In response to the ongoing crisis in California’s homeowners insurance market, the Reinsurance Association of America (RAA) has released a comprehensive white paper offering insights and recommendations to address the challenges posed by wildfire-related risks and changing environmental conditions.
Since the devastating wildfire losses experienced in 2017 and 2018, the insurance industry has been grappling with the task of insuring homes and structures in an era marked by droughts, shifting environmental conditions conducive to wildfires, and demographic changes that have increased the number and value of properties at risk.
Adding to these challenges is a regulatory framework that was not designed to accommodate the rapidly evolving climate and frequent catastrophic wildfire risks in residential areas.
RAA President Frank Nutter commended California’s Governor Newsom, Commissioner Lara, and legislative leaders for their proactive efforts in funding wildfire risk reduction initiatives.
Nutter stressed the importance of ensuring insurance companies receive timely approval to charge rates that accurately reflect the risks they bear, allowing them to prudently insure catastrophe-exposed properties.
Currently, California policymakers are discussing potential legislation to address the ongoing crisis, including modernising the rate regulatory structure for new policies in line with Proposition 103.
One proposal being considered would permit insurers to include their actual reinsurance costs in their rate filings and authorise the use of catastrophic models to estimate expected insurance losses.
In exchange, insurers would be required to increase their share of catastrophe-exposed “distressed” markets to at least 85% of their statewide market share.
However, Nutter expressed reservations about the 85% threshold, cautioning against rapid expansion without ensuring adequate rates.
He emphasised that reinsurance cost and catastrophe modeling are essential tools in evaluating and approving risk-appropriate rates in a timely manner.
Furthermore, Nutter underscored the necessity of rate adequacy, stating that insurers must have sufficient rates in place when writing policies to avoid financial losses and insolvency.
He argued that incorporating reinsurance costs in rate-making makes economic sense and ensures that insurers only purchase reinsurance when it is financially prudent.
Nutter also warned policymakers about the risks of inaction, emphasising that adequate rates foster competition and consumer choice. Forcing insurers to write policies at inadequate rates can have short- and long-term adverse impacts on insurance availability.
He stressed that attracting essential insurance capital to address the challenges posed by climate change in California relies on rate adequacy.
In conclusion, the RAA is urging policymakers to review and consider their white paper and its recommendations. Recognising the increasing risk of catastrophes due to climate change, the RAA emphasises the importance of a prudent approach that ensures insurers can make a reasonable profit over time, thereby guaranteeing the availability of risk-bearing capital to meet the needs of California and its residents.
