New California Insurance Rule Forces Carriers to Boost Coverage in Fire-Risk Areas

Firefighters work at a home devastated by the Franklin Fire in Malibu, Calif., on Dec. 11, 2024. Jae C. Hong/AP Photo

California’s insurance chief issued a new regulation on Dec. 30 to ensure residents living in wildfire areas have access to homeowner policies.

Homeowners in the state have struggled to maintain insurance plans after several major carriers retreated or markedly increased costs.

Insurance Commissioner Ricardo Lara’s regulation aims to restore stability to the market while also addressing growing risks, he said in a statement on Monday.

“Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change,” Lara said. “This is a historic moment for California.”

The new rule mandates that insurance companies operating in California write at least 85 percent of their policies in wildfire-prone regions of the state. Companies that fall short will have to increase the number of such policies by 5 percent every two years until the threshold is met.

The state currently has no legal requirement for insurers to provide coverage in high-risk areas, according to Lara’s office.

Lara also included a clause that would prohibit companies from passing on reinsurance costs to their policyholders.

“Reinsurance” is a financial tool used by insurance companies to manage their risk portfolios. The tool, often referred to as “insurance for insurance companies,” transfers risk to the reinsurance company, which assumes all or part of one or more policies, according to the National Association of Insurance Commissioners (NAIC).

All other states allow for costs of reinsurance in rates. A review of climate risk strategies in 2023 by the state’s Insurance Department and Ceres, a nonprofit group focused on climate change policy, revealed that reinsurance is the primary strategy most insurance companies use to continue to write and expand coverage in higher-risk regions, according to Lara.

Insurance companies would also not be allowed to “model shop,” or choose risk models that produce higher rates for consumers. Lara’s plan includes allowing for forward-looking catastrophe models, instead of requiring companies to calculate rates based on historic losses.

Lara’s “Sustainable Insurance Strategy” is expected to be rolled out this year.

Firefighters battle the Franklin Fire in Malibu, Calif., on Dec. 10. Jae C. Hong/AP Photo

The new rules operate in conjunction with other reforms that Lara has spearheaded to increase coverage options for state residents, according to his office.

Seven of the top 12 insurance companies, including California’s largest insurer, State Farm, stopped writing new policies over the past three years in California.

Many of the companies cited wildfire risks and burdensome insurance regulations as reasons for leaving the state.

Farmers Insurance, however, resumed writing policies on Dec. 14 for some types of insurance and increased the number of homeowners’ policies it would offer.

Rex Frazier, president of the Personal Insurance Federation of California—an advocacy group representing many insurance companies—told The Epoch Times in December that he hoped to see more change.

“What this Farmers announcement indicates is that there’s been a lot of work done and we should start to see some changes,” Frazier told The Epoch Times. “Hopefully, we’ll see more of these announcements and start to see small cracks in the dam that set the stage … and we can start seeing more fundamental change.”

One opponent of Lara’s new regulation, however, claims it would further increase homeowner costs.

The reinsurance regulation would allow insurance companies to drive up home insurance rates by up to 50 percent, without offering a substantive expansion in wildfire coverage, the nonprofit Los Angeles-based consumer organization Consumer Watchdog said in a Facebook post on Thursday.

“This plan is of the insurance industry, by the insurance industry, and for the industry,” wrote Jamie Court, president of Consumer Watchdog. “The commissioner has left no opportunity for public comment on the regulation before it is final by issuing it on an emergency basis. It’s the worst type of power grab.”