Regulator orders insurers to explain "forecast gap"

Forecast-linked drift insurance, whose monthly premiums rise and fall automatically with the TDA's published permeation index, has grown explosively since its introduction three years ago and now accounts for over sixty percent of new drift-object policies. The selling point was months of low premiums when the index is low; but when the index stays high — as on the bayfront this summer — premiums rise and do not come down. Bay-area policyholders now pay 1.4 times what they paid in January, and the products are designed so that canceling makes it hard to return to cheaper conventional coverage.

The Financial Services Agency's request has three parts: state a numerical premium ceiling for sustained-high-index periods at signing, disclose the basis for each month's rate revision, and explain cancellation disadvantages in writing. "We are not rejecting the product design," the agency said. "But unlike weather, this index skews by neighborhood on a scale of years. The explanations did not let policyholders understand that."

Insurers defend the pricing as "fair rates matched to risk." An official at a major underwriter said: "Bay-area claims have genuinely risen. The rate is a tracing of the risk — the gap is not of our making."

Bayfront shopkeepers hear it differently. "It's the same as being told to move," said a hardware-store owner, 58. "The shop can't be moved. The index is set with no regard to our effort. Insurance meant as a precaution has become a price tag on where we live." The shopping-street association has begun sounding out insurers on group contracts to bring rates down.

The product's rapid spread owes much to timing: for its first two years, the bay index ran at historic lows, premiums held at about sixty percent of conventional coverage, and word of mouth did the rest. "Policyholders who felt the 'cheap months' recommended it to friends — whole shopping streets switched together," an industry source said. "Today's bayfront resentment is the mirror image of that early bargain."

Nor does the household impact stop at insurance. Index-linked thinking has begun spreading to parking fees and freight rates, and in some bayfront condominiums, management associations are split over whether to pass rising common-area premiums into monthly fees. Consumer-center inquiries about index-linked pricing in the first half of this year exceeded all of last year's.

The city assembly has taken note as well, with members observing that index-linked pricing "has begun to affect bayfront land values and the appetite to open shops"; an industry survey finds bay-area retail properties now take about 1.5 times as long to lease as last year.

The agency will decide by year-end whether to cap rate variation. "Index linkage is a rational invention," a senior official said. "But the more rational the invention, the more quietly it sorts people. Drawing the line is the government's job."