California announces plan for insurance policies in high wildfire-risk areas

Summary

The California Department of Insurance has announced a plan to increase the availability of homeowners and commercial property insurance in high-risk wildfire areas of the state. The key points of the plan are:

Insurance companies will be allowed to use catastrophe modeling in ratemaking if they commit to increasing coverage in designated "distressed areas" with high wildfire risk.
For residential insurance, insurers must either write policies equivalent to 85% of their statewide market share in distressed areas or increase policies in these areas by 5% over two years.
For commercial insurance, insurers must increase coverage in eligible high-risk ZIP codes by 5% of their total insurable value over two years.
The Department released a statewide map showing areas where wildfire risk and FAIR Plan policies are concentrated to guide insurers on where they need to write more policies.
Consumer advocates expressed concerns about the lack of transparency in the catastrophe models and called for the development of a public model for setting rates or benchmarking private models.

The goal of the plan is to reduce the number of properties insured under the state's FAIR Plan (insurer of last resort) and make comprehensive coverage more available in high-risk areas by incentivizing private insurers to participate in these markets.

California announces plan for insurance policies in high wildlife-risk areas – NBC 7 San Diego

If you’re one of thousands of Californians who lost their home insurance coverage due to wildfire risk, this development may apply to you.

On Wednesday, the California Department of Insurance released further details of a plan to increase the writing of homeowners and commercial insurance policies in areas of the state with high wildfire risk.

“Californians in every corner of our state are frustrated with outdated regulations and desperate for change. 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,” said Commissioner Ricardo Lara.

As part of the announcement, the department released a new statewide map it developed showing areas where wildfire risk policies are concentrated.

There are 19 areas in San Diego County on the map including:

Alpine, California
Boulevard, California
Campo, California
Descanso, California
Dulzura, California
Guatay, California
Jamul, California
Julian, California
Pine Valley, California
Potrero, California
Julian, California
Pala, California
San Diego county, California (Palomar Mt)
Pauma valley, California
Armona, California
Ranchita, California
Santa Ysabel, California
Valley Center, California
Warner Springs, California

With this map, insurance companies will have direct knowledge of where they need to write more policies in the state in order to take advantage of certain financial incentives.

The department took a hybrid approach due to the state’s large population and complex geography.

Under the plan (click here https://www.insurance.ca.gov/0400-news/0100-press-releases/2024/release023-2024.cfm), companies would commit to writing policies for a certain number of homes in regions of the state considered at greater risk of wildfires.

In return, the companies would be allowed to use "catastrophe modeling" to predict future losses when asking to raise rates.

According to the National Association of Insurance Commissioners, catastrophe models are used to quantify the financial impact of wildfires, using computer models that project future claims risks, a concern due to massive wildfires caused by drought and climate change. Currently, historical claims data are used in preparing rate hike requests.

The commission is holding a public workshop on June 26. After that workshop, the department will review public input before issuing the full regulations for adoption by the end of the year.

The agency hopes to have the regulations in place by the first of the year.

News: 2024 Press Release

For Release: June 12, 2024

Media Calls Only: 916-492-3566

Email Inquiries: cdipress@insurance.ca.gov

Commissioner Lara unveils next steps in his strategy to expand coverage options for Californians in areas of high wildfire risk

First-ever wildfire risk map showing where insurance companies need to write more coverage

LOS ANGELES — Insurance Commissioner Ricardo Lara today released further details of his transformative plan to increase the writing of homeowners and commercial insurance policies in areas of the state with high wildfire risk. This action is the next step of his Sustainable Insurance Strategy that will help restore coverage options for Californians across the state while safeguarding the integrity of the state’s insurance market. Commissioner Lara is keeping California on course for the most significant insurance reform in 30 years by releasing regulatory text outlining the commitments that insurance companies must make in order to use forward-looking catastrophe models for ratemaking. The release of this regulatory text and announcement of a June 26 public workshop is part of the package of regulatory language designed to incorporate the use of catastrophe models in California ratemaking.

“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.”

Under Proposition 103 enacted by voters in 1988, insurance companies are legally free to choose where they will write policies in California. As a result, insurance companies are writing more and more in areas of the state deemed less risky, especially with the continued threat of climate change. This most affects residents and business owners in areas with wildfire risk where the California FAIR Plan has become the only option for insurance, not the last resort as it was intended. Under Commissioner Lara’s strategy, insurance companies will be allowed to use forward-looking catastrophe models if -- and only if -- they increase writing of policies in these wildfire distressed areas, helping fix a fundamental shortcoming of Prop. 103.

“We are addressing this crisis of insurance availability head-on. For the many Californians who live anywhere where wildfires are a threat, my Strategy will increase their options while requiring insurance companies to take their wildfire safety actions seriously,” continued Commissioner Lara. “This builds on my first-in-the-nation Safer from Wildfires regulation by requiring insurance companies take into account wildfire mitigation efforts at the individual property, community, and regional level.”

Under this regulatory package, insurance companies must detail where they are writing policies in submitted rate filings and the Department will use its existing enforcement authority to hold them accountable. Insurance companies using catastrophe models also will be required to take into account the steps taken by policyholders to mitigate wildfire risk.

“Technology is harming consumers not helping them when it comes to making insurance more available and affordable. I commend the Department for insisting that there be a tangible benefit for consumers,” said Amy Bach, Executive Director of United Policyholders, a non-profit 501(c)(3) organization founded in 1991 that informs and advocates for insurance consumers across the country. “The Department is intent on this being a two-way street where consumers are better served. We need a public model as a benchmark and strong regulations to prevent overcharges and unfair underwriting practices.”

First-ever insurance map shows where increased coverage is needed

As part of today’s announcement, the Department released a statewide map that it developed showing areas where wildfire risk and FAIR Plan policies are concentrated. With this map, insurance companies will have direct knowledge of where they need to write more policies in the state in order to utilize catastrophe modeling in their rates that are subject to Department approval. The Department took a hybrid approach due to the state’s large population and complex geography.

The Department used insurance data first to identify ZIP Codes in areas of wildfire hazard where more than 15% of policies are written by the California FAIR Plan, the state's insurer of last resort, as well as ZIP Codes where incomes are low and insurance premiums are high, namely above $4 per $1,000 of coverage. To be more inclusive, the Department also identified counties where greater than 20% of homes are considered high risk by a review of that county’s aggregate fire risk scores. Finally, as part of new growth benchmarks, insurance companies must take FAIR Plan policies facing wildfire risk from more urban areas.

The map aligns with recent work by CAL FIRE identifying fire hazard zones where mitigation resources are targeted, thus amplifying those efforts. The Department will update this information from time to time but no less than once every year.

“This type of coordination and alignment between state agencies is a critical part of our success in preparing communities for wildfire,” said State Fire Marshal Daniel Berlant. “Commissioner Lara’s work aligns with CAL FIRE’s wildfire mitigation efforts and builds on major investments the state is making to protect residents.”

Insurance companies must write more policies

This hybrid approach enacts an agreement that Commissioner Lara reached with insurance companies last year to cover at least 85% of properties in distressed areas. The new regulatory text also recognizes the complexity of California’s insurance marketplace which is made up of large and small companies, including some serving geographical regions with fewer homes at risk of wildfires.

Larger insurance companies with a major presence in distressed areas will need to write no less than 85% of properties within two years of a rate filing being adopted and report their progress to the Department. Companies already meeting the threshold will be required to maintain those policies in force for three years. Smaller companies, new entrants, and companies that largely write outside of wildfire risk areas and cannot meet the 85% requirement will need to expand their writings by at least 5%. Companies will be able to craft plans subject to the Department’s review and approval that expand policy writing in areas of wildfire risk anywhere in the state, helping all parts of California benefit from greater insurance options. Commercial insurance companies will need to increase coverage by 5% in wildfire distressed ZIP Codes statewide, which will increase coverage options for farms and wineries, homeowners and condo associations, and other businesses.

“California Farm Bureau members applaud Commissioner Lara's continued commitment to restore competition to the insurance market by bringing insurers back to write residential and commercial policies in our state,” said Shannon Douglass, President of the California Farm Bureau.“Competition is the first step to guide the market to a place where pricing reflects ongoing wildfire mitigation efforts undertaken by Californians, including by our farmers and ranchers who work to remove fuels and safeguard properties. Our productive agricultural lands provide important buffers that can reduce the risk of catastrophic fire events. We hope our members can obtain comprehensive, affordable coverage through improved insurance offerings that recognize their contributions to protecting California from wildfires.”

Continued progress toward enacting transformative insurance reforms

The regulatory text that Commissioner Lara announced today is part of his Strategy enabling insurance companies to use “forward-looking” catastrophe modeling in rate making when they commit to writing and maintaining more policies. This is a companion to draft text that he released in March before receiving public input at an April workshop. Following the public workshop on June 26, the Department will review public input before issuing the full catastrophe modeling regulation for adoption by year end.

Commissioner Lara detailed another part of his Strategy in February when he published a “complete rate application” regulation that creates clarity in the rate review process for all participants. This regulation is a critical part of reducing unnecessary delays that can cause rate filings to take more than a year. This regulation holds insurance companies accountable for providing the complete information that the Department needs to make informed and timely decisions on these filings, and also helps prevent delays caused by intervenors raising issues not relevant to the rate review process.

The Department plans to introduce another major part of the Strategy with proposed regulation text in July to allow insurance companies that take on greater risks in California to incorporate a reinsurance cost component in their rate filings to cover those risks. That same month, Commissioner Lara also plans to require the FAIR Plan to increase coverage to $20 million per structure for larger homeowners’ associations, condo associations, farms, and other businesses. He also will require the FAIR Plan to have a sounder financial sustainability structure.

“We have been surviving with 20th century regulations for 21st century problems. We are compressing decades of deferral and delay into a one-year timeline of action,” Commissioner Lara told the Assembly Insurance Committee on May 15. “We have to remain flexible. We have to be responsive. The lesson of the past is that we cannot be locked into another 30 years of stagnant regulations.”

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Media Notes:

Led by Insurance Commissioner Ricardo Lara, the California Department of Insurance is the consumer protection agency for the nation's largest insurance marketplace and safeguards all of the state’s consumers by fairly regulating the insurance industry. Under the Commissioner’s direction, the Department uses its authority to protect Californians from insurance rates that are excessive, inadequate, or unfairly discriminatory, oversee insurer solvency to pay claims, set standards for agents and broker licensing, perform market conduct reviews of insurance companies, resolve consumer complaints, and investigate and prosecute insurance fraud. Consumers are urged to call 1-800-927-4357 with any questions or contact us at www.insurance.ca.gov via webform or online chat. Non-media inquiries should be directed to the Consumer Hotline at 800-927-4357. Teletypewriter (TTY), please dial 800-482-4833.

The fault lines running through California’s spiraling homeowners insurance crisis were on display Tuesday at a state hearing, where consumer advocates clashed with industry firms over a plan to allow insurers to use complex computer models to set premiums — a move state officials say will attract insurers to the market.

State Insurance Commissioner Ricardo Lara has proposed allowing insurers to employ so-called catastrophe modeling, which uses algorithms that predict the future risk properties face from wildfires, when setting the price of policies. Currently, rates are based on an insurance company’s past losses, which insurers increasingly dismiss as insufficient in light of the widespread acceptance that climate change has thrust California into a more dangerous future by causing more wildfires.

The models, which are in use in other states, are a key element of Lara’s strategy to moderate price increases by allowing more accurate calculation of risks while persuading insurers to do business in neighborhoods prone to wildfires. The move comes amid a recent stream of insurers exiting the California market with announcements they are not renewing policies or have stopped writing new ones.

Consumer groups worried at the hearing that the draft regulations would not allow enough scrutiny of the models, while several consulting firms that have developed them expressed concern about protecting their intellectual property.

“The algorithms and artificial intelligence that private ‘black box’ catastrophe models use will simply be tools for insurance company price gouging unless California mandates real transparency into how they impact prices and imposes real rules of the road regarding their design and use,” said Carmen Balber, executive director of Consumer Watchdog, an L.A. advocacy group that led the campaign for passage of Proposition 103, the 1988 measure that requires homeowners and auto insurers to get state approval for rate hikes.

The group, like other consumer advocates who spoke at the hearing, called on Lara to work with the state’s academic and insurance experts to develop a “public model,” in which all the factors that go into the computer simulations are available for everyone to review. Such a model could be used to set rates or benchmark privately developed models.

The draft regulations require those who want to review the models to sign nondisclosure agreements, which Consumer Watchdog has alleged will prevent its staff members from discussing the models among themselves.

Julia Borman, a director at Verisk, a company that builds computer models used by insurers, expressed concern that the draft proposal put forth by Lara would allow for a review by “countless participants and create the opportunity for an infinite timeline,” while not safeguarding companies from having their models ripped off by others

Michael Soller, the state Department of Insurance’s deputy commissioner for communications, said Lara has publicly stated that the draft rules will allow for the development of public catastrophe models, which the department might then use to evaluate the insurers’ proprietary models.

The proposal to allow catastrophe models is part of Lara’s larger Sustainable Insurance Strategy announced last fall. Other elements include righting the finances of the state’s Fair Access to Insurance Requirements plan, an insurer of last resort that has been deluged with new policyholders since insurers started pulling back from the market. He also wants to allow insurers to include in premiums the cost of reinsurance, which they purchase to protect themselves from disasters.

Catastrophe models are already allowed in California for pricing policies that cover earthquakes and fires caused by quakes. Along with wildfires, under the proposed regulations, the use of the models would also be permitted for insurance covering terrorism, floods and some other types of coverage.

Gerald Zimmerman, senior vice president of government and industry relations at Allstate, which stopped selling new homeowners insurance policies in the state in 2022, said that adopting Lara’s strategy would be a game changer. “Allstate will begin writing new homeowner insurance policies in nearly every corner of California,” he said.

Other speakers at the three-hour hearing included insurance agents and local officials, as well as homeowners groups, which want to ensure that catastrophe models take into account steps taken by homeowners and government agencies to reduce fire risks, such as by making homes more fire-resistant and reducing brush in a community. Although the draft regulations call for doing so, several speakers complained that such mitigation efforts had not been reflected in recent premium increases.

The Insurance Department plans to review Tuesday’s remarks in preparing for the release of a new set of proposed regulations. Lara has the support of Gov. Gavin Newsom, who issued a letter calling for the commissioner to move quickly to resolve the crisis. The regulations do not require legislative approval or the governor’s signature.

“We will review all public comments while staying on track to implement all changes this year, so insurance companies start writing more policies in all areas,” Soller said.

Proposed Regulation Summary

The proposed regulation seeks to incentivize insurers to increase the availability of residential and commercial property insurance in high-risk wildfire areas of California. Here are the key points:

1. Insurers can use catastrophe modeling in ratemaking if they commit to increasing coverage in "distressed areas" (undermarketed ZIP codes and counties with high wildfire risk).
2. For residential insurance, insurers must commit to either:

a) Writing policies in distressed areas equivalent to 85% of their statewide market share, or
b) Increasing policies in distressed areas by 5% over two years.

3. For commercial insurance, insurers must commit to increasing coverage in eligible high-risk ZIP codes by 5% of their total insurable value over two years.
4. Insurers with under $10 million in annual CA premiums are exempt until they exceed that threshold.
5. Insurers must document policies written to fulfill their commitments in a Wildfire Risk Portfolio Register.
6. Limited modifications are allowed if an insurer's market share drops significantly.
7. Failure to meet commitments requires submitting a new rate filing without using catastrophe models.
8. Insurers can propose alternative commitments if they can't meet the standard ones due to size, scope of coverage or recent severe events.

The regulation aims to reduce the number of properties insured by the state FAIR Plan and make coverage more available in high-risk areas. Catastrophe modeling is allowed as an incentive for insurers to participate.

FAIR Plan

The FAIR (Fair Access to Insurance Requirements) Plan is a state-mandated insurance program that provides basic property insurance coverage to property owners who are unable to obtain insurance through the traditional voluntary market, typically due to high risk factors associated with their property, such as its location in an area prone to natural disasters like wildfires or hurricanes.

Key points about the FAIR Plan:

1. It serves as an insurer of last resort for property owners who have been denied coverage by private insurers.
2. The FAIR Plan is not a government agency but rather an association of all property insurers licensed in the state.
3. Each state's FAIR Plan has its own rules and regulations, but generally, they offer limited coverage compared to private insurers.
4. In California, the FAIR Plan provides basic fire insurance and optional coverage for other perils like windstorms and vandalism.
5. Premiums for FAIR Plan policies are often higher than those from voluntary market insurers due to the higher risks associated with the properties they insure.

The proposed regulation aims to reduce the number of properties insured under the California FAIR Plan by incentivizing private insurers to write more policies in high-risk wildfire areas, thereby increasing the availability of more comprehensive coverage options for property owners.

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