California to offer insurers more leeway to set rates for fire risk

California’s insurance commissioner announced a new regulatory plan backed by the industry that would allow insurers to factor future climate risks into their pricing and require them to offer more coverage in fire-prone areas.  

The announcement on Thursday, bolstered by an executive order from Governor Gavin Newsom, came after several major insurers, including State Farm General Insurance Co. and Allstate Corp., said they would stop issuing new homeowner policies or renewing existing ones in a state that has been ravaged by wildfires in recent years. The insurers argued that California’s current rules, which limit their ability to use predictive models and curb rate increases, made it too costly to cover homes.

The new agreement reached with insurers could result in higher premiums for homeowners across the state, adding another challenge in one of the country’s most expensive real estate markets.

“Making insurance more available is becoming critical for our entire economy — with the climate crisis coupled with historic inflation, we are truly living in unprecedented times,” Insurance Commissioner Ricardo Lara said at a briefing. “It is clear we cannot keep going down the same road without any action or change.”

The new regulations, which haven’t been formally proposed, would give insurers more flexibility to use forward-looking data on climate change, instead of relying on historical data, subject to the approval of the commissioner. As part of the plan, insurers agreed to write at least 85% of their statewide market share in areas designated as high-risk by the state, Lara said.

The deal is the result of months of negotiations. Insurance companies said California’s consumer-friendly regulations didn’t reflect the rising damages from wildfires and surging costs to rebuild homes. Consumer advocates have accused the industry of seeking to sidestep a cumbersome regulatory process in search of unnecessary rate hikes.

State Senator Bill Dodd, a Democrat who represents parts of fire-scarred Napa County and sits on the Senate Insurance Committee, said California needs to ensure homeowner policies are available even if costs increase around the state.

“There are people that are nowhere near the wildfire danger that aren’t being renewed,” said Dodd. “This helps stabilize the entire market.”

The shrinking insurance market has forced many California homeowners in areas that are threatened by wildfires to go without property insurance. Others have switched to the FAIR Plan, a state-mandated insurer of last resort that saw enrollments grow 70% between 2019 and 2022.

The American Property Casualty Insurance Association, a trade group representing home, auto and business insurers, said in a statement that it looked forward to working with Lara and other stakeholders on “meaningful reforms” to ensure consumer access to coverage.

“Everyone understands that California’s insurance market is in a spiraling crisis that requires immediate policy solutions to protect consumer access to the coverage they need,” said Denni Ritter, a vice president at the association.

Lara’s proposal doesn’t require legislative action but still faces a lengthy rulemaking process and a series of workshops where the state will discuss climate-risk modeling. The insurance commissioner hopes to complete the regulatory process by December 2024, a spokesperson for his office said.

Jamie Court, president of the advocacy group Consumer Watchdog, said the group will scrutinize the drafting of the regulations.

“It’s bound to drive up premiums,” said Court. “This is going to be a bonanza for the insurance companies if we’re not careful.”