California is proposing major insurance changes as it faces climate risks

California’s top leaders announced Thursday reforms to the state’s insurance system to stabilize the market, a major shift in the nation’s disaster-prone state, one of the world’s largest insurance markets.

Government action using executive orders came later Seven of the state’s top 12 carriers, including giants Allstate and State Farm, have scaled back coverage in the past year due to wildfires and the rising costs of such risks. Homeowners’ premiums are not commensurate with the risk they face, they said.

The government’s move could have national implications as insurers across the country grapple with the latest threats from climate change.

California Insurance Commissioner Ricardo Lara called it a “historic agreement” between regulators and the industry as his department works more closely with insurers to quickly evaluate and rule on their rate increase requests, which are now six months away.

His agency wants to more accurately price at-risk homes and encourage residents to harden and protect them from wildfires, and slow the rapid growth of California’s FAIR program, which, as Laura said Thursday, is “a first resort, not a last resort for many residents.”

In a major win for the industry, California reversed its position on barring insurers from using forward-looking catastrophe models, which are standard in other states, for more accurate pricing rates. Until now, the government allowed carriers to use only historical, 20-year data during pricing policy.

The reason, explained Amy Bach, executive director of United Policyholders, a consumer group, is that regulators fear that insurers using sophisticated catastrophe models may overstate how dangerous a part is by overcharging.

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Laura said insurers need to be transparent about how they use this data. If they don’t, the department has full authority to “claw” their rate up.

“This is a real crisis we’re in,” Laura told a news conference Thursday, acknowledging that the state’s current regulatory framework doesn’t meet its current needs and is actually hurting consumers and putting the theme at risk.

California is struggling to keep pace with a rapidly evolving climate emergency: How can homeowners insure their homes when they want to pay higher prices to carriers and pass that cost on to consumers? Places like Louisiana and Florida face similar problems.

With these moves, California is trying to avoid becoming Florida, which has seen its premiums rise rapidly as a result of recent legislation and rate hikes. Residents there pay an average of $6,000 a year, while Californians pay about $1,300. But industry groups say Californians have to pay more in the event of major disasters, and their homes generally cost more.

For years, California lawmakers have had a push-pull relationship with the industry.

Regulators don’t want to raise rates and let carriers fold complex modeling data into their policy decisions, but with more destructive and expensive catastrophes and higher costs to insure themselves through reinsurance, carriers have said they no longer want to take on more risk. Unless the government allows them to charge extra and bring in private companies to make those decisions.

Laura’s move to fix the market since 1988 comes after lawmakers failed to come up with a solution this session to loosen regulations and raise rates.

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This ripple effect squeezes the market and inevitably forces more residents to obtain policies through the state’s insurer, the California Fair Plan. It also happens in Florida, Louisiana and other states.

As part of their reform package, California will now require insurers to write “less than 85% of their statewide market share in distressed areas,” which Lara would identify; Reduce the amount of policyholders in the FAIR scheme and bring them back under private carriers; and implement $20 million worth of commercial and HOA improvements coverage from the fair plan.

Gov. Gavin Newsom (D) issued an executive order Thursday greenlighting Laura’s plans, authorizing the commissioner to take “emergency regulatory action” to expand coverage choices for consumers, especially in disadvantaged areas, speeding up the department’s rate approval process to keep the market competitive and improving, and making it solvent. Get more people out of the program than is fair to keep.

Newsom cited some of the industry’s concerns in his line, particularly carriers’ exposure to more billion-dollar extreme weather events, higher construction repair costs, global inflation and higher reinsurance premiums.

While the government has approved the rate hikes, they don’t match what industry is thinking of doing business in the disaster-prone state. Over the past 10 years, homeowner insurance companies have “done the worst in California nationally,” Laura said in her Thursday presentation.

Industry groups applauded California’s actions.

“California’s 35-year-old regulatory system is outdated, complex and fails to reflect the catastrophic losses consumers and businesses face from inflation, climate change, extreme weather and more residents living in wildfire-prone areas,” Denny Ritter, APCIA Department Vice President for State Government Relations, said in a statement.

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“The actions announced by the Commissioner today are the first of many necessary steps to address the deterioration of the insurance market.”

While the Insurance Commissioner’s package is an important step forward, experts say it is still missing some key elements. For one thing, the FAIR program is “in big trouble,” said Michael Wara, a wildfire and insurance expert at the Stanford Woods Institute for the Environment, and more needs to be done to reduce the amount of coverage state insurers do. Quick action is also required as homeowners must build Protected areas Government backed project to prevent fire place.

There are also questions about how quickly Laura and the department can act. The commissioner said the executive action enables his department to “move quickly and set regulations with a sense of urgency.”

He wants all these reforms to be implemented by December 2024, he said. But as Wara points out, homeowners are in the thick of fire season and need serious action now.

“It’s an emergency,” he said. “By what process will Laura get this? How fast can she do this? Time is of the essence in all of this.”

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