How to thrive in the new California P&C insurance market

California holds a unique position in the American insurance landscape. This large market has not been without its share of challenges. Over the past year, major insurers have departed from the California market, while others have imposed restrictions on writing new policies within the state.

The issues underlying this situation are multifaceted, with insurers citing factors such as reinsurance costs, inflation, and the escalating impacts of climate change and natural catastrophes—particularly the state’s risk of wildfires.

In a promising turn of events, California Governor Gavin Newsom and Insurance Commissioner Ricardo Lara have recently embarked on a process to reshape the insurance market in the state. They have laid out a vision for comprehensive reforms through an executive order and subsequent proposal by the California Department of Insurance (CDI).

Proposed California insurance reforms

These proposed reforms are crafted to strike a balance, safeguarding consumers’ choices and security while ensuring insurers’ financial stability for a sustainable insurance market. There are a few key components worth highlighting: 

1.    Reinsurance inclusion: Historically, reinsurance has not been considered an allowable expense in California, requiring insurers to absorb these costs themselves. However, the cost of reinsurance has now surpassed the allowable profit margins for many carriers, prompting some to withdraw from the market. These proposed reforms seek to rectify this by permitting the inclusion of reinsurance costs in rate change calculations. This essential step recognizes reinsurance’s pivotal role in insurer risk management and market stability.

2.    Catastrophe risk projections: Another groundbreaking aspect of the reforms is the proposal to allow insurers to assess catastrophe risk using forward-looking projections derived from risk models. This shift acknowledges the inadequacy of relying solely on historical data, particularly in a world grappling with rapidly changing weather patterns and natural catastrophe events.

3.    At-risk market participation: In exchange for these concessions, the CDI will require that admitted insurers actively participate in covering homeowners in wildfire-prone areas at a rate of 85% of their statewide coverage. This strategic approach ensures that insurers commit to safeguarding the most vulnerable regions of California in proportion to their market share, thereby expanding the options and coverage for homeowners facing heightened wildfire risks.

Navigating the reforms

The proposed reforms herald a seismic shift in the insurance landscape. To navigate these changes effectively and seize the opportunities they present, P&C insurers must adjust their strategies within the market. Those who act swiftly and with foresight stand to gain a competitive edge. Three immediate actions insurers can take to excel in this new environment include:

1.    Low-risk properties in “at-risk” areas: Identifying and underwriting policies for low-risk properties within state-defined “at-risk” regions can provide a valuable head start. According to HazardHub data, approximately 25% of properties in these areas will likely yield profits at current rates, offering insurers early compliance and portfolio sustainability opportunities.

2.    Embracing advanced analytics: Understanding and embracing high-resolution risk analytics can empower insurers to precisely identify, price, and manage risks at a granular level. Employing sophisticated solutions that consider various risk factors to assess and differentiate risks can confer a significant competitive advantage.

3.    Strategic reassessment and rate plan refinement: Evaluating current market presence, refining risk appetite, realigning marketing strategies, and exploring avenues for differentiation becomes paramount. In a market where not every insurer can compete solely on price, adding value through speed, service ease, and innovative coverage options can attract customers – and help meet “at-risk” market share targets. By reevaluating strategies and rate plans, insurers can position themselves for success in California’s evolving insurance landscape.

While California’s insurance market grapples with formidable challenges, it remains highly insurable. HazardHub data underscores that more than 90% of property damage in the state concentrates in just 10% of its territory, marked with an F rating for wildfire risk. Thus, the majority of the state remains highly insurable.

As the state moves forward with these proposed insurance reforms, insurers must proactively and strategically adapt to the changes. They must evaluate their market presence, redefine their risk appetite, revamp marketing strategies, and explore avenues for differentiation. Embracing state-of-the-art risk analytics is essential to their success, equipping them with the capabilities to precisely identify, evaluate, and price risk.