California Insurance Commissioner Ricardo Lara announced on June 12 the next steps to expand insurance options for homeowners and businesses in the state, especially in wildfire risk areas.
Mr. Lara said insurers will be able to use “catastrophe modeling”—or risk-based data—when setting rates if they write more policies in high-risk areas, with additional requirements for the state’s largest insurers. Under his plan, all insurers must also give discounts to policyholders who have invested in fire mitigation in or around their homes.
Last year, Mr. Lara announced that he had reached an agreement with insurers in the state requiring them to write more policies in high-risk areas in exchange for allowing them to use the so-called catastrophe modeling system when setting rates.
Previously, such insurance companies set rates based on historical data, such as fires in the past 20 years, which they have said is a poor predictor.
According to the commissioner’s announcement, larger insurance companies with a “major presence” in distressed areas must write a minimum of 85 percent of their policies in higher-risk ZIP codes. This would go into effect within two years of an insurer’s rate being approved by the commission.
Companies who already meet the 85 percent writing threshold must maintain those policies for two years in order to use catastrophe modeling in future rate increase requests. Smaller companies that mostly write policies outside of wildfire risk areas will also need to add new insurance customers in riskier areas by 5 percent in return for the same.
Also, commercial insurance companies are now required to increase coverage by 5 percent in wildfire-distressed areas if they are to also use catastrophe modeling, which will see more policies written for owners of farms, wineries, homeowners and condo associations, and other businesses, according to the recent announcement.
Mr. Lara first announced what he calls his Sustainable Insurance Strategy in September 2023, calling it the “most significant insurance reform in 30 years” for the state.
According to Mr. Lara, decades-old regulations in the state under Proposition 103, passed by voters in 1988, allow insurers to choose where they write policies, leading some to avoid risky areas.
This has led homeowners and businesses in those areas to be left with a state-run option—known as the FAIR Plan—that provides basic coverage when other insurers aren’t available but at significantly higher rates.
“If you are stuck on the FAIR Plan because of your unique wildfire risk, there will be help for you,” he said.
Included in the latest announcement, the Department of Insurance also released a first-ever map highlighting FAIR Plan policies in areas with higher wildfire risk. The map, which was a collaboration with CAL FIRE, will help insurers know where more policies are needed, according to officials.
“This type of coordination and alignment between state agencies is a critical part of our success in preparing communities for wildfire,” State Fire Marshal Daniel Berlant said in the statement.
The department plans to announce next month another part of the strategy to allow insurers to factor in the costs of reinsurance—insurance purchased by insurers to cover losses—in their rate increase filing requests.
Also in July, Mr. Lara plans to require the FAIR Plan to increase coverage to $20 million per structure for larger condo and homeowners’ associations, farms, and other businesses, according to the statement.
According to a September report by the Insurance Information Institute—a New York-based organization that provides information on insurance to consumers—insurers in California failed to collect more from their policyholders’ premiums than what they paid in claims between 2013 and 2022, with $1.08 spent for every $1 received.
According to the institute’s report, recent disaster-prone years in California have led to unprofitability, with fires in 2017 and 2018 costing insurers more than $2 for every $1 they took in.
In 2018, the Camp Fire, the deadliest and most destructive wildfire in the state’s history, destroyed more than 18,000 buildings in Northern California’s Butte County.
Some regulations under Prop. 103, including what’s known as an intervenor process, are partly to blame according to the institute. Under the process, the state’s Department of Insurance reviews all proposed rate increases that are 7 percent or greater, which can sometimes take years, according to officials for the institute.
California’s yearly cost of insurance for a $300,000 home is below the national average and “significantly” less than some other states, according to a June 12 statement from California Gov. Gavin Newsom.
According to Mr. Newsom, California’s average for such insurance yearly is $1,405, compared to Texas at $3,851, Florida at $4,419, and nationwide at $2,601.
