California Insurance Commissioner Ricardo Lara unveiled today an effort to force insurers to resume writing policies in high-fire-risk areas 鈥� part of an overall plan to address the state鈥檚 .
It consists of three different ways insurers can meet minimum requirements for writing policies in areas deemed 鈥渉igh risk鈥� or 鈥渧ery high risk鈥� by Cal Fire. Insurance Department regulators said this hybrid approach takes into account the state鈥檚 complex geography as well as the different risk levels that big and small insurers can afford to assume. Lara said this should help homeowners who have lost coverage or been forced to turn to the last-resort FAIR Plan.
Insurance companies would have these three options:
- Write 85% of their statewide market share in high-risk areas. The department explains it this way: 鈥淚f a company writes 20 out of 100 homes statewide, it must write 17 out of 100 homes in a distressed area.鈥�
- Achieve one-time 5% growth in the number of policies they write in high-risk areas.
- Expand their number of policies 5% by taking people out of the strained a pool of insurers the state requires to provide fire-insurance policies when property owners can鈥檛 obtain insurance elsewhere.
The department released maps showing where wildfire risk and FAIR Plan policies are concentrated, as well as a list of counties and ZIP codes of high-risk areas, that correspond with the requirements. Insurers can apply the 85% or 5% option in either counties that regulators have identified as distressed, or in ZIP codes the regulators have deemed 鈥渦ndermarketed鈥� and high risk 鈥� meaning the ZIP codes have at least 15% of policies in the FAIR Plan and have a certain percentage of residents who can鈥檛 afford their premiums.
Or insurance companies can choose the third option, and reduce the number of policies in the FAIR Plan statewide.
Regulators will update these areas at least once a year.
Gov. Gavin Newsom hailed Lara鈥檚 announcement as 鈥渃ritical鈥� to fixing the state鈥檚 insurance crisis. 鈥淎s the climate crisis has rapidly intensified, the insurance system hasn鈥檛 been seriously reformed in 30 years 鈥� this is part of our strategy to strengthen our marketplace and get folks the coverage they need,鈥� the governor said in a statement.
A growing number of property insurers have paused or stopped writing policies in California in recent years, citing increased fire risk and inflation. If today鈥檚 proposal works as intended, homeowners could eventually find it easier to buy insurance with adequate coverage, as opposed to the expensive fire-only policies that many recently have been forced to buy from the FAIR Plan.
The proposed options aren鈥檛 technically requirements, because the state cannot legally require insurers to write either homeowner or commercial property policies. But the state expects insurers to comply because failure to do so would mean insurers would not be able to take advantage of something they鈥檝e lobbied for long and hard: catastrophe modeling.
Lara unveiled the first part of his plan to allow for catastrophe modeling in March; this is the second part of that plan. Catastrophe modeling takes into account historical data and combines that with projected risk and losses 鈥� something insurers have been able to do in every other U.S. state but California. Insurers will be able to use it here once Lara鈥檚 overall plan takes effect as promised at the end of the year.
Today鈥檚 announcement made clear what the companies will have to do in return.
鈥淚nsurance companies need to commit to writing more policies and my department will need to verify those commitments and hold them accountable,鈥� Lara told reporters this morning. When they submit rate reviews, insurers will state which of the pathways they choose. If they don鈥檛 fulfill the requirements of that pathway, 鈥渕y department will use its law enforcement authority and reconsider rate reviews,鈥� the commissioner said. That means possible lowering of rates and even refunds, according to his staff.
Lara鈥檚 staff said they established the requirements for minimum coverage in distressed areas after talking with different stakeholders, including insurance companies that said the requirements were achievable. But the draft regulations also include a possible out for insurers, who would be able to request 鈥渁lternative commitments鈥� because of changes in their size or scope of coverage, or the 鈥渇requency or severity of recent events鈥� affecting them.
The draft regulation would give insurance companies two years after a rate filing to comply with the quasi-requirements 鈥� time regulators said the companies need to be able to write those policies. 鈥淲e expect them to get started right away, but recognize they just can鈥檛 flip a switch,鈥� said Michael Soller, deputy commissioner and spokesperson for the Insurance Department.
But Consumer Watchdog Executive Director Carmen Balber said in a statement that she sees those two years as a loophole that 鈥渓ets insurance companies off the hook if they fail to meet their commitments.鈥� Meanwhile, she said, consumers would have been paying higher premiums.
鈥淭he rest of the plan will still mean quick, massive rate hikes,鈥� she told CalMatters.
One insurance industry group, the American Property Casualty Insurance Association, did not address any specifics of the plan released today, other than to say it 鈥渞emains committed鈥� to working with the Insurance Department.
Rex Frazier, president of the Personal Insurance Federation of California, called the proposal 鈥渃omplex, with many trade-offs,鈥� but said his group also remains committed to working with Lara.
As with all the regulations the commissioner is proposing, this latest one is subject to public comment. The department is holding a public workshop June 26 at 2:30 p.m. and is accepting written comments until June 27.
Lara has yet to release the other main parts of his overall plan, including making improvements to the FAIR plan and allowing insurers to include reinsurance costs in their premiums.
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