Regulations that will allow insurers operating in California to use forward-looking catastrophe modeling in ratemaking have received final approval, marking a major step in the state’s efforts to stabilize its shaky insurance marketplace and expand coverage.
The regulations will now be enforced by California Department of Insurance Commissioner Ricardo Lara, who said the “first of its kind” rules will also require companies to expand coverage in areas with high wildfire risk.
“For the first time in history, we are requiring insurance companies to expand where people need help the most,” Lara said in a statement. “With our changing climate we can no longer look to the past.”
In exchange for the use of forward-looking cat models – a practice currently allowed in most other states – the department will require insurance companies to write more policies in wildfire-distressed areas.
In addition, the CDI has appointed Kara Voss, a climate scientist, to the newly created position of model advisor, to oversee the cat models and ensure their integrity. The new regulations will also require the models to account for wildfire mitigation efforts undertaken by homeowners and businesses.
Altogether, the changes aim to expand private coverage in the state and reverse the rapid growth of the California FAIR Plan, which Lara is also subjecting to regulatory changes.
Mixed reaction
Farming groups, homeowner groups and even environmental advocates hailed the rule’s finalization, saying the changes would allow for better pricing for policies and expanded coverage.
“Sophisticated wildfire risk models help insurers and reinsurers quantify risks more precisely, and agricultural properties that demonstrate minimal exposure should result in increased insurance access and reduced premiums,” said Peter Ansel, a senior policy advocate at the California Farm Bureau, in a statement.
But Consumer Watchdog, a non-profit group that advocates on behalf of consumers on insurance matters, said in a statement that the rules do not ensure adequate public oversight of the cat models and gut transparency provisions in the state’s insurance consumer protection laws.
“The rule will let insurance companies raise rates based on secret algorithms but not expand coverage as promised,” said Carmen Balber, executive director of the group, in a statement issued last week.
A year of reforms
The new rules are part of a series of reforms announced by Lara this year that aim to stabilize the state’s insurance market, which has been under strain due to recent catastrophic wildfires and other market pressures.
Numerous major insurers have announced in recent years that they were pausing or pulling back coverage in the state, prompting Lara to unveil a series of regulatory reforms starting in 2023.
Last week, Farmers Insurance said it would resume writing coverage for multiple personal lines, citing regulatory reforms.
Lara told this publication in a recent interview that the series of reforms his office is passing this year – which also will include reforms allowing insurers to use California-specific reinsurance in rates, and reforms to speed up rate reviews – can only work if insurers step up and do their part come January 2025.