The California FAIR Plan recently announced that it is cutting the commission it pays brokers to write its policies. Unfortunately, homeowners could end up paying the price.
The Fair Access to Insurance Requirements (FAIR) Plan is California's insurer of last resort. It assures that basic home insurance plans are available for homeowners who can’t get homeowners insurance. It is essentially a consortium of the state's insurance carriers. If it makes money, it keeps it to offset future losses. If it loses enough, it bills the participating insurers for their share.
Most insurance companies pay a broker somewhere between 10 and 15 percent of the premium for writing the policy and managing the client relationship. The exact number depends on the product, the company, and the volume the broker writes. That commission is how brokerages pay their agents and cover their expenses.
In recent years, the California FAIR Plan has only paid brokers 8 percent, but because the premiums were so expensive, brokers were able to meet expenses and still make a profit. Under the new arrangement, the FAIR Plan will pay 3 percent on new policies and 2 percent on renewals, which cuts broker pay by roughly two-thirds. However, brokers are still expected to place the policy, manage it, and answer customers’ questions. The FAIR Plan also doesn't allow brokers to charge a fee on top of the commission.
This leaves only one place for a broker to cut costs, and that is the level of service. I expect many brokerages, especially small local ones, to stop handling FAIR Plan policies altogether. If enough brokers bow out, the only ones left will be high-volume shops—internet brokers who have never heard of Ukiah and have no personal relationships here. They will process as many policies as fast as they can.
Customer service will likely consist of sending an email and getting a response in two or three weeks. Right now, my local insurance broker calls me back within half an hour. When he doesn't know how to answer my question, he says, "I'm sorry, I don't know, but I'll find out," and then he does. That is the kind of service I've come to expect and appreciate.
The bottom line is that the FAIR Plan’s new brokerage rate probably won't lower anyone's premium. The FAIR Plan is having financial troubles of its own, even at the rates it charges, thanks to California’s wildfires.
There is little consumers can do about the commission cut, but there is one thing you should already be doing if you're on the FAIR Plan: check with your broker regularly, and certainly at every renewal, and ask whether a more consumer-friendly alternative exists. Remember that a FAIR Plan policy is different than a typical homeowner's policy. It covers no liability. If someone slips on your front steps or a laptop is stolen from your car, a standard homeowner's policy responds. With the FAIR Plan, you need a separate liability policy, which adds to the cost. A liability claim can be many times larger than a fire loss, and the FAIR Plan simply isn't set up to cover that.
The larger problem is why the FAIR Plan exists at all. So many carriers have stopped writing or renewing California homeowner's policies, and those still here have raised rates dramatically. There is a little good news: State Farm has announced that it will write new policies in California again for the first time in three years, probably because the state has softened some of its regulations.
Some consumer advocates want to force insurance companies to take on business they expect to lose money on. That’s a dangerous road that will lead to fewer companies doing business in our state (less supply means higher prices). Along these lines, we're electing an insurance commissioner this year. Both candidates are Democrats, but only one appears to understand anything about economics: Ben Allen. Hopefully, he’ll get elected and bring a rational approach to this whole debacle.
If you have questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 50 years. The opinions expressed here are his and do not necessarily represent his affiliated organizations.
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