California wants public feedback on new insurance modeling regulation

California wants public feedback on new insurance modeling regulation | Insurance Business America

Catastrophe & Flood

California wants public feedback on new insurance modeling regulation

Comment period to culminate in a hearing in September

Catastrophe & Flood

By
Terry Gangcuangco

California Insurance Commissioner Ricardo Lara is seeking public feedback as he moves toward the final approval of new wildfire modeling regulation in the state. The public comment period will culminate in a hearing on September 17.

The new regulation sets out specific requirements for insurance companies in their future rate filings, including commitments to increase coverage in wildfire-prone areas as a condition for utilizing advanced wildfire catastrophe models that assess risks more accurately.

Additionally, it mandates public review of the models used in ratemaking, in compliance with California law. The regulation is introducing two firsts in California: pushing insurers to cover higher-risk homes in wildfire-affected areas and the adoption of forward-looking wildfire catastrophe modeling.

Lara’s strategy also addresses critical limitations in Proposition 103, a voter-approved law from 1988. Although the law allows insurers to propose rates based on future loss projections, it doesn’t require them to cover all residents. As climate risks have intensified, major insurers have raised rates and reduced coverage in high-risk areas, leading to a situation where the FAIR Plan has become the only available option for many consumers.

In June, the Department of Insurance released a first-ever map showing the expansion of FAIR Plan policies as traditional insurers withdraw. The proposed regulation aims to reverse this trend by encouraging insurers to write more policies in high-risk areas using modern catastrophe models.

California’s current regulations, which have remained largely unchanged for three decades, require insurers to apply a catastrophe factor to rates based on wildfire losses over the past 20 years. However, the outdated rules have led to sharp rate increases following major wildfires, without fully considering the growing risks from climate change or extensive mitigation efforts at local, state, and federal levels.

“Climate change is affecting every part of our lives, making insurance harder to find and more costly for those at the greatest risk,” Lara said. “With climate-driven mega-fires burning across the state, it is clear that relying on decades-old regulations only hurts our ability to prepare for the future.”

In Lara’s view, the strategy will help modernize the marketplace by restoring consumer options and safeguarding rate regulation experts’ review of rate filings.

“Over the past several years, the state has put billions toward wildfire mitigation efforts and homeowners have made significant investments in home hardening,” the commissioner went on to say. “Under Prop. 103’s existing regulatory framework, this is not accounted for by our existing retrospective, past-focused models for ratemaking.

Meanwhile, the proposed reform has elicited a range of responses from stakeholders, including those who support the move toward modernized catastrophe modeling and the inclusion of wildfire risk mitigation in insurance ratemaking.

Sarah Heard, director, MarketLab, The Nature Conservancy, commented: “Requiring catastrophe models, used by insurers for pricing, to incorporate landscape-scale mitigation is a big step forward in rewarding essential investments in wildfire resilience.”

For Napa County supervisor Anne Cottrell, the move toward a catastrophe model “makes so much sense” amid climate change.

“We need to be looking forward,” she asserted. “We need to ask the insurers to include consideration of community and large-scale wildfire risk mitigation, because that’s the right thing for communities to do to make their communities safer and their properties safer. And, we need to see that value reflected in the insurance industry.”

What do you think about this story? Share your thoughts in the comments below.

Related Stories

Keep up with the latest news and events

Join our mailing list, it’s free!