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Professor Ken Klein Explores Opaque Insurance Regulations in Light of Recent Wildfires

Wildfire in Southern California

As Southern California experiences an array of wildfires just two months after the massive blazes in Wine Country, California Western School of Law Professor Ken Klein’s expertise is called upon by CNBC—for an article examining the potential Santa Ana windfall for insurance companies in the disasters’ aftermath.

Proposition 103 requires the "prior approval" of California's insurance regulator before insurance companies can implement property and casualty rates, including homeowner's insurance.

According to Klein, "California has a consumer-friendly approach with Proposition 103, and the insurance industry hates it… [They've] been battling that proposition for a long time."

Under Proposition 103 and other California insurance regulations, property and casualty insurance companies cannot take all the losses associated with one event, such as this year's wildfires, and then simply put them onto next year's rates. The state requires a longer-term trend, not a one- or two-year disaster impact.

Without the proposition, Klein says, Californians could experience what happened in the Gulf Coast in the wake of Hurricane Katrina. "After Katrina, the insurance industry immediately re-rated on the assumption that a Katrina event would happen the next year, which of course it didn't," Klein explains. "As a consequence, I believe that was the single most profitable year they ever had—the next year."

Nonetheless, California's insurance regulators can't ignore the increased wildfire risk in urban areas of the state and will need to work with insurance companies.

"There's no question that insurance companies are going to have to react to what is apparently a consequence of climate change, which is the increase in the frequency and severity of wildfires and wildfires in urban interfaces," Klein says. The state's insurance regulator "is already having extended discussions about how they will make sure that the insurance industry remains healthy and robust in this state."

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