SACRAMENTO — Months after California’s home insurance market was rocked by major companies pausing or limiting their coverage, the state’s top regulator announced Thursday that it would issue new rules to persuade insurers to open their operations in the country’s most populous state to continue.
Seven of California’s 12 largest insurance companies by market share have either paused or limited new policies in the state since last year.
Some state lawmakers attempted to introduce a bill that would address this issue. But they failed to reach an agreement before the legislative session adjourned for the year last week.
Here’s a look at what California Insurance Commissioner Ricardo Lara has proposed and how it would impact the state’s insurance market:
What rules apply to insurance companies?
Unlike most states, California heavily regulates its property insurance market.
In 1988, California voters approved Proposition 103. It said insurance companies would have to get approval from the state’s Department of Insurance before increasing their rates.
When setting their rates, insurance companies cannot take current or future risks of a property into account. You can only use historical data.
Insurance companies also write insurance themselves, a process called reinsurance. Companies are not allowed to consider their reinsurance costs when setting rates for homeowners in California.
WHAT IS THE PROBLEM?
Climate change has increased wildfires in California. According to the California Department of Forestry and Fire Protection, 14 of the 20 most devastating fires in state history occurred since 2015.
Insurance companies say it’s difficult to truly price in real estate risk because they can’t take climate change into account in their rates. They also complain about having to pay more for reinsurance, which they can’t recoup from ratepayers.
Many insurers have responded by pausing or limiting new business in the state. They also chose not to renew insurance coverage for some homeowners.
If homeowners who need insurance cannot obtain it from private insurance companies, they must purchase policies from the California Fair Access to Insurance Requirements (FAIR) Plan. Insurance companies doing business in California must deposit money into a fund to finance insurance coverage under the FAIR plan.
The number of people using the FAIR plan has almost doubled in recent years. Insurance companies are concerned about this trend. If the fund becomes insolvent, the insurance companies would have to cover the costs.
WHAT IS THE STATE’S PLAN?
California Insurance Commissioner Ricardo Lara said he would write new rules that would allow insurers to take climate change into account when setting their rates. He has also pledged to explore rules that would allow them to account for some of their reinsurance costs.
Rules requiring insurance companies to seek government approval to raise their rates would not change.
Lara said the state will only allow companies to adopt these new rules if they write more guidelines for people living in areas at risk of wildfires. He said this means companies in these areas must secure policies equal to at least 85% of their national market share. That means if a company insures 20 out of 100 homes, the company would also have to write 17 policies for homeowners in a wildfire-prone area.
What impact does this have on prices?
Some consumer groups, including California-based Consumer Watchdog, fear that insurance companies’ consideration of climate change in their rates will result in dramatically higher prices for homeowners.
But Lara said the new rules could also benefit homeowners. He said insurance companies may also consider improvements that owners have made to make their homes more resilient to wildfires. Companies might also consider the billions of dollars in public money the government has spent to better manage forests and reduce the risk of wildfires.
If the rules work and more companies stay in California’s insurance market, it could increase competition for customers and potentially keep rate increases at bay.
When do the rules come into force?
It would take a while for state regulators to write the rules. The process involves plenty of time for insurance companies and consumer groups to provide input. Lara said he gave the department a deadline of December 2024 to finalize the new rules.