California Is Making a Change to Stop Fleeing Insurers

Rates likely to spike as insurers incorporate catastrophe models in policy pricing
By Arden Dier,  Newser Staff
Posted Sep 22, 2023 8:37 AM CDT
Insurance Rates Could Swing Amid 'Historic' Deal in California
Woodbridge firefighter Joe Zurilgen passes a burning home as the Kincade Fire rages in Healdsburg, Calif., on Oct. 27, 2019.   (AP Photo/Noah Berger, File)

Insurance providers are applauding proposed changes likely to result in rate increases in one of the world's largest insurance markets to better account for billions of dollars in potential damage from natural disasters amid a changing climate. Through executive orders approving "emergency regulatory action," California moved Thursday to reform its insurance system to more accurately price at-risk homes, in what could be a sign of things to come nationwide. In what the Washington Post reports is "a big win for the industry," the state reversed its stance of requiring companies to use only historical data when setting rates. Under the proposed changes, to be finalized and put in place by the end of 2024, carriers could use forward-looking catastrophe models as in many other states.

Consumer Watchdog founder Harvey Rosenfield says this "will dramatically increase homeowner and renter insurance bills by hundreds or even thousands of dollars," per the AP. California Insurance Commissioner Ricardo Lara says "difficult choices" are required "when the world is changing rapidly." He adds the "historic agreement" between regulators and the industry would be better for consumers as the current regulatory framework leaves them at risk. Seven of the top 12 carriers in California have restricted new business in the state in the last year, arguing homeowners should be paying more for their exposure to disasters like wildfires. In response, residents have turned to the state's FAIR plan, which provides a temporary safety net while coverage from a traditional carrier is unavailable.

The FAIR plan, paid for by a fund to which all insurance companies operating in the state contribute, has become the "first resort, not last resort" for many residents, says Lara. "This is a real crisis that we are in." To lessen the number of FAIR plan policyholders and keep the plan solvent, insurance companies will now be required to write no less than 85% of their statewide market share in at-risk areas. "That means if a company writes policies for 20 homes, it must write 17 new policies for homeowners in wildfire-distressed areas," per the AP. Acknowledging concerns that insurers would use catastrophe models to inflate risks to overcharge consumers, Lara notes his department "will be able to verify these models to make sure they're accurate" and can "claw back" rate increases if necessary. (Florida is facing a similar crisis.)

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