Insurance companies have written fewer policies for residents in California areas that are deemed to have high wildfire risks due to climate change. This has caused homeowners in these areas to have no coverage plan for their properties and instead have to purely rely on the California FAIR plan, which was created as an insurer of last resort. This led to a massive policy overhaul when California Department of Insurance Commissioner Ricardo Lara proposed one of the most significant insurance reforms in 30 years.
“Californians in every corner of our state are frustrated with outdated regulations and desperate for change,” said Commissioner Lara. “Whether you live in the Sierra or the foothills, along the coast or in a city, California is not a ‘one-size-fits-all’ place, and we need to be inclusive. We are enacting a major reform that will result in insurance companies writing more policies, so if you are stuck on the FAIR Plan because of your unique wildfire risk, there will be help for you.”
This plan allows insurers to use computer models to predict future losses in areas with high wildfire risks when requesting rate increases from the Department of Insurance in exchange for writing more policies in these areas. The department released ZIP codes and counties where insurance providers are expected to write more policies. These policies use data that factors in wildfire risks, the percentage of homes on the FAIR plan, the average cost of insurance, and the per capita income level in each district.
Previously, insurance companies were not allowed to use these technologies when asking the state to increase their rates. Instead, they were only allowed to review data from the past two decades and project their losses based on their inferences. California is the only state that has this mandate, which trade groups criticize as being “obsolete.”
This deal is part of the Commissioner’s Sustainable Insurance Strategy which aims to solve California’s declining insurance market caused by these unpredictable conditions. The Department of Insurance cannot force these providers to write policies, but these new reforms aim to incentivize them to get back into the market for these high-risk areas.
“This proposal is complex, with many trade-offs, including insurer commitments that no other state requires,” Seren Taylor, a lobbyist and vice president of the Personal Insurance Federation of California, said in a statement. “However, we remain committed to working with all stakeholders to increase insurance availability and restore the health of the insurance market.”
One provision in this proposal states that for insurance to gain access to these computer models, they must commit to covering a certain number of homes in these high-risk areas or increase the existing policies in that area by 5%.
The proposed reforms have been met with mixed reactions, with some parties approving the policy and others saying that they feel left out. “There is some concern that not all the areas that are in crisis are covered,” said Jolena Voorhis from the League of California Cities.
Others state that the 5% threshold can be considered a loophole and should therefore be eliminated. Michael Delong from the Consumer Federation of America said that the current proposed policies had “too many ways for insurers to argue or evade their way out of serving Californians.”
The proposed reform is still under review and is expected to be completed by the Department of Insurance within the year.
