California catastrophe model didn't prevent State Farm cuts

State Farm announced on March 26 that it was cutting 72,000 policies in California, citing wildfire risks, just two weeks after California’s insurance regulator proposed allowing the use of catastrophe (Cat) modeling to improve availability.

It is questionable whether the regulator’s efforts could have prevented the carrier from dropping policies, however, according to an insurance consumer advocate.

“State Farm’s latest action seems more related to their larger fiscal situation nationally than the pace of the administrative procedures around the Cat modeling and reinsurance pass through regulations,” stated Amy Bach, executive director of United Policyholders (UP), in a written response to questions.

Ricardo Lara, California Insurance Commissioner.

The California Department of Insurance’s (CDI) sustainable insurance strategy proposal includes an agreement with insurance carriers to underwrite in disaster-prone areas at least 85% of what they write in other areas not prone to disasters. CDI has prohibited reinsurance for these disasters, but is considering allowing it as part of the strategy, commissioner Ricardo Lara said in an April 5 media call hosted by the National Association of Insurance Commissioners (NAIC), the association of U.S. state insurance regulators. 

Lara is also co-chair of NAIC’s climate and resiliency task force. Earlier in March, NAIC called for property market data from insurers to get a more accurate picture of the home insurance market.

UP isn’t sold on the Cat model plans, though. In a July 2023 letter to CDI attorney Jon Phenix, Bach wrote, “We firmly believe that allowing the unfettered use of Cat models for rate setting will create more problems than it will solve. … We remain unconvinced that Cat models are fully taking into account the coverage reductions that insurers are implementing through high and multiple deductibles and limits on indemnification for water and smoke damage.”

In the letter, Bach also states that opaque and proprietary aspects of Cat models make it impossible for regulatory reviewers to evaluate their projections. She questioned insurers’ statements that Cat models make it easier to give discounts for mitigation, pointing out that revised flood risk models elsewhere eliminated mitigation discounts.

Bach proposed that instead of Cat models, CDI should instead allow insurers to apply a trend factor to past catastrophe losses to recognize the increase in wildfires, or an industry-wide catastrophic loss experience model, rather than individual insurers’ Cat models.