The owners of homes that will almost certainly suffer a total loss within the next 20 to 30 years should prepare to pay insurance premiums on par with a mortgage, according to Farmers Chief Executive Officer Raul Vargas.
In certain areas the concentration of risk is huge, Vargas told California Insurance Commissioner Ricardo Lara at the inaugural Global Sustainable Insurance Summit Program on April 10. Premiums should reflect it.
And he endorsed shifting additional risk to homeowners, saying it makes coverage more affordable and incentivizes them to install devices and maintain properties to help prevent or reduce a loss.
“It is the right thing,” said Vargas. “Radically reduce the risk or take modest exposure because the price allows you to do so,” he said.
Farmers Insurance Group is the fifth-largest homeowners multiperil writer in the United States with a 6.2% market share, based on direct premiums, according to BestLink.
The CEO said he has been traveling around the country— he noted a recent trip to Minnesota— and believes homeowners are much more willing today to assume more risk in exchange for more palatable premiums.
“Insurers like us should be part of that conversation,” said Vargas. They need to be willing to have “the uncomfortable conversations, the ones that are difficult and tough but allow you to be better and learn new ways” to operate and move forward.
Vargas spoke in response to queries from Lara about how insurers can meet the moment amidst unprecedented pressures.
Lara mentioned his department’s efforts to overhaul “20th century regulation” in effect for “21st century problems.” He noted declining affordability and availability.
“People are scared and concerned . . . scared of being dropped,” said Lara, also advocating increased communication.
Vargas threw support behind the use of data to help predict property losses from natural disasters, which is a change Lara has introduced in California, and said policyholders will mitigate risk, given the right incentives.
“You need the sophistication of the data today for the right risk for the future,” he said. Insurers who are confident they’re pricing risk accurately regain confidence in a market, he told Lara.
Zurich Insurance Group appointed Vargas as CEO of wholly owned subsidiary Farmers Group Inc., and as a member of the Zurich Group executive committee, 18 months ago.
He took over early last year, in the midst of what he called a time of great disruption in the industry. ”It’s so important to have clarity about what changes are needed,” said Vargas.
He started the list with the need to become “much more agile” and to find more ways to collaborate. “This industry is in the business of time” and can’t afford to waste it waiting to take action, said Vargas.
The CEO wants to increase trust with and by regulators, business partners and distributors. And said curiosity is a key component of change.
“Don’t think you have all the answers,” he said. “Be humble about trying to learn,” even from competitors, said Vargas.
At the same time, don’t forget to focus on results, he added.
Farmers, California’s second-largest homeowners writer, started limiting new business in the state last year, citing “record-breaking” inflation, higher reconstruction costs and the impact of severe weather events.
But it’s still open for business in the state, said Vargas, because the CDI is collaborating with stakeholders like Farmers.
Lara said the industry “can’t price ourselves out of this crisis . . .We as regulators need to make sure our markets are strong.”
Reduce some friction in the system, suggested Vargas, notably legal abuse, a term he said he prefers over social inflation. Every time a carrier overpays a claim it “affects the entire system,” the CEO said.
Underwriting entities of Zurich Insurance Group Ltd. currently have a Best’s Financial Strength Rating of A+ (Superior) and A (Excellent).
The five largest homeowners multiperil writers in California in 2022, based on direct premiums written, were: State Farm Group, with a 20.58% market share; Farmers Insurance Group, 14.46%; CSAA Insurance Group, 6.66%; Liberty Mutual Insurance Cos., 6.43%; and Allstate Insurance Group, 6.36%; according to BestLink.