CA insurance regulations

California Insurance Commissioner Ricardo Lara today outlined an effort to force insurers to resume writing policies in high-risk wildfire areas – part of an overall plan to address the state’s insurance crisis.

It covers three different ways insurers can meet minimum underwriting requirements in areas that Cal Fire deems “high risk” or “very high risk.” Department of Insurance regulators said this hybrid approach takes into account the state’s complex geography as well as the different levels of risk that large and small insurers can afford. Lara said this should help homeowners who lost coverage or were forced to use the last-chance FAIR plan.

Insurance companies would have three options:

• Save 85% of your statewide market share in high-risk areas. The department explains it this way: “If a company registers 20 out of 100 homes statewide, it must register 17 out of 100 homes in the affected area.”
• Achieve a one-time 5% increase in the number of policies written in high-risk areas.
• Increase coverage by 5% by taking people off the tight FAIR Plan, the group of insurers the state requires to provide fire insurance policies when property owners can’t get insurance elsewhere.

Insurers could meet these policy writing requirements at the county or zip code level. Specifically, they could apply the 85% or 5% option in counties that regulators have identified as at-risk, or in ZIP codes that regulators have deemed “undermarketed” and high risk – meaning ZIP codes include at least 15% of the rules in the FAIR plan and they have a certain percentage of residents who cannot afford to pay the premiums. Insurers that already meet the 85% threshold would be required to maintain that threshold for at least three years after the rate is applied.

Or they can choose a third option, restricting FAIR Plan rules statewide.

Regulators will update these areas at least annually.

Gov. Gavin Newsom called Lara’s announcement “critical” to fixing the state’s insurance crisis. “As the climate crisis has rapidly worsened, the insurance system has not been seriously reformed in 30 years – part of our strategy to strengthen our marketplace and ensure people have the coverage they need,” the governor said in a statement.

In recent years, an increasing number of property insurers have withheld or stopped writing policies in California, citing increased wildfire risk and inflation. If today’s proposal works as intended, it would finally be easier for homeowners to purchase insurance with adequate coverage, as opposed to the expensive fire insurance policies that many have recently been forced to purchase under the FAIR plan.

The proposed options are not technical requirements because the state cannot legally require insurers to write homeowner’s or commercial property policies. However, the state expects insurers to comply with the regulations because failure to comply would mean insurers would not be able to benefit from something they have lobbied long and hard for: catastrophe modeling.

Lara revealed the first part of its disaster modeling plan in March; this is the second part of this plan. Catastrophe modeling takes historical data and combines it with projected risks and losses – something insurers could do in every other U.S. state except California. Insurers will be able to use it here once Lara’s master plan goes live as promised at the end of the year.

Today’s announcement made clear what companies would have to do instead.

“Insurance companies need to commit to writing more policies, and my department will need to review those commitments and hold them accountable,” Lara told reporters this morning. When submitting rate reviews, insurers will indicate which path they will choose. If they do not meet the requirements of this pathway, “my department will reach out to law enforcement and reconsider rate review,” the commissioner said. According to his staff, this means a possible reduction in rates or even a refund.

Lara staff said they established minimum insurance requirements in at-risk areas after discussions with various stakeholders, including insurance companies, who concluded that these requirements were achievable. However, the draft regulations also include an option for insurers to apply for “alternative commitments” due to changes in the size or scope of their coverage, or the “frequency or severity of recent events” affecting them.

The draft regulation would give insurance companies two years after submitting a rate application to meet the quasi-requirements – time regulators have said companies must be able to write such policies. “We expect them to act right away, but we realize they just can’t flip the switch,” said Michael Soller, deputy commissioner and spokesman for the Department of Insurance.

But Consumer Watchdog executive director Carmen Balber said in a statement that she sees the two years as a legal loophole that “frees insurance companies from liability if they fail to meet their obligations.” Meanwhile, she added, consumers would pay higher premiums.

“The rest of the plan will still mean rapid, massive interest rate increases,” she told CalMatters.

One insurance industry group, the American Property Casualty Insurance Association, did not comment on any details of the plan released today other than to say it “remains committed” to working with the Department of Insurance.

Rex Frazier, president of the California Personal Insurance Federation, called the proposal “complex and involves many compromises,” but said his group also remains committed to working with Lara.

Like all regulations proposed by the commissioner, this last one is also subject to public comment. The department is hosting a public workshop on June 26 at 2:30 p.m. and will accept written comments until June 27.

Lara has not yet released the remaining major parts of its overall plan, including making improvements to the FAIR plan and allowing insurers to include reinsurance costs in premiums.