Lawsuit Alleging 25 Carriers Conspired

I read about a lawsuit alleging 25 carriers conspired in California to withdraw from wildfire prone locations simultaneously. I haven’t read this lawsuit, only some articles regarding it, so what follows may be total folly. If so, have some fun with it.

My first reaction in reading these articles is that here we go again, more nut jobs suing insurance companies for likely unfounded reasons. A segment of our country appears to think prosperity is built through lawsuits.

But then I thought, “What if the suit is right for the wrong reason?” I have zero knowledge of what 25 different insurance companies might do behind the scenes. In my experience, carriers go to great lengths to avoid any appearance of working together, regardless of how innocent the situation. Furthermore, I am not sure they’re competent enough to work together. Most of their data systems are too poor to manage their own companies well, which is proven by their unintentional concentration of geographic risk, among many other deficiencies.

Most are also too competitive to want to work together. After all, what is the value of ABC going to XYZ and saying, “If you don’t write homeowners insurance in this crappy area, neither will I. What do you say?”

A better explanation is that no one wants to write homeowners in crappy areas. It is not all that hard for people to independently agree on what constitutes a lousy area or house. No one needs a PhD or AI to figure this out.

To suggest the carriers conspired stretches belief. But the suit might be right for the wrong reason. I don’t think the carriers got together in some back room of the Greenbriar and agreed not to write in specific areas. But carriers are like lemmings. They buy the same advice from the same large consulting firms, resulting in everyone doing the same thing. They never stop to think that everyone doing the same thing is likely a poor strategy.

A great example is how all carriers want small commercial, especially in light manufacturing if possible. The demand for small commercial and light manufacturing exceeds supply by at least two times. They all bought the same consulting reports and never thought about price elasticity curves.

One piece of advice I think they all bought was effectively the same wildfire mapping software, and then told their underwriters not to think about writing anything outside those lines. I only possess a lot of anecdotal evidence, but clearly, underwriters are not thinking about actual wildfire risk. From what I’ve seen, those maps are poor. Those maps should not be used without a thinking underwriter using them. And this is an awful way of underwriting, which (correctly) undermines confidence in the industry, resulting in this landmark class action suit.

I am sure the software firms advised carriers to avoid making underwriting decisions solely on the maps, but carriers seem to be doing so anyway.

Plaintiff attorneys succeeded in suing apartment rental firms for using the same software, which, without directly conspiring, resulted in the same de facto result. I think this might be the approach the plaintiff attorneys are using here, and they might be right.

If so, I’m not sure this is a bad thing. Blanket underwriting and thoughtless underwriting are not good for the industry, it is not good for the public, and it is not even good for carriers because they’re losing a ton of good business. This is not just a wildfire issue but a wind issue too.

Property can be underwritten well if underwriters can think, are taught to think, and are instructed to think through the risk, including mitigation efforts that can turn a marginal risk into a good risk. This is the constructive approach the industry desperately needs. Savvy carrier executives will adopt this approach.

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