California-type laws will worsen New Mexico’s insurance crisis

As someone who has for years covered California’s simmering insurance crisis, it breaks my heart to watch New Mexico struggle with a similar issue. Rates are rapidly rising—by 16% statewide and by as much as 47% in some fire-prone New Mexico counties, per the Office of the Superintendent of Insurance—and insurers are fleeing.

Homeowners are struggling to find insurance, so the governor and the New Mexico Legislature are considering a variety of far-reaching proposals, including creating a state-operated program that’s separate from its legislatively created insurer of last resort, the insurance-industry funded Fair Access to Insurance Requirements (FAIR) Plan.

I applaud policymakers for tackling this complex matter, but they need to do the right things. One current bill would follow the California model of banning the use of credit scoring in setting insurance rates, but that approach will only worsen a situation born of the wrong kind of government regulation. As usual, my home state of California is a poster child for what not to do.

California’s mess started in 1988 when voters approved Proposition 103, which turned the insurance commissioner into an elected position (who has little political incentive to approve rate hikes) and gave that office the power to approve rate increases and even to roll back rates. The result was a price-controlled system. It created a slow and bureaucratic process for adjusting rates, which has led to years of underpricing and incentives for insurers to exit the market.

Homeowners at the time were experiencing rapidly rising rates, but it was due to a California Supreme Court decision (Royal Globe) in 1979 that allowed accident victims to file third-party lawsuits seeking punitive damages against another party’s insurer. My point: Sometimes in their zeal to fix a problem, legislators—or in this case voters—will adopt a measure that makes matters worse. They then create a regulation that becomes nearly impossible to roll back.

Fortunately, New Mexico insurers remain profitable and most New Mexicans can still find insurance, albeit at uncomfortably high prices. Finding a way to provide decent coverage in areas where it’s lacking is a proper role for the state government. For instance, I have friends who decided not to move to their dream locale in the Sangre de Cristo Mountains in part because of insurance issues.

New Mexico doesn’t show any signs of taking the prior-approval route, but the state Legislature is considering House Bill 80, which would “exclude the use of credit information as a factor in rating or underwriting personal insurance coverage.” Supporters allege that the use of such credit scoring is unfair and discriminatory.

Insurance-based credit scores are much different from scores that predict credit delinquency. They do not use personal information or consider variables such as race, gender, age or income. They are simply a form of modeling to determine the likelihood that someone will file an insurance claim and the severity of the claim. They are never the sole variable in determining rates.

Studies from the insurance industry and the federal government find that such scoring is accurate. The Federal Trade Commission concluded that their use is “likely to make the price of insurance better match the risk of loss posed by the consumer.”

Seven other states also ban the use of insurance credit scores, including Washington. Its insurance commissioner banned credit scores as an emergency measure in March 2021. As a result, senior citizens (who generally have high credit scores) saw their premiums soar. Banning insurance credit scoring had the perverse result of boosting rates for lower-risk customers to benefit high-risk ones. That mismatches risk and pricing—and leaves insurers vulnerable and encourages them to write fewer policies.

In California, the mismatch in risk and pricing is the underlying source of the state’s insurance woes. The Proposition 103 system doesn’t let them properly adjust rates to match fire risks. Its ban on insurance credit scoring then makes it harder for insurers to assess the individual risks of policy holders. As New Mexico struggles with a very real insurance problem, state leaders should start by rejecting any policies that could throw fuel on the fire.