The insurance Commissioner in California has been trying to institute “use it and lose it” regulations for the state’s homeowner insurers (see here) and has been meeting resistance and generating quite a bit of commentary. Although this issue does not directly affect the specialty lines insurance market, I find this kind of controversy interesting because it gets to the fundamentals of the insurance business: discrimination on the basis of risk.
The practice of “use it and lose it” refers to an insurer refusing to renew a policy, or significantly increasing the renewal premium, when an insured has presented a claim.
George Wallace has a good description of where we are here and here. The Commissioner attempted to ban the “use it and lose it” practice through regulation. When insurers challenged his position in court, the court determined that he had exceeded his authority. So the Commissioner has constructed another set of requirements, including disclosure and reporting requirements, intended to be so onerous as to effect his “use it and lose it” ban. This has been met with resistance as well (see here and here).
Barry Zalma has a description of the legal aspects of this and need, or lack thereof (see here). It also leads me to another post/article by Barry on the Law of Unintended Consequence (see here) regarding insurance and bad faith. If the Commissioner is successful what are the possible unintended consequences of the “use it and lose it” regulations? My guess would be higher premiums and tighter underwriting.
Martin Grace has a discussion of this issue (see here) and includes a theoretical scenario with a claim slightly higher than the deductible and how a buyer would or should consider the cancellation probability. While this is a useful exercise, I think the reality is more complicated. The customer should also consider the impact of a premium increase based on the claim, not just the probability of cancellation, any prior claims, and maybe even the specific circumstances related to the claim. Also, most homeowner insurers have rate filings that include a partial description of their underwriting approach, but a customer would not typically have this information. Even adding my comments to Martin’s, reality is still more complicated.
Since there appears to be many more claims than complaints, one would have to conclude that in most cases insurers are accepting claims and renewing. What I have not seen, and I am sure exists, is convincing support that there is a problem that needs to be solved.