admitted market's unwillingness to insure many of the properties that are currently with a fair plan. The ongoing sustainable insurance strategy is designed to change this. It does this by giving insurers a clearer, more predictable regulatory framework and by aligning rates, risk modeling, and mitigation incentives in a way that makes writing these risks viable again.
For years, insurers have argued that the rate setting system did not allow them to reflect current and future wildfire risk, which made them unwilling to write in high risk areas. As commissioner Dada himself indicated in his previous testimony before this committee just four weeks ago, the SIS changes this by allowing the use of forward looking catastrophe models paired with strong transparency and mitigation requirements. And talk a little bit more about specific recommendations now. The department has identified a series of targeted improvements that would straighten the clearinghouse and better support consumers during this period of market transition. One of the most important improvements involves ensuring that policyholders are able to receive clearinghouse offers.
As previously stated, participation participating insurers must present offers through agent or brokers or records. This delays and prevents consumers from learning that a voluntary market option is even available, Allowing insurers to simultaneously offer both to the broker of record and directly to the policyholder would increase transparency and help ensure that consumers are aware of opportunities to move out of the fair plan. The process of paying commission when the policy is moved from the fair plan to a voluntary market also needs to be simplified. Under current law, a voluntary market insurer must appoint a fair plan broker in order to pay a commission, which is not feasible for insurers that sell exclusively through captive agents, creating a narrowly tailored exception that allows the normal market to ensure to take the policy out of the fair plan using a broker agent with whom the insurer has an existing appointment would remove a significant barrier to insurer participation. In addition, allowing admitted insurers or surplus lines brokers to make direct offers to policyholders who have been with the fair plan for two or more years would expand opportunities for depopulation, particularly given the increasing number of homeowner policies placed and then surplus line market.
Strengthening bro broker education would support more effective use of the clearinghouse. The fair plan's approved continuing education course entitled brokers on the fair plan should be made mandatory prerequisite to registering or reviewing of the fair plan or renewing of the fair plan. Excuse me. Furthermore, the fair plan should enhance its broker training curriculum to enforce brokers' fiduciary duties, diligent search requirements, and responsibilities in advising consumers about voluntary market options. Of the fair plan's 54,000 registered brokers, only 604 have taken the course.
Given the size and diversity of California's producer more network, education and outreach are essential components of any successful deploying strategy. In closing, improving the clearinghouse will require a combination of statutory adjustments, operational changes, and coordinated efforts among the fair plan, insurers, producers, and the department. These recommendations are designed to increase transparency, reduce barriers to ensure participation, align incentives with depopulation goals, and ensure that consumers receive meaningful opportunities to return to the voluntary market. The department looks forward to working with legislature and all stakeholders to advance these improvements. Thank you for the opportunity to testify today.
Speaker 1
Thank you. Appreciate both of you being here today. So we're gonna open it up for questions from, members. I'll go ahead and start. So why did CDI remove diligent search requirements, and any idea whether that diligent search will be requested again?
Speaker 6
Thank you, madam chair. My understanding is hopefully hopefully, everyone can hear me. My understanding is that requirement was being viewed as an impediment to consumers who were really eligible and entitled to fair plan policies from being able to access the fair plan when they needed it and were eligible for it. It may have been a timing issue because sometimes getting the the written rejections that my understanding is there were three that were three written rejections from an admitted market insurer were required as a prerequisite to obtaining a fair plan policy, and there's also an affordability component as well. Just because another policy may have technically been available either from an admitted or surplus lines carrier, if that policy was prohibitively expensive, is it truly available to the consumer?
And in some instances, we're seeing that replacement policies could be 10 or even $20,000 more than than what the consumer was paying. So I think that was the reason.
Speaker 6
Our understanding is that it was approximately 730 policies from inception of the clearinghouse program in July 2021 through, I believe was it April 2025? April. Yeah. April 2025. But the fair plan might have more updated information.
Speaker 7
Thank you, madam chair. Thank you guys for being here, and appreciate the testimony. I think, just building off the chair's questions and I mean, 730 policies through the clearinghouse in five years or four years is effectively showing I mean, this is an outcomes review. I mean, it's hard not to have a pretty clear takeaway that this isn't working. You only have 11 residential insurers actually taking part in the program.
And so I think as part of this, you know, we're trying to figure out how to actually get folks off the fare plan and back into admitted carriers. And and the Department of Insurance did note some reasons why that's not happening, broker record problems, coverage gaps, and we'll get to that, I think, in the next panel. But I guess the question is what what exactly was the clearinghouse supposed to be doing, and why isn't it doing it? Because I still don't know really what this clearinghouse program even does. As the staff report noted, it's just completely opaque as to what the program functions as.
Speaker 7
in any other market, you have consumers going to market within broker record looking for insurance, and they either get rejected or they get admitted. Somehow, we set up a program where insurance companies are supposed to go to the fair plan and, I guess, cherry pick, if you will, plans that they want to bring back. It's odd that we would have thought that that would have worked in the first place, but what exactly is the functionality of the program? And could you just walk us through how it actually works?
Speaker 2
I'm happy to take take that as someone who how obedient. So I was I was in the room when the bill passed in thirty what? 3012 and 2020. So at a very basic level, it is just a platform to reduce the concentration of the fair plan at the time. Right?
But you you must understand there's context here because there's independent parties that have to agree to take someone out of the fair plan. The fair plan never had any control as far as Armania has to leave the fair plan out leave the fair plan and go somewhere else. And they're not asking to. Right? It's a platform to start the process of reducing the concentration of the fair plan.
So number one, you do have independent parties, and I appreciate the CDI's testimony because that the the broker issue, it's it's a lot of policyholder policy questions that are involved in that because the incentives for the brokers to remove somebody out of the fare plan, there's a lot of factors that they need to take into consideration doing that. And I won't I'm sure they're testifying today, so I won't get into too much in the specifics of that. But, again, the the message here is it's a platform. You got two independent parties that are wanna wanna do business together before they even come out. And the second piece of that is you have the sustainable insurance strategy.
The policyholders need somewhere to go. So, again, CDI rightly pointed out that if there's not availability in the private market, it's hard for someone to leave the fair plan. If if I'm I'm I'm not sure I'm tracking because there's there's a big picture here that's happening outside just the fair plan. Right? And then for the Fair Plan's role of meeting the needs of consumers, you do have mandatory expansion to the Fair Plan that's been happening for the past five years.
Right? Last year, SB five two five to cover mobile homes. That's a that's a big expansion. So there's a lot of these other factors, but I think going back again, madam chair, thank you for the hearing because I think this is a lot of stakeholders are involved, and there are good some ideas that the CDI has presented today that we can, you know, work with stakeholders and see how we can improve the fair play.
Speaker 7
Yeah. Well, I guess the question is whether you try to improve it or you just let it sunset and and don't don't do it anymore. I mean, I I don't under understand why we would continue with the program given the testimony. I mean, maybe maybe some data would help. For example, there's 730 policies that have actually been removed from the fair plan through the program.
How many how many offers beyond the 730 have been made through the clearinghouse to policyholders that, I guess, didn't consummate a new policy.
Speaker 2
You wanna touch on the process itself because you're relying on data that you're getting from
Speaker 3
Yeah. So once the carrier identifies policies that they want to take on, they have to go through the broker of record?
Speaker 3
The the fare plan doesn't have any data to know what offers have been made. We only have the data for the offers that have been accepted and then canceled. But then even at that point, the broker has to select the clearinghouse as the reason for why the policy was canceled. They have other reasons they can select, such as insurance request. So there could be more policies that have left.
We only know of the number of policies that were identified as clearing.
Speaker 3
Yeah. And and that's only gonna tell us the cancellations. We still don't know anything about the offers.
Speaker 7
That's interesting. Yeah. So you don't you actually don't know. I mean, it's just self reporting data then. And the only the 730 is based on someone leaving the fair plan, checking the box that they're using the clearinghouse, and that's that's how we have our data as to whether the clearinghouse program is working or not.
Right. Yeah. That seems I mean, that seems problematic. I mean, it seems like you should have much more data on how this transaction is happening. And to the extent that the legislation didn't provide for it, what what should we be providing for to allow for better outcomes?
Speaker 3
So, assembly member Harabidian, one thing I forgot to go over in the slides is we would recommend that we get more data reporting to the fare plan from the carriers and the brokers and right? So that we can track how many have been taken from the fare plan, and that that could include the data as far as offers. But we we would like to see some mandatory reporting. Reporting. So we don't you sitting here today, you
Speaker 7
don't even know how many offers have been made through the Clearinghouse program since its inception. You don't have that data? Correct. Wow. Okay.
Well, then I don't think any of my additional questions probably you can answer, but, actually, I'm pretty sure you can because I was gonna ask, you know, how was the program working in wildfire prone areas and whether offers in those areas were being made, but just you don't have any of that data? And either does CDI?
Speaker 4
Thank you so much, and thank you for the, for the information. And you may not be able to answer this question either, but, you know, I've talked a lot in these, hearings about the huge percentage growth into the fair plan on the Central Coast since from 2020 to 2024. We estimated a 300% growth in Monterey County, a 530% growth in Santa Cruz County, and a 560% growth in San Luis Obispo County. And, two of those counties have not seen the massive wildfires that we saw in Santa Cruz County. Of course, in Santa Cruz County, we had the CZU fires in 2020 that affected people's ability to get insurance, people's ability to rebuild, etcetera.
But San Luis Obispo and Monterey County haven't seen those kinds of fires yet. We've had double the growth into the fair plan in those two counties than we've seen in Santa Cruz County. And so my question was gonna be, you know, what are you seeing region by region? I know the assembly member asked about high wildfire areas and what happened in LA cannot be under stated for the tragedy and and the amount of people that, if they're able to rebuild, are likely gonna be forced into the fair plan. But what are we seeing geographically across the state?
It sounds like a relatively small number, 130, But where are those folks, and and how is the clearinghouse being effective across different geographies of the state?
Speaker 3
Thank you for the question, assembly member Addis. I unfortunately, I don't have the data to the geographic level prepared today, but I'd be happy to research that and get back to you.
Speaker 4
That would be that would be very helpful. I know, folks in every region of the state are asking. I do wanna be able to provide that to constituents in our area. We held a town hall as it were with the insurance commissioner. It was probably one of the most popular things that we've done because people are so hungry for information about how they're gonna get homeowners insurance and why they're being pushed into the fair plan even though, some of their areas haven't seen these wildfires.
And so it's very confusing for people, and they wanna know how they're gonna get back into the regular market. I guess the second question, and I'm not sure if you have this answer either, is I've talked a number of times. I know it's important to the assembly member and many others who have already spoken about underinsurance and the problem of underinsurance. And if the clearinghouse, as you're doing work to move people from the fair plan into the regular market, if you're also cognizant that they're getting a fair offer in the regular market. Because one of the things that has happened for too many people, certainly in the LA fires, definitely on the Central Coast, is in the regular market, they're actually not being offered the type of insurance that would cover a rebuild, and we've seen it in fire after fire.
I think you know, folks think that they're injured well enough, and and they're not. And it's not because they didn't wanna pay for the insurance. It's because they weren't offered the product. And so I'm just wondering how the clearinghouse, is approaching that kind of issue, if at all.
Speaker 2
Yeah. No. So I think that question, respectfully, some of them were at us. It's a it's a broker question because they don't actually advise the policyholder. It's the broker has to let them know, do you have enough insurance, or are you underinsured?
So that conversation is not a level of information that it actually privy to.
Speaker 4
So I I just would suggest, if people have enough insurance in the fair plan, say they're in the fair plan market, they have adequate insurance, there's an effort to get them back into the regular market that the clearinghouse process would be cognizant that we want people to be have enough insurance in the regular market also. Right? So if part of the effort is to get people into the regular market, we need to also be cognizant of this under insurance problem. Otherwise, we're pushing people either into unaffordable insurance, which it sounds like as men in many cases is happening, or we're push we're we're trying to move people into inadequate insurance, which also is gonna be very challenging. So I just would suggest that the clearinghouse is aware of that issue as well.
Speaker 1
That's it for now. Thank you, madam chair. Welcome. Do we have any other questions from, members? Thelma Gibson?
Speaker 9
Thank you very much. Just real quick question. When does this sunset when does it sunset? Do we have it doesn't sunset? There's no sunset.
Okay. Because I know it was made mention of it, so I was just curious because I couldn't find a sunset. So that's why. Thank you.
Speaker 1
Welcome. I have a couple more questions. So what personal information is provided to insurers?
Speaker 3
Thank you, madam chair. The fair plan, when a policy is represented by a broker, the fair plan provides the first three letters of the policyholder's last name and then the full property address. As far as the property is concerned, it lists the coverages and certain property characteristics along with the broker's contact information. If the policy is not represented by a broker, then the full policyholder's name is provided.
Speaker 3
Oh, so the only difference in the information provided is if it's represented by a broker, then the the carrier seeking the coverage has to go through the broker.
Speaker 3
So it's limited. They don't get the customer's full name Right. So they don't contact the customer directly. Per statute. Per statute.
Yes.
Speaker 1
And then I have one more question. So the fair plan is essentially taking no ownership of their policyholders. I mean, so if if a time frame was put on how long a policyholder could be on the fair plan, how would the fair plan implement that?
Speaker 2
I think, so I will. I think we we need to discuss that with stakeholders. Obviously, the concept there is after predetermined time, let's say, I don't know, couple of years, at that point, the fair plan would would be willing to release more information. That way, insurers and other folks can approach the frame plan policyholder, give them more options at that point. Because then it it you know, he just laid out for you the the difference in information available publicly.
So what they're saying is that after a period of time, consumers should have more choice and see if other lower priced products can be marketed to them directly.
Speaker 1
Okay. Do we have any other questions from the dais? No? Okay. Thank you so much for your testimony.
Appreciate it.
Speaker 1
Thank you. Okay. Now we'll call up our second panel, and we'll hear testimony from, several people. Please welcome John Norwood on behalf of the independent agents and brokers of California, Mark Second, vice president from American Property Casualty Insurance Association, Sharon Taylor, vice president, Personal Insurance Federation of California, and Cliston Brown, vice president, Surplus Lines Association of California. Welcome, gentlemen.
Whenever you're ready.
Speaker 10
Yeah. Good morning, madam chair and members. John Norwood on behalf of the independent insurance agents and brokers of California. Thank you for the opportunity to have a few comments this morning on this program. As the department indicated, a little background information, the insurance marketplace consists of at least three delivery systems or sales systems.
Independent agents are members who represent multiple insurers and can shop the entire market for coverage because they're brokers. Captive agents that represent one company such as State Farm or Allstate and insurers who sell products through employee agents. There's actually quite a history of independent agents also contracting with captive agent companies as well as direct riders to write insurance, especially in rural areas and that type of thing. So that's not something that can't be done. IIIB's I a IIIB CAL supported the clearinghouse bill in 2020 because we believed it would provide yet another market for our brokers to place insurance.
In addition, the bill took the same approach as adopted by other states that have a clearinghouse program to ensure that new offers for coverage would dovetail with other insurance coverages held by the homeowner, and the consent of the insurer would be obtained through the agent or broker that the home that advised the homeowner. At that time, I don't think anybody felt that the Clearinghouse Program would be the silver bullet to depopulation of the Fair Plan, but really, realistically, just another tool that we'd have in the toolbox to try to help with that effort. Also, five years ago, I don't think anybody envisioned the fair plan being as large as it is today. I mean, it's the elephant in the room. Everybody realizes that.
You can't have a real conversation about a return to a conventional market for insurance until you deal with depopulation of the fare plan. In that same vein, you cannot ask why the clearinghouse program is not working when we haven't dealt with the key factors in the insurance marketplace that are needed before depopulation could even occur. In reviewing the bill analysis and other background information that led to the enactment of the clearinghouse bill, the goal was to, and I quote, provide a platform for agents and brokers and insurers to work together to move policies from the fair plan to the voluntary private admitted market. Based on materials and the testimony this committee's had over the last couple of informational hearings, there's two things that must happen for depopulation of the fair plan to work and for the clearinghouse program to be an element of that program. A, there must be an open and functioning admitted market for homeowners insurance in the private sector, and b, the fair plan must have approved rates that make them the market of last resort, not the market leader for homeowners insurance like they are today.
Neither is the case today. Just a couple weeks ago, the insurance commissioner before this committee said there were just five of the 118 companies licensed to write homeowners insurance in California that have new rates approved by his department. He said that there were another, eight or 10 in the queue for that. He also indicated that he thought it would be another two to five years before the market returned to normal. Our association, recently conducted a poll of our members to confirm that there has been little change in the availability of admitted markers admitted insurers willing to write homeowners insurance in fire prone areas.
76 of our members report that they are not seeing insurers reopen for business in distressed areas. 90% of our members report that they still rely on the fair plan for about 25% of their book of business. The exception is the non admitted insurers. Non admitted insurers are available to write many of these risks because they have the ability to charge premiums they believe reflect the risk they're being asked to assume. Our members tell us that when they obtain an offer from a non admitted insurer to place coverage, more often than not, the client's not willing to pay more than what they're paying in the Fair Plan, so they stay put.
As you heard from the Fair Plan earlier this year, the rates the plan is charging are inadequate. That's clear when you look at the rates the Fair Plan has requested over the last three cycles versus the rates that have been approved. By the plan's own testimony, they need an 80% rate increase to have actuarially sound rates. So this is kind of the situation. Fair plan's rates are here.
Non admitted insured rates are here. The homeowners are making a pocket book book decision to stay in the fair plan because they believe when the admitted market gets through all these rate approvals, they're gonna come back in and the fair plan rates are gonna be here and the market rates are gonna be here and then then they'll change. But the reality of the situation is just based on what the fair plan's asking for rates, what non admitted insurers are are asking in premiums, and what consumers are paying in the other six states in the country that are catastrophic states that that the premiums for the fare plan will be here for the admitted market here and the non admitted market here. So it's our belief there's really not very much you can do right now to alter the consumer's choice to stay where they are until things change. And we also don't believe that imposing mandates trying to force homeowners out of the fair plan are really politically viable.
Our member survey indicates there's some hope for a better market. Non renewals have slowed substantially. Reinsurance costs have softened worldwide. Our members are seeing some appetite for growth among carriers. Thanks to the insurance commissioner, California is now in line with other states, allowing insurers to use rating factors such as the cost of reinsurance and catastrophic modeling, and insurers are getting through the process.
So with that in mind, we do see some things that could be considered going forward to help depopulate the fair plan, whether it's through the clearinghouse or otherwise. Just quickly, one, improve transparency and efficiency for voluntary market outreach. The Fair Plan could publish aggregated data identifying brokers with the largest number of clients in the plan by ZIP code or geographic area. Then insurers, whether admitted or not admitted, seeking to expand, their market share could then market directly to brokers. This would be particularly helpful for non admitted for the non admitted market insurers because they write through wholesalers who in turn get their business through retail agents and brokers, our members.
Establish a time limited fare plan placement, similar to Florida Florida's approach. If if private coverage is available within a defined premium corridor, for example, within 10 to 20% of the fair plan pricing, a homeowner would not be eligible for renewal in the fair plan. This would preserve the fair plan's function of a market of last resort while preventing indefinite below market retention. Lastly, outside the clearinghouse, under the sustainable insurance strategy, insurers are required to write 85% of new business in distressed areas. Carriers should be encouraged to first offer coverage to policyholders they've previously nonrenewed.
In most cases, that insurer is writing the continues to write the DIC policy for that insurer. Often, they're writing the auto and homeowners or auto and umbrella policy for the homeowner. They already have a customer relationship and an agent in place. They already possess the property data. And given the relatively small number of large carriers that control most of the residential market, even a partial rewriting of that book of business could materially reduce the fair plan.
So in conclusion, we don't believe that depopulation can be mandated into existence. We have to fix the underlying system. I appreciate the opportunity.
Speaker 8
Chair and members of the committee, thank you for the opportunity to testify today. My name is Mark Seckman. I'm vice president of state government relations for the American Property Casualty Insurance Association. APCIE is the leading national trade association representing over 1,200 companies who write all lines of property and casualty insurance. California's Fair Plan was designed as an insurer of last resort, a temporary safety net for property owners who could not obtain coverage in the voluntary market.
In recent years, however, the Fair Plan has experienced extraordinary growth. That growth raises concerns not only for the plan itself, but for the broader insurance market and ultimately for consumers. A growing residual market concentrates risk, increases assessment exposure for insurers, and signals stress in the admitted market. The legislature recognized this risk when it enacted AB three zero one two in 02/2020, creating a residential clearinghouse intended to connect Fair Plan policyholders with the private market. This was the appropriate policy objective.
Just as an aside, this was partially based on what was called the Sierra Insurance Finder, which was a creation of the Tree Mortality Task Force Insurance Subcommittee. Yes. There was such a beast that worked in 2015 and 2016, and United policyholders and APCI put this together. But it's important to note, the market was much different when we were working on the Sierra insurance finder than it is now, and that plays a key role in the success of the clearinghouse. The key question before this committee today is whether or not California's clearinghouse has implemented its working in practice.
From an mature perspective, California's clearinghouse remains largely voluntary, manual, and constrained by market realities. The clearinghouse allows admitted insurers insurers to review for fair plan risks and make voluntary offers through the agent or broker of record. Broker participation, while encouraged, is difficult to enforce and can create operational friction friction. The program does not permit forced transfers and ensure participation is voluntary, which we support because sustainable population depends on insurers assuming risk that can prudently underwrite, price, and retain over time. Voluntary replacement ensures that takeout decisions are aligned with underwriting standards, capital capacity, and long range risk appetite.
Since its establishment, the clearinghouse has been expanded and refined through additional legislation and regulatory actions, including the extension to commercial lines. However, insurers report that these expansions have not meaningfully increased the population because they do not address the binding constraints that determine whether insurers can reasonably assume risk. These constraints include persistent rate adequacy relative to underlying risk and limits on underwriting capacity driven by capital and reinsurance considerations. In this context, the issue is not a lack of interest in depopulation, but the absence of conditions necessary for sustainable private market participation. Other states offer a clear lesson.
Clearing houses can help, but they are not the primary driver of depopulation. Residual markets shrink when entry is constrained, premiums are appropriate, and private coverage is meaningful flavor favored. States that have kept their fair plants small rely on a consistent set of guardrails, eligibility tied to the absence of private market options, premium differentials that present prevent the residual market from underpricing risk, mandatory acceptance of reasonable private offers, and structural limitations on cover even as policy forms evolve. Florida and Louisiana illustrate different applications of these principles. Florida pairs a clearinghouse with mandatory movement and rate discipline.
Louisiana relies more heavily on pricing and eligibility controls, except in a slower depopulation. Florida demonstrates how depopulation accelerates when market signals are clear and rules are enforceable. Louisiana offers a contrasting example, emphasizing pricing discipline and incentives over speed. From an insurer perspective, California's clearinghouse remains constrained by three practical realities. First, rate adequacy.
When fair plan premiums are materially lower than actually sound admitted market rates, policyholders have little economic incentive to leave the fair plan for more expensive private coverage even when insurers are willing to make offers. In that circumstance, depopulation will stall. Second, operational friction. Insurers receive limited underwriting data through the clearinghouse and must coordinate through brokers making slowing decisions and limiting scalability. Third, misaligned incentives.
Brokers play a central role but receive no compensation for clearinghouse activity. This result has limited an episodic policy movement not because insurers oppose depopulation, but because the current structural underpricing and process constraints limit both insurer offers and policyholder acceptance. Florida's experience also underscores the importance of aligned agent incentives. As depopulation accelerated, agents risked losing customers and renewal commissions when policies were assumed by insurers that did not appoint them. Florida addressed this by allowing limited appointments so the agent of record can continue servicing the policy.
California already requires clearinghouse activity to occur through the broker of record. While Florida's depopulation framework demonstrates that aligned incentives and clear rules can produce meaningful policy movement, California's market structure differs in ways that warrant caution before importing Florida's approach wholesale. Florida's takeout market has historically been supported by state based or regional insurers operating primarily through independent agents and monoline property writers, which facilitates limited appointments and agent driven transfers. In contrast, California's homeowners market is dominated by large national multiline insurers who operate through exclusive or tightly controlled agency systems and manage risk on a portfolio wide basis. In that environment, mechanisms designed for broker centric, monoline market may not translate cleanly and could introduce operational and distribution conflicts without producing the depopulation results.
The issue is not whether Florida model works, but whether its structural assumptions align with California's market realities. For that reason, our members support learning from California Florida's experience, but believe California's clearinghouse should be evaluated and refined based on our own market composition rather than by direct replication. In closing, experience across states demonstrates a consistent lesson. Clearinghouses can help reconnect policyholders to the private market, but they cannot compensate for upstream policy choices that drive residual market growth. California's challenge is not whether clearinghouses work, but whether the clearinghouse is supported by actually sound fair plan rates, so policy holders have a meaningful incentive to transition back to the private market.
Clear and predictable clear clearinghouse mechanisms, including pricing alignment, data availability, and voluntary participation rules that allow insurers to responsibly assume and retain risk, aligned incentives for insurers, agents, brokers so participation is operational feasible at scale, and a policy and regulatory environment that supports private market participation and avoids changes that inadvertently expand reliance on the fare plan. The most effective path to populations restoring a healthy competitive private market. California has taken important steps in that direction. Now it's essential to give these reforms time to work, evaluate where they fall short, and avoid actions that inadvertently expand the residual market further. Thank you for the opportunity to share these perspectives.
Speaker 11
Thank you. Good morning, madam chair and members. Sharon Taylor on behalf of the Personal Insurance Federation of California and the National Association of Mutual Insurance Companies. Thank you for the opportunity to comment on the Fair Plan Residential Clearinghouse Program established by AB thirty twelve. My colleague, mister Sechten, made a lot of important comments there, so I'll try not to be repetitive.
But getting right into, I think, the crux of what's been being talked about today, from the perspective of the admitted market insurers, it is important to note that carriers do not yet have extensive operational experience with the clearinghouse. The market for high risk properties has been constrained for many years, and insurers that are able to write new coverage can easily find business outside the clearinghouse. Therefore, utilization of the clearinghouse program has been fairly limited. However, you know, we're hopeful that dynamic will begin to change as the commissioner's sustainable insurance strategy continues to move forward. As insurers begin writing more policies in wildfire distressed areas, consistent with the commitments contained in recent CESS filings, we expect there will be greater need for the clearinghouse to help move policies from the fair plan to the regular market.
In that context, the clearinghouse could become an important tool for achieving the goals of fair plan depopulation and growing private market availability and wildfire risk communities. Now when insurers are asked about the challenges they encounter with the clearinghouse, the feedback we receive is that the issues are more structural than technical in nature. For example, carriers that offer a difference in condition or DIC policy, they have a preexisting relationship with that customer. However, greater clarity is needed around the process when there is no customer relationship and their policy originates with another broker. In addition, including the most recent fair plan premium data and data files would improve insurers' ability to evaluate whether they can offer competitive alternative and whether a successful depopulation effort is likely.
Know, another structural limitation exists because California has no mechanism requiring policyholders to move to an admitted carrier when a comparable offer is available. And without that type of framework, conversion rates may remain limited even when private market options exist. Now we have several, improvements that could strengthen the clearinghouse program. That includes incorporating the current fare plan premium into the submission data, establishing a clear and standardized depopulation process, and providing greater visibility into wildfire mitigation efforts so insurers can better assess eligibility and pricing. Collectively, these enhancements would improve transparency, efficiency, and ultimately the conversion of policies back to the admitted market.
But lastly, successful depopulation will also depend on ensuring the fair plan rates are actuarially sound. And a couple of people have referenced this. The fair plan did previously testify in this committee that it faces a rate need of roughly 80%. They have a 36% rate filing pending. And if fair plan policies remain underpriced and subsidized through assessments on regular insurers and their policyholders, it's gonna be very difficult for admitted carriers to compete for that business.
So a lot of things to think about here, but, again, not a lot of experience yet. The hope is that there will be a lot more as the SISC starts to kick in, and down the road, people are gonna need to go to the clearinghouse to try to find this business. We're just not there yet. So thank you. We look forward to working with the committee to ensure the clearinghouse is an effective tool for restoring a healthy insurance market, and appreciate your time.
Speaker 12
Good morning. My name is Cliston Brown, and I am the vice president for public affairs with the Surplus Line Association of California. I would like to thank the chair, the vice chair, members of the committee, and staff for the opportunity to testify here before you on the matter of the fair fair plan clearinghouse program. Before I discuss the issue that is before us today, I would like to provide some very brief background information on the surplus line association and how surplus line insurance is regulated under the California Insurance Code. The surplus line association was created in 1937 and appointed in 1994 as the California Department of Insurance's surplus line advisory organization.
In this role, we review every surplus line transaction filed in the state of California to verify compliance with the surplus line laws. Surplus line insurance in California is regulated primarily under twenty one secondtions of the California Insurance Code section seventeen sixty through seventeen eighty, some of which are particularly relevant to our testimony today. It is important to note that by law, surplus line insurance is specifically intended to be a secondary market with admitted carriers being given the first opportunity to cover a risk. California insurance code section seventeen sixty three requires that surplus line brokers make a diligent effort to place a risk in the admitted insurance market. Brokers may place a risk in the surplus line market if the broker obtains three declinations from a many carriers who write that type of risk and determines that fewer than three insurers actually write that type of insurance in California or finds that the particular coverage is included on the commissioner's export list.
In short, a risk can be placed in the surplus lines marketplace if a broker first obtains prima facie evidence that the risk cannot be insured in the admitted market. Surplus line insurance therefore functions as a safety valve providing insurance options to consumers where such options would otherwise not be available. For property insurance coverage, primarily fire insurance, should a broker fail to place a risk with either the admitted or surplus line markets, the broker can then place that risk with the insurer of last resort, the fair plan. California insurance code section one zero zero nine three subdivision a clearly lays out the progression from admitted insurers to surplus line brokers and only then to the fair plan. However, we are aware that agents often lacking knowledge of the law or the surplus line marketplace commonly place policies directly in the fair plan.
When the legislature passed a b thirty twelve six years ago, we were hopeful that it would help restore balance to the homeowners insurance marketplace and reduce the Fair Plan's exposure. We asked that the bill allow for surplus line insurers to take part in the clearinghouse, and we're very pleased when it was amended to do so as provided in California insurance code section one zero zero nine five subdivision j. However, we realized a problem existed when the fair plan reached out to us to ask if we could provide information on surplus line insurers who might be willing to take policies out of the clearinghouse. We could not do that because California Insurance Code section seventeen sixty one subdivision a specifically requires that surplus line transactions be conducted through a California licensed surplus line broker contacted the non admitted insurers to place the risk. As noted earlier, this legal requirement is in place to help preserve the prerogatives of the admitted market.
Additionally, surplus line insurers are not our members. The SLA is a broker association and per California insurance code section seventeen eighty point five two subdivision b, only licensed surplus line brokers are deemed by California law to be members of our association. We do not, as a matter of either law or practice, represent surplus line insurance companies. To the extent that we have any dealings with surplus line insurers, it is through our financial analysis department's charge to perform a security review and analysis. Upon discussion with the Fair Plan, we came to understand that the Fair Plan believed AB thirty twelve required them to work directly with insurers, they could not open the clearinghouse to surplus line brokers.
As noted earlier, California statutes governing our industry simply do not permit that approach which creates a legal impasse. As such, surplus line brokers have had difficulty in accessing the clearinghouse except in certain specific cases. For example, the Burns and Wilcox brokerage has received authorization from a Lloyd's syndicate, Amlan, to access the clearinghouse on its behalf. We also have learned that a managing general agent in the surplus land space, Delos, has been able to take a number of policies out of the clearinghouse, and we believe this is because Delos, as an MGA, has an insurer's authorization to bind business on the insurer's behalf. I also learned this morning of another brokerage that is poised to begin taking policies out of the clearinghouse.
However, except in rare cases such as these, we believe that the legal and procedural impasse has significantly prevented the surplus line industry from accessing the Fair Plan Clearinghouse. We've also heard that some of the brokers of record who have placed policies for the Fair Plan have expressed reluctance to move those policies to the surplus line market due to the lower premiums in the Fair Plan. In short, surplus line insurers have largely been unable to participate in the Fair Plan Clearinghouse except in rare cases where a surplus line insurer has authorized a surplus line broker to act on its behalf. We believe that the legal and structural barriers that currently exist will continue to impede participation in the clearinghouse by our industry sector. Thank you for the opportunity to testify here today.
Speaker 4
I do. Thank you so much, and thanks to all of you for your presentation. Right. My questions are really the same as for the last panel. I understand there's challenges moving from the fair plan into the regular market.
But if there's any data around how things are going geographically across the state, if we have pockets where it's more difficult, pockets, where things are going better. I know we have statewide issues, and we're starting to see people come back into the marketplace, but if there's anything geographic specific. And, of course, my particular interest is Central Coast,
Speaker 4
know, Santa Cruz, Monterey, San Luis Obispo issues knowing that, you know, we have massive issues statewide.
Speaker 11
Gotcha. Yeah. Seren Taylor again with PIFF. I'll you know, what I can offer to you to think about is under the commissioner's sustainable insurance strategy, they've identified they have data around distressed area ZIP codes. And what those distressed areas generally reflect is high fare plan concentration.
And so while, you know, as PIF, I don't have that data on a statewide basis. We have individual carriers who know what their situation is, and that doesn't get reported to me. But the department has data around that, and that's what they've built out with those distressed areas. So that is a clear indication. If you're on that ZIP code list, that means that there's a high degree of fair plan concentration there, and that's gonna sort of tell you what's going on.
And I do think in the Central Coast in your district, there are a lot of that. And obviously, you know, at this point, something like 80% of the state is considered a high Yeah. You know, high fire risk area. So, even if there hasn't previously been a fire there, the fire threat is still active.
Speaker 10
Yeah. If I can add to that, hope this is all kind of done by now, but one of the things that I think occurred when people are looking at getting nonrenewed in their place where they're not in a fire area and they're wondering why. You know, what what happened? You know, the commissioner, can impose moratoriums, on nonrenewal of insurance in all the areas and adjacent areas that have been affected by wildfires. And that's really good for our customers.
It's good for the agents. It's good for everybody involved. But in some cases, insurers, have who are under pressure because they can't afford re the reinsurance to continue to write as broad as they they want to, and they have to restrict their book of business, have to cancel somewhere. So then they start canceling in areas where they're not fire prone. And so, you know, every action has an equal and opposite reaction.
I mean, that's happened. Hopefully, with, you know, some softening of reinsurance rates worldwide and, you know, the the the SIS being involved and, you know, we're past that and we can see that turnaround. But that has been a, you know, double edged sword.
Speaker 8
And on that, you know, insurers are required by law to maintain certain capacity to pay reserves and claims. And if you have a moratorium situation where a large area of policies are under moratorium and you can't adjust your book of business there, then you have to look other where other place. And I think that's a lot of what you're saying.
Speaker 4
Yeah. I think, you know, what's concerning and I said that the last panel, but I'll say it again is we've had, you know, close to 600% increase in four years on the Central Coast from 2020 to 2024 into the fair plan. We're talking about how we're getting people out of the fair plan. Certainly, you know, we've got folks in two counties that haven't experienced wildfires, god forbid, folks in one county that experienced a devastating wildfire that have struggled to rebuild, not necessarily, you know, your responsibility. There's a lot of reasons they haven't been able to be re rebuild, but, you know, folks are anxious to to understand this.
So, appreciate that. And, you know, my other question, I would say I ask it at every single hearing, is what is happening with under insurance and how is it you know, when we're we're trying to move folks out of the fair plan back into the regular market and hearing two things. One, that insurance in the regular market out prices insurance in the fair plan. That's a problem. But also a huge concern that when people get back into the regular market that, they're not being offered enough insurance, right, of no fault of their own.
Speaker 8
I think there's a couple of ways to address that. I think one of the issues you have to understand is that insurers ever since the nineteen ninety one Oakland Hills fire where there were replacement cost policies and the costs were extraordinary. The joke is they found more rare book libraries in Oakland than anybody ever thought existed. So companies moved to policy limit policies. That way they can predict what their actual risk is.
Companies are required by regulation to give homeowners a estimating replacement cost value estimate. The problem with that is and when the regulations were adopted by the prior prior commissioner, we brought this up. Those regulations do not include demand surge. Okay? The commissioner did not wanna include demand surge because it's unpredictable.
And by including that, it would have raised premiums for generally everybody. But that entire predictability is where you run into a lot of the under insurance problem. The amount of insurance is determined by the policyholder who pays the premium. The legislature has addressed this issue somewhat by having companies required to offer an extended replacement coverage policy, which people can buy to provide additional coverage. I don't know what the uptake on that is, but there is an option.
But under insurance, it's going to be a huge problem until we are able to anticipate and price for demand surge.
Speaker 4
I didn't know if you were looking at this now. Okay. I I guess, you know, in some states, folks are notified of of this. You know, you should be aware of your replacement costs. You should carry enough insurance.
I don't know that that's really necessarily standard in California. At least I haven't seen it be standard in California, that that people would be made aware. You may not be being offered a policy that is going to cover your replacement cost. You know? Therefore, you might want to do x, y, and z.
Some states do have that kind of a notification. And in some states, actually, you know, the coverage goes up every year sort of automatically. You're just offered a you know, another policy that is going to keep up with the rate of, of what the replacement cost is estimated to be. And and so a lot of people have really struggled, actually, across our state in these fires. And I bring it up in this context because we're talking about moving people back into the regular market.
We wanna make sure when we when they get there, one, they can afford it, but, also, they're offered the the coverage that they're gonna need. Yeah.
Speaker 10
Well, I guess I would add one thing is that when people look at what's it cost to rebuild my house, they're often looking at databases, which are out there in the industry or in the construction industry. But just by their nature, the databases are two years behind. And when you see 30% inflation and costs and things like that, that's that's an issue. With AI now, it must you know, maybe it'll it'll those will be updated much quicker. So I think, you know, that's one of the issues.
And as Mark points out, the the whole idea of extended replacement is, you know, you you insure your house to the value you think it will cost to, you know, be replaced and then add 50%. And then that kind of is supposed to take care of the bubble from after events, etcetera. And you can go 50%, 75%, a 100%, and that's and it's less than the cost of the, you know, the underlying coverage, the coverage a.
Speaker 11
Yeah. No. I just wanted to add that, I did happen to get my renewal, back in October, so I I took a picture of it because I know this issue comes up. And and on on that renewal, it has the replacement cost estimate, and it does say, you know, we've adjusted you up a little bit, but you should talk to your agent and figure out, is this the right amount for you? So that is typical in California that you do get that, you know, to say that you as the customer ultimately need to decide what's the amount.
And as Mark alluded to, there's a long, I think, legal, statutory, and regulatory history on this issue. It it it does tend to pop, you know, over decades. It pops up after almost every wildfire because of the demand surge that hits and then and then that adds to this issue. I'll just say anecdotally, I have, member of companies telling me that they had people in LA that were insured at $800 a square foot, had a 50% replacement cost policy to cover $1,200 a square foot. And the way the contracts are coming in because of the demand surge, some people would say there's price gouging.
They're seeing rebuilds of $15.1600 a square foot, which is something no one would have even imagined. And so when we talk about estimating what is the rebuild cost of a home, even in a normal circumstance, it's difficult. You know, again, it's a little bit of a personal anecdote, but I just had to put a roof on a property here in Midtown Sacramento. And I just went and got bids on a roof. And in the span of one year, it went from 22 to 30,000 to 45 to 60,000.
And when I got two estimates, same materials, two different contractors, One was at 40,000, one was at 58,000. So what's the right number? Right? How do you just say, in a vacuum today, here's what it's gonna be a year from now with demand surge, 15,000 people are trying to rebuild. There's a couple 100 contractors.
The material costs are up. So there's so many things to pick that right number. And if I think people try their best. Carriers try their best. I think, you know, customers also do make decisions.
Some people, as you talk about, like, they wanna buy more. And I think, generally, if you go to your insurance, say, I wanna increase my coverage, they're gonna say yes. They have no motivation, not you know, the difference between a $900,000 policy and a $1,200,000 policy is not that dramatic. I think if if you had, like, a $1,000,000, you know, estimate and you said, want $5,000,000, they might go, that sounds a little suspect. Let's talk about that.
But but, you know, there's there's this tension where a lot of people, I think, often are like, what's the minimum I can get away with for purposes of my mortgage? And that's an economic way of thinking about this, and most people don't think they're ever gonna be the victim of a wildfire or a loss, so they make that economic decision. And then, of course, when this happens, then then they're upset, and they wanna be like, my insurer didn't give me enough coverage. So I think there's a lot of dynamics in this under insurance conversation.
Speaker 4
I would I would agree there's untold dynamics. I'll just say the stories we're hearing are folks that, actually, their insurance company said no. We act we don't offer more coverage. We don't offer a higher level of coverage. And then the other, stories that we've heard and have been published, I think, in some of the newspapers are that companies actually were using tech platforms that were undervaluing and then by design under, you know, offering under insurance.
And and those pieces, I think, are the ones I I agree with you. Construction costs, material costs, inflation out of control and has really hit the construction market hard. I'm I'm married to a construction manager, as I've said in many hearings. So, you know, we I'm familiar with the with these issues, the rebuild costs with 16,000 homes burned down. I mean, the rebuild costs are out of control.
Absolutely agree on that issue. And, of course, there are folks that say, I simply can't afford or I don't want to pay that premium. The very specific problem I'm talking about and why it's pertinent to this issue is why we're getting, folks you know, we have this huge massive effort to get folks back into the regular market. We wanna know that when they get into that market, insurance companies are going to be, you know, one, using data that is going to accurately as best as possible accurately value what somebody's gonna need, not using platforms that are undervaluing. And then two, that companies really by and large across the state are doing what you've said, which is offer the insurance somebody's need at somebody needs and then let the consumer decide.
But that's not that's not the the you know, what we've been told that those two things we are still struggling with in the regular market.
Speaker 10
I just looked at the survey that our association took, and some insurance companies do limit insured valuation. In other words, they're not gonna write policies above a certain amount. So that could happen in terms of just we're not gonna go there.
Speaker 11
Yeah. But that's usually Yeah. Like, 3,000,000. Some people will cap out at $3,000,000, and then you get into a more specialized product that's not Yeah.
Speaker 10
In moderating Carmel, there's a lot of high value homes. I mean, you know, so we looked at the whole issue of stacking fair plan on top of, you know, there's a fair plan policy, then stacking other policies on top of that, and then trying to blend all the other coverages.
Speaker 11
Yeah. That would be interesting to understand and be happy to follow-up with your office just if, you know, if you have some of those examples because it's a difference if it's like, oh, we're at 900,000. We wanted to go to 1,100,000.0, and the carrier said no versus the carrier has an underwriting cap of 3,000,000, and that's their cap. And so they just don't go over $3,000,000, which I think is a different question. So
Speaker 4
Yeah. The these are much lower values, to be clear. But I appreciate it. I would love to follow-up with you. I appreciate the,
Speaker 1
the time, madam chair. Thank you. Welcome. Assemblymember's hair obedient.
Speaker 7
Thank you, madam chair, and thank you again for the testimony and and the information. I don't think we're gonna solve the economics here. I think the first three I think all of the witnesses talked about actuarial sound market conditions, which this hearing really isn't about. And I think we can all agree that until we have, changes in the market, you're not gonna solve for getting people off the fair plan. Taking that, as an assumption, though, going forward, you know, we're really talking about how can we improve the clearinghouse program.
And and the first question I have is if there's only 11 residential insurers taking, taking part in the program. Are your I guess, to the two of you, are your clients one of those 11?
Speaker 11
So I'll be candid. I don't know offhand who's in there. I did. I heard from the fair plan, by the way, the other day that there's 15 admitted carriers in there and another 13 or so surplus lines, but, you know, there's a 100 admitted carriers in the market. So, obviously, we want more people in the program.
And I don't know specifically which PIF members are in there or not. I will say that for a lot of most many PIF member companies sell what's called the difference in condition policy, and so that wraps around the fair plan policy. And so they don't necessarily need to go through the clearinghouse because they already have a relationship with that customer through the DIC. And I know, for example, some PIF member companies that have made SIS filings, they're gonna start there. They'll say, I already have an existing relationship with this customer.
I'm already selling them their DIC, so I'm just gonna contact them that way and not get caught up in sort of the operational friction that folks have been talking about. And so at this juncture, again, there had just hasn't been a lot of call to go into the clearing house. And then, again, there's a lot of business already outside of it as well. But not to be repetitive, but obviously, with the hope is as we get into the cyst, that's gonna exhaust and then the clearinghouse can be more important.
Speaker 12
We also do not know specifically, what surplus line carriers are operating in the market, in the clearinghouse. That is not information that comes to us, so we really don't have any better idea than than Sarin does.
Speaker 8
Nor do I, but I would say 15 carriers could be a major percentage of the residential market depending on who they are. Because although John mentions there's over 100 that are theoretically licensed to right homeowners, when you look at the market share, I think it takes about 12 carriers to get to about 90% of the market.
Speaker 7
So, yeah, assuming it's 11 or 15, I guess why don't I'm just curious. Why don't you know whether members of your coalition's clients are taking part in this or not? I guess whether they are or not is is a question that we should be able to answer, and why they're not, if they're not, is and I'm not as worried about the surplus lines. I'm obviously worried about the admitted residential insurers.
Speaker 11
I mean, certainly, we can go back and ask them. There's not there's I don't think there is a barrier to us finding out. I think, you know, again, to be candid, prior to this hearing, I don't think we'd had a significant conversation about the clearinghouse, you know, since the bill went through and the concept was in place and then the market's been deteriorating. And we've been so focused on what's you know, for two you know, for three years after the bill passed, it was how do we get the market back. We got into the SIS discussion, then it was get all the SIS rules and regs in place to re you know, start to rebuild the market.
And, I think the timing of the hearing is good to start this discussion again, but the focus just hasn't been on the clearinghouse. So, you know, I don't wanna give you the impression that there's a barrier to us going and asking that and finding out who's in the clearinghouse or not. It's just that's that's a transaction that happens between the fare plan and the carrier, and it's just not routine information that comes to us as an association, but it's not, like it's, you know, national security secret.
Speaker 7
Yeah. No. I was worried coming into an outcomes review hearing on a program, I would have imagined that you talked to member companies and clients about the program. And if you didn't do that, I guess, how are we I mean, this is this is a very specific type of hearing. Right?
We're trying to figure out whether a program that was implemented by a specific bill is working. And I'm just curious, did you actually have conversations with any of your members that actually use it? Yeah. Okay. I did.
So which which members are actually using it?
Speaker 8
I think the easiest answer would be just ask the fair plan who's got a relationship with them.
Speaker 11
you have that information? I wanna say. So, I mean, the questions that that, frankly, I started with were what is your experience with the clearinghouse program? What are the barriers? If you have any, you know, those were the types of questions that I was exploring with the member companies coming into this hearing.
You know? And and to be fair, you know, last week, as you know, there was the other hearing on what's happening with tribal affairs and the cost of insurance down there. And so you're the it's there's a lot going on this year. And so trying to triage and get to this and then start asking those questions. And then, of course, it did pop into my head to say, how many companies are using it?
It you know, I will admit that I did not think, let me go out and survey specifically who is in and who is out. But, certainly, we had conversations about what's working, what's not, are you using it, how many companies are in, those types of broad questions coming into the hearing.
Speaker 11
Again, I did not ask them specifically, but I I I would I would say based on the conversations and just knowing where State Farm is right now, as you know, they're broadly not writing new policies in the state yet. Now they just had their the rate filing that went through. I know there's conversations with the department, but, you know, if you're not writing new policies, then I think one could sort of reasonably infer why would you be going pulling people out of the clearinghouse.
Speaker 7
So going to some of your feedback then on how to improve the clearinghouse, mister Sechten, you talked about misaligned incentives. We'll get to the brokers. But mister Taylor, you talked about a clear process. And so I I guess, you know, you talked about fair fair fair plan premium data and and wildfire mitigation. But so what how can we make this process better?
I mean, I I guess, what what specifically can we make this process better so that and, again, I'm worried more about the admitted carriers, so that we can actually use this as a tool. No one thinks that this is gonna be a silver bullet, but it's clear that more people are going on than coming off, and this is a tool to use. So how can we make that process better according to your testimony?
Speaker 11
Yeah. So, again, I think having the premium data in there is gonna be helpful so you can immediately analyze, you know, am I within some percentage of what they're paying in the fare plan? So as as, you know, mister Norwood talked about, people are price shopping the fare plan now. So if I know that I'm 30% more expensive or 40% more expensive, I'm not likely gonna convince that person to to come over to the admitted carrier. So that's an element of it, having that data in there.
When talking about sort of a clearer depopulation process, This conversation clearly needs to happen with the brokers and agents about what's a fair way to compensate them for moving business in and out of of the program. You know, should there be and I think you heard miss Figueroa from the department talk about should there be limited appointments, things of that things of that nature, would would improve the process. I I mean, I'll be candid. I don't think this is an immediate, like, this year problem. We we want this to be a problem within the next two, three years, but I think there's a lot of business outside of the clearinghouse.
And, again, carriers have relationships with their customers that have DICs, so there's gonna be growth in the market with or without the clearinghouse in the near term. It's just we're gonna hit a point at which that's gonna max out, and then it's gonna be better to have a more functional clearinghouse.
Speaker 7
And thanks for that. And, mister Seckin, you said misaligned incentives for agents. And and I think there's a there's a bit of a tension there between what we heard from mister Norwood and you and what we heard from Department of Insurance about the roles of of of the agents, the designated agent versus, being able to basically have an open market. So, what are the misaligned incentives?
Speaker 8
Well, I think and mister Norwood, I think, spoke to it. It's a compensation structure for the Fair Plan. It's not the same. It is for the mid market and it should be. I think it's important because California law supports it that the agent basically owns that business.
And so with that, it's important to maintain that relationship. I think another thing that might be helpful for companies is to get slightly better underwriting information available on the FairPlan policies. So like Serin said, you would need premium, but you also need to get a sense of what you're underwriting. The FairPlan, as you know, doesn't necessarily underwrite policies unless you're a meth house. They pretty much have to cover you.
And so their underwriting guidelines are fairly limited, but providing if it's possible, provide more information to the carriers who are looking at the business might also be helpful.
Speaker 7
So what just so I'm clear. When what proposed reform to the clearinghouse program would you make then? Would you would you not then have this requirement to go through the broker of record, or would you continue to have that? Because there's obviously gonna be probably a difference of opinion there.
Speaker 8
I don't think our member companies have a problem going through the agent broker of record. I think most of them are used to working for it. There might be some need for companies that don't have captive agents to allow for a limited appointment as Florida does. Remember, Florida system is different because you really have new carriers that are taking out companies out of Citizens, not through their clearinghouse, but just directly. So I think we need to kind of understand that and work through it.
Speaker 7
Anything to add there, mister Norwood, about broker record versus potentially going just to, you know, straight to the consumer or going around the broker record?
Speaker 10
Well, we don't believe that, you know, legislating and getting in between the relationship between the agent and broker and the and their customer is good for either party. You know, the customer relies on their agent broker to know what their coverages are and get it explained to them. And oftentimes, the the agent or broker they're using are writing other coverages for them, particularly in situations where you've got vineyards and ranches and farms and things like that where the commercial and the the personal lines policies intersect. For the for the broker, obviously, having somebody else take a piece of the business creates possible gaps in coverage, which creates e and o problems. Obviously, it it interferes with their propriety proprietary work product.
I mean, you know, the and there and there are just other a lot easier options to go forward with to do that besides going down that that road. Just to clarify, one of the questions that that the committee asked is, do brokers have incentive to remove policyholders from the fair plan? They have every incentive to to move it out. Again, these coverages that are in the fair plan look. The fair plan has done a great job, having to grow from zero almost to where they've had.
So there's no criticism of the fair plan from our standpoint. You know, we use it to take care of our client. I say client needs a place to to go, and that's a market. So we've been able to use that. But from the agent or broker standpoint, you know, the coverage isn't as good.
It creates gaps. There's potential problems. We wanna get them out of that. Secondly, going into the fair plan doesn't, as a small business, build relationships with private insurers, and that's what you wanna do as an agent or broker. And, also, the compensation is better through a private insurer than it is the fair plan.
We built that in the fair plan. It's you know? So the agent, every reason to move move the policyholders out and just, you know we're just like consumers. Please give us a market, and we'll move it tomorrow. And we don't need a clearinghouse to do it.
You know, anything else, we just need a market to do it. And, you know, it also is kinda strange in that and frustrating a little bit in that, our members don't have the majority of business in the fare plan. Clearly, that's from the large carriers. As Mark said, the top 12 carriers, three of them are independent agency companies. So that's, you know, where the marketplace is.
And as Sharon said, I think and then we suggested that a lot of those carriers are gonna go back to people that they used to write. And so if they just go and take half the business out, that's a 35% reduction in the fare plan overnight, you know, overnight. But it's and that's a more organic way I think things are gonna happen. There's not going to be a point in time where we wake up one day and say, oh, there's a private market's back and, oh, by the way, the the rates for the fair plan just got an 80% increase. And now we, you know, now we can have something work.
I mean, you're gonna see these big carriers that have the the, incentive, also the dollars to go through the fair to the process to get their rates done. They're gonna get that done. They're gonna get back to the marketplace. They're gonna take the easiest path to, you know in growing their book of businesses. What we're just talking about is going back to the people they used to write.
And so I think that's the way this all gonna is gonna happen. And, and, again, we provide some other options that, we think are more efficient that'll that'll work that, you know, might help, the, clearinghouse be a tool in that toolbox. But, again, not the we're not gonna it's not gonna be the predominant thing that'll work to depopulate the plan. We have to go back to the basics, and that's the private market and the the rate the fare plan is charging.
Speaker 7
Yeah. Yeah. And we're not gonna again, we're not gonna solve the that economic problem here. And I don't think the clearinghouse was supposed to solve it. I think it's more of a process question.
I do think that I'll just leave it with this. I mean, coming into this hearing, I spoke to many of your members, for example, independent brokers who have no idea what this program is. They've never heard of it, and there's zero education on it within coalitions of of brokers. It it sounds like even the residential insurance market might not have a very, you know, firm grasp of what the program is. So all I would say, again, from an outcomes review, maybe there needs to be more required education on this as a tool.
And maybe I mean, obviously, it's a voluntary program. I'm not sure why it couldn't be a requisite that all of the admitted carers take you know, have some sort of participation in this because I think it is a tool for consumers, and I think it's a tool to get people off of the Fair Plan. It's not a silver bullet, but, you know, I think, obviously, making it voluntary has has caused, I think, a a real, a real lack of participation, a lack of education. And so maybe that's something that we need to approach, and and I think this is a timely conversation. So thank you, madam chair.
Speaker 1
You're welcome, mister Embleman. So I have a couple questions. First one's for mister Norwood. Can you describe the measures your client takes upon renewal specifically for a policyholder they have in the fair plan?
Speaker 10
Yeah. I mean, I think when a renewal's coming up, our members out in the marketplace trying to see, you know, they know from the companies that they're appointed with, you know, is there is there a market? Is it you know, are they open? I mean, we have the information here that they're you know, each individual company will have their own either wildfire score restrictions or geographic restrictions or insured value, restrictions or a restriction on the number of of of applications the agent or broker can even submit to the company. So, you know, their peep the their people in internally know that and, you know, work through those companies to look for a marketplace.
They also then, you know, will go out in many cases to the to the surplus lines market through a surplus lines broker and look for coverage there as well. Now the association also just kinda need to deal with the surplus lines group to try to, you know, make it easier for our members to access that market as well. And some of our our larger members are also, surplus lines brokers, so they have direct access to that. So they're looking, and, if they find coverage, oftentimes, I mean, they call the con the consumer. Basically, it's we have additional coverage for you.
I mean, we have this option for you. It's at this price. And as been reported, oftentimes, that price is substantially higher, and the consumers, you know, deciding to stay put stay in place. Because I I really do think there's a misimpression out there that the consumers think that rates are gonna come back at a low you know, and we'll be in a position where the fair plan will be the highest you know, high again and the the voluntary market rates will be below that. I I just think that's probably not gonna happen.
So Alright.
Speaker 1
Thank you. And then a question for mister Taylor and mister Sutkin. As part of the the SIS filing, do you have to agree to participate in the clearinghouse?
Speaker 11
I don't I don't well, I'm trying to think because I don't know in the in the conversations that go on between the department and the carrier, I mean, and the carrier, I suppose that could come up, but I'm not aware of if it has at this juncture. And I think, you know and I guess mister Herobedians left, but, I mean, these are very smart, sophisticated companies. And so they know they have to make these commitments and this is and to achieve them. And if they feel like they need to go to the clearinghouse to get that done, then they're gonna get that done. And and if if they think that they can get it through these other relationships and other ways, they'll get it done that way.
But, I think, you know, folks are aware of it, and if it becomes a tool they need, they're gonna go utilize it. But I just I just don't know offhand if it's a specific part of the CIST filing. Sorry.
Speaker 8
I was just gonna say the CIST filings do offer depopulation of the Fair Plan as an option to meet the requirements to both use catastrophic muscles and reinsurance. It's 5%, and this also applies to commercial. But it doesn't specify they have to come out of the clearinghouse. A company that already has placed a number of policies in the Fair Plan could easily take out the policies they placed in the Fair Plan, but they may not be going through the clearinghouse. So there are efforts to depopulate.
Speaker 1
And thank you for that. Mister Sakin, do your members participate in the clearinghouse in Florida or Louisiana? Do you know?
Speaker 8
They do to some degree, and I've talked to some member companies about it. But again, the situation in Florida is different because the clearinghouse is not used very much because there is an ability to take policies directly out of citizens without going through the clearinghouse in most companies, particularly in Florida because what you have in Florida is you have a lot of new companies that came in after the Florida legislature finally fixed their market. And so you have companies coming in, and they're as a way to build business, they're going after citizens policies, which is
Speaker 1
k. And last question for anybody. If what are your thoughts if the Clearing Hills had a sunset?
Speaker 11
I I don't have strong thoughts on it. I mean, I think that I think right now it's important to give it the opportunity to see how it evolves in this new environment with assist and then see if it becomes the type of tool that we hope it all is or other things start to happen. You know, I mean, again, just anecdotally, but I think what we see a lot is when carriers come back into an area, the brokers and those neighborhood, you know, apps. You know, everyone starts to know when someone shows up, and that that's how, you know, that just happened with my brother when he got a house in the woods in Sonoma, and the broker knew everyone who's writing in that area, they didn't need to go to the clearing house. Right?
And so maybe down the road, it becomes a a of an important tool because there's these other new technologies that are superseding it. At the moment, I don't think, you know, we have a strong opinion about whether there should be a sunset on it or not, but I would certainly encourage, let's give it some time. I wouldn't make it too soon. Let's give it some time to play out and then maybe do this again in five years.
Speaker 10
know what? I I don't have an opinion. I may agree with that opinion pretty much, but I'd like to answer a question that you raised earlier about declinations. And, you know, in the non admitted space, there's always been a requirement of three declinations before you go to the non admitted companies. But the Department of Insurance has a process where you waive those on a list that's called
Speaker 10
The export list. There's a there's an export list that's developed every year where everybody agrees there's no market. So when there's no market, you know, admitted market, you don't have to have the three declinations. That's essentially kinda what happened, I think, with the fair plan that used to have declinations is that everybody realized what was going on. And brokers had very difficult time getting insurers to basically write you know, sign a piece of paper or to indicate in writing that they weren't gonna write a particular policy.
So it's very difficult to obtain declinations. They also you know, brokers could not, in some cases, ask companies for more than x number of applications a month so you could only get so many declinations. So it just became very problematic, you know, to even get to that. So that's why the declarations were taken away. I mean, that's it's just a a problem from our standpoint of being able to comply with that just because of the market conditions.
Speaker 1
Alright. Thank you so much, gentlemen. We appreciate your testimony. Thank you for being here today. At this time, I'd like to open up for public comment.
If you could please come forward, state your name, affiliation, and provide a brief remark.
Speaker 13
of bring this back to Luke as I am actually one of the carriers that's the ENS carriers. Mr. Brown actually just mentioned. Also, he mentioned Delos and so part of the clearinghouse. We have successfully brought in my name is Robert Feldman, the way, the CEO of Wow Insurance.
We have successfully brought in a program from London in the E and S markets. We've secured over a $100,000,000,000 capacity, and we are now aggressively looking to depopulate. Clearinghouse actually in support of CalFairPlan has done an excellent job of putting this together. I just recently, within the last two months, became a part of the Clearinghouse. We are working with brokers.
Our challenge, obviously, was to get some of the information that the clearinghouse has. We're still working with them to do those things together. But we have successfully brought in multiple. I have six different carriers now that are looking to top populate. That that's why I kinda went running out the door for the two assemblymen that that walked out the door as I wanted to make sure I caught them.
Because bottom line is the way you're gonna change this is with the clearinghouse support, at the same time, making sure that we have options. Fire hardening is a big part of it. I am a speaker for the California Association of Realtors, so I have multiple hats. That's what they wanna hear. How do they get insurance for their clients?
We're able to do these things. There are some challenges with the Clearinghouse, but with the number one thing that we are gonna fix, we're seeing estimations of two to 4% growth per month, not per year with CalFair plan when we run our numbers. Obviously, there might be different numbers with the CalFair plan. We will turn the tides. I already have them lined up.
The Clearinghouse is doing the right direction, but it's gonna be more on the E and S market side while the admitted market still works its way out. If I can help any in analytics or information from an ENS standpoint, we are planning to work with the clearinghouse to give them constant information because I do believe that 700 and whatever was the clearinghouse is a complete misnumber at this point. I know for a fact we have successfully over the last month probably have pushed that number. Okay? So if the brokers aren't doing it.
So I do think this program is working. I think what happens is it needs to come from someone like us that's really a true I wholesale for multiple carriers but also have our own programs. I think that's the analytics that you're looking for, and we would welcome the opportunity to give this committee that information.
Speaker 14
Morning. I think we're still in the morning. Madam chair, members, Peter Ansel, California Farm Bureau, thank you for looking at this issue. When our members go into the fair plan, agricultural policies are considered to be commercial policies, is why we sponsored the SB five zero five a couple years ago. And I would just encourage you for what you're doing here and looking at with the residential side of the clearinghouse.
You understand that the commercial policies often tie in our cases. I think somebody mister Norwood mentioned that the case of farms and ranches, it's often commercial and residential side by side. We need access. When our members go in, they do not expect that their term in the fair plan, the time that they're gonna spend with the policy in the fare plan is beholden to the company that they had a policy with when they first went in or the relationship between brokers and agents and admitted carriers. What they want is the opportunity to get access to comprehensive, affordable, insurance again.
This is still about access in the admitted market that is broken. We did not expect when we ran $5.00 5 for the clearinghouse to be a panacea and a cure all, but we did hope that it would be a tool so that if our members were doing things like home hardening and conducting vegetation management and if insurers were recognizing that agricultural properties have a lower propagation risk for wildfire, that they could use the clearinghouse as a mechanism to find those policies that present lower risk and bring them back into the admitted market. There wasn't an ex there was not an expectation that that would necessarily be with the same policy you went in to the fair plan with because what we're hoping for is competition in the marketplace. So access brings back competition. That brings back the ability for people to move out.
So I would just encourage that the commercial side isn't forgotten in this because that's, for our members, where their policies are in the fair plan. Thank you.
Speaker 1
Thank you so much. Again, I wanna thank all our panelists for coming here today in hopes of improving, the outcome of the Fair Plan Clearinghouse program. We'll continue to tackle this issue to ensure Californians have a pathway to the voluntary market as the insurance market market stabilizes, due to the sustainable insurance strategy. This concludes the assembly insurance oversight hearing.
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