Although insurance availability will increase, premiums may well skyrocket even further
New California Insurance Commission rules will require insurers to write more homeowners insurance policies in wildfire-prone areas.
Most likely, insurance consumers reading this will think that is heartening news. However, there is a wrinkle — although the regulations giveth via their mandates that insurers write policies in fire-prone areas, they also will most likely taketh away from consumers’ wallets as their combined effect ultimately will allow companies to increase their rates by as much as 40 to 50 percent, according to a study by a consumer watchdog group. That is because in exchange for increasing areas wherein they offer homeowner insurance coverage, insurers will now be able to consider climate change and the costs of reinsurance when setting their premiums.
California Insurance Commissioner Ricardo Lara has spearheaded a year-long effort to overhaul regulations imposed on insurers to address the insurance market crisis — a crisis that has seen an exodus of several of the largest insurers from writing policies in the state.
On Dec. 13, Lara authorized a regulation on an emergency basis that allows insurers to incorporate catastrophe modeling into ratemaking when submitting their premium cost proposals to the commission for approval. The models are computer programs that try to predict the likelihood and expense of disasters, including wildfires, utilizing complex variables. Previously, insurers were precluded from including future catastrophe projections and could only utilizehistorical losses, making California the only state to impose such a restriction on regulated insurers. On Dec. 30, Lara authorized a Net Cost of Reinsurance in Ratemaking Regulation requiring insurance companies — for the first time — to increase coverage in fire-distressed areas, ensuring more options for Californians while limiting the costs that insurers can pass on to customers.
Reinsurance is a financial tool that is a component of how insurance companies manage their risk portfolios associated with the policies they write to homeowners and business owners. Insurers acquire reinsurance from other larger insurers so as to limit their payouts during huge wildfires and other catastrophes.
All other states except California have allowed for the costs of reinsurance to be considered in setting premium rates. A 2023 review of climate risk strategies by the California Department of Insurance revealed that reinsurance is the primary strategy employed by companies seeking to write policies in higher risk areas in this state and nationwide. Hence, Lara’s decision to authorize insurers to include reinsurance cost projections in their proposed rates, but as a condition to that concession, the regulation mandates that the insurers increase their coverage in fire-prone areas.
How the quid pro quo works
Insurance companies are required to demonstrate that they will write policies in disaster-prone areas at a rate of at least 85 percent of their statewide market share, with annual increases until that threshold is met. That means that an insurer with a 10 percent share of California’s home insurance market would have to write 8.5 percent of the policies in such areas.
Companies will have to increase their policy writing in areas experiencing disasters by 5 percent every two years until they meet the threshold.
The CDI released preliminary maps this year of the areas considered to be disaster-prone. Southern California neighborhoods include zip codes in Malibu as well as Beverly Hills and other mountain communities. Homeowners in those areas have been turning to the FAIR Plan, California’s insurer of last resort, which does not offer comprehensive policies. FAIR provides up to $3 million in coverage for residential properties, an amount that is deficient to adequately insure against losses that might be faced by many Malibu homeowners.
The new regulation treats reinsurance like other insurance company expenses under Prop. 103, a regulatory provision requiring the commissioner to approve insurers’ premium rates. Other expenses include claims handling or agent commissions. The new regulation establishes an industry-wide standard cost of reinsurance and caps the reinsurance costs that can be charged to consumers. Any companies spending more than the industry standard cannot pass such costs onto policyholders. Importantly, the regulation limits costs to those incurred in California only. Thus, consumers do not have to share in the costs incurred relating to insuring against hurricanes or other disasters nationwide.
Advocacy group Consumer Watchdog warned that the new regulation would allow insurance carriers to increase home insurance rates by 40 percent to 50 percent, based on experiences in other states.
“Tellingly, the commissioner did not do a cost impact analysis of his plan on consumers. That’s because this plan is of the insurance industry, by the insurance industry and for the industry,” said Jamie Court, the organization’s president. “The commissioner has left no opportunity for public comment on the regulation because it is final as he issued it on an emergency basis.”
Nevertheless, the regulatory compromise is most likely the best outcome for addressing what is rapidly becoming an increasingly challenging homeowners insurance market.
In some California counties, nonrenewal rates have increased to more than 500 percent since 2018, according to a New York Times report addressing a recent Congressional investigation which revealed that more than 1.9 million home insurance contracts nationwide have been dropped. When one cannot secure home insurance, one cannot obtain a mortgage and, for many consumers, that translates into not being able to purchase a residence. As the Congressional investigation noted, when communities are determined to be too dangerous to insure, there is a risk that property values will decline. If that happens, there will be less tax revenue for schools, police, and other social services. Simply stated, that slippery slope is not a path that either Malibu or its residents want to endure.
Some carriers have reacted favorably to the new regulations, with Farmers Insurance saying it will resume offering coverage for multiple lines of insurance in California to new customers.