In a move to help drive back a developing insurance crisis across the state of California, that has witnessed companies pulling back on underwriting property insurance there, or exiting the state completely, Insurance Commissioner Ricardo Lara has unveiled a regulation to allow for an expanded use of catastrophe models to help insurers operate there more sustainably.
According to the announcement, the Department of Insurance currently allows the use of catastrophe models for earthquake losses and fire following earthquake.
However, the proposed regulation expands the allowable use of catastrophe models to include wildfire, terrorism, and flood lines for homeowners and commercial insurance lines.
Commissioner Lara explained: “My Sustainable Insurance Strategy is intended to address decades-long neglected issues. Under outdated rules, the growth of climate-driven mega fires has supercharged insurance costs for many Californians while making insurance harder to find.”
Adding: “We can no longer look solely to the past as a guide to the future. My strategy will help modernize our marketplace, restoring options for consumers while safeguarding the independent, transparent review of rate filings by Department of Insurance experts, which is a bedrock principle of California law.”
Moreover, the expansion to cover perils of wildfire, terrorism and flood is anticipated to enable more risk commensurate pricing, ultimately developing a more sustainable view of rates for insurance in California.
Commissioner Lara’s strategy also addresses a major limitation of Proposition 103, which was passed by voters in 1988.
Under that law, insurance firms are free to propose rates at any level needed to cover future losses but, unlike public utilities, are not required to cover all residents.
“With the combination of climate-intensified disasters, rising costs of repair and rebuilding, and global economic forces, major companies have increased rates while pulling back from higher-risk properties where the FAIR Plan is now the only option,” the announcement explains.
The key goals of the regulation is to make insurance rates more reliable, as well as make coverage more available, and develop knowledge across the state so California can continue to lead on consumer protection.
In addition, the regulation corrects a major shortfall of using historical data, which fails to account for wildfire mitigation.
Commissioner Lara’s announcement continues: “The regulation specifies that any model must incorporate the best available scientific information on risk mitigation at the property, community, and landscape scales, including risk mitigation initiated by local and regional utility companies. This forward-looking change will also enhance a recent regulation that Commissioner Lara spearheaded and now enforces, requiring wildfire safety discounts for homeowners and businesses and aligning with record investments in wildfire mitigation by Governor Newsom and the California Legislature.”
Further, the regulation also complies with California’s strong consumer protection laws. These laws state that anytime an insurance company seeks to change its rates, it must provide a complete rate application with all information that the Insurance Commissioner requires for review.
Further, the Department of Insurance will hold a public workshop to take input on the proposed regulation on April 23, 2024.
