California Forced Insurance Companies to Drastically Increase Policies in High Wildfire Risk Areas

California Insurance Commissioner announced a new regulation on December 30th aimed at ensuring residents living in wildfire-prone areas can access home insurance. This comes as several major insurance companies have pulled out of the California market or significantly raised premiums, leaving homeowners struggling to maintain their insurance plans.

The Insurance Commissioner, Ricardo Lara, stated that the regulation is designed to restore market stability while addressing the growing risks. Lara emphasized that Californians should have a reliable insurance market and that insurance companies should not withdraw from communities vulnerable to wildfires and climate change.

Under the new regulation, insurance companies operating in California must have at least 85% of their policies signed in high-fire-risk areas. Companies falling short of this requirement must increase such policies by 5% every two years until meeting the threshold.

Lara’s office mentioned that currently there is no legal requirement in California for insurance companies to provide coverage in high-risk areas. Additionally, a provision has been added to prohibit companies from passing on reinsurance costs to policyholders.

“Reinsurance” is a financial tool used by insurance companies to manage their risk portfolios. This tool, often referred to as “insurance for insurers” by the National Association of Insurance Commissioners (NAIC), transfers risk to reinsurance companies that take on some or all of the risk of one or more policies.

While all other states allow reinsurance costs to be included in premiums, Lara stated that a review on climate risk strategies in 2023 by the California Insurance Department and the non-profit organization Ceres focused on climate change policies showed that reinsurance is the primary strategy for most insurance companies to continue underwriting and expanding coverage in high-risk areas.

Insurance companies are also prohibited from engaging in “model selection,” which involves choosing risk models that result in higher rates for consumers. Lara’s plan includes allowing prospective catastrophe modeling rather than requiring companies to calculate premiums based on historical losses.

Lara’s “Sustainable Insurance Strategy” is expected to be rolled out this year. His office indicated that the new rules will work in conjunction with other reforms led by Lara to increase insurance options for state residents.

Over the past three years, seven out of twelve top insurance companies, including California’s largest State Farm, have ceased issuing new policies in California. Many cite the reasons for pulling out of California as wildfire risks and cumbersome insurance regulations.

However, Farmers Insurance resumed underwriting certain types of insurance on December 14th and increased the number of home policies they offer.

Rex Frazier, President of the California Personal Insurance Alliance, representing many insurance companies, expressed hope for more changes. Yet, opponents of the new regulation argue that it will further increase costs for homeowners.

Consumer Watchdog, a Los Angeles-based non-profit organization, stated in a January 2nd post that the reinsurance requirement could allow insurance companies to raise home insurance costs by up to 50% without significantly expanding wildfire coverage.

Jamie Court, the organization’s president, wrote, “This plan is designed by the insurance industry for the insurance industry. The Department provided no opportunity for public comment before finalizing the regulation, releasing it in an emergency manner. This is the worst power grab.”