In a California “first,” insurance companies will write more policies in wildfire distressed areas. 

August 17, 2024 – SACRAMENTO, CA – Insurance Commissioner Ricardo Lara is inviting public input as he begins the final phase of approving a “first of its kind” catastrophe modeling and ratemaking regulation that will help restore options for all Californians and prepare for the reality of climate change. On Friday, the Office of Administrative Law published the regulation online, marking the beginning of a public comment period that will conclude with a hearing convened by Commissioner Lara on September 17. The regulation has received strong public support in two previous public meetings the Department has held.

Friday’s announcement marks the latest step to enacting Commissioner Lara’s Sustainable Insurance Strategy to safeguard the integrity of the state’s insurance market -- keeping California on track for a December 2024 goal of enacting the state’s largest insurance reform in over 30 years.

“Climate change is affecting every part of our lives, making insurance harder to find and more costly for those at the greatest risk. 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,” said Commissioner Lara. “My strategy will help modernize our marketplace, restoring options for consumers while safeguarding the independent, transparent review of rate filings by my Department’s rate regulation experts.”

The regulation posted on Friday details the commitments that insurance companies must make in future rate filings to write more policies in wildfire distressed areas as a condition for using wildfire catastrophe modeling to more accurately assess wildfire risks they will write. The regulation also provides for the public review of models used in ratemaking, as required under California law. This marks two “firsts” for the state’s regulation of insurance rates: The first time insurance companies will commit to cover higher risk homes in wildfire distressed areas, and the first use of forward-looking wildfire catastrophe modeling.

Commissioner Lara’s strategy addresses major limitations of Proposition 103, passed by voters in 1988. Under that law, insurance companies are free to propose rates at any level needed to cover future losses but, unlike public utilities, are not required to cover all residents. With the combination of increasing climate risks, rising costs of repair and rebuilding, and global economic forces, major companies have increased rates while pulling back from higher-risk properties, resulting in areas where the FAIR Plan is now the only option for consumers. In June, the Department released a first-ever map showing where FAIR Plan policies have grown and the traditional insurance market has retreated. The proposed regulations released on Friday focuses on reversing FAIR Plan growth as a result of insurance companies committing to write more in high risk areas through the use of wildfire catastrophe models in ratemaking.

For the past 30 years, California regulations have required insurance companies to apply a catastrophe factor to insurance rates based on historical wildfire losses over the past 20 years. These outdated rules have contributed to rate spikes and balloon premiums following major wildfire disasters without fully accounting for the growing risk caused by climate change or risk mitigation measures taken by communities or regionally, as a result of local, state, and federal investments.

“Over the past several years, the state has put billions toward wildfire mitigation efforts and homeowners have made significant investments in home hardening,” added Commissioner Lara. “Under Prop. 103’s existing regulatory framework, this is not accounted for by our existing retrospective, past-focused models for ratemaking. We want consumers to reap the full benefits of these efforts through modern, forward-looking models on how rates are calculated.”

According to the public notice published on Friday: “While using historical experience may have allowed insurers to accurately project losses in prior eras, insurers and others working in the insurance field note that the progression of increased risk of loss due to wildfire, extreme weather events, and other climate risks, now renders historical experience increasingly unsuitable to accurately project losses.”

The Department of Insurance will hold a virtual public hearing to take input on the proposed regulation on September 17, 2024, at 10:00 A.M./PT.

Written comments can be submitted to: CDIRegulations@insurance.ca.gov.

What others are saying in public comments: 

Sarah Heard, Director, MarketLab, The Nature Conservancy: “TNC appreciates and supports the proposed regulation requiring catastrophe models used in rate setting to incorporate risk mitigation at the property, community, and landscape scale... 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.”

Anne Cottrell, Napa County Supervisor: “Moving toward a catastrophe model makes so much sense in this age of climate change. We need to be looking forward…. 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.”

Peter Ansel, Senior Policy Advocate, California Farm Bureau: “Right now, access to insurance is our member’s largest issue. They understand that the adoption of the modeling and the inclusion of reinsurance is going to have an impact on consumer’s cost for insurance to reflect actual risks, and they're willing to absorb those costs so long as they're fair and equitable, but they really need access. Working farms and ranches across California are often swept up in residential and commercial insurance policy cancellations and non-renewals that seem to occur at a zip code level, even though agricultural lands present a low risk for wildfire propagation. Because crops are actively managed, harvested, and most often irrigated, which reduces the amount of dry vegetation available to burn, agricultural lands typically have lower fuel loads compared to forests and natural grasslands.”

Kim George, Battalion Chief, South Lake Tahoe Fire Rescue: “We've put a lot of work into making sure that our amazing community, beautiful Lake Tahoe, is protected. And, our community is very well aware of the fire dangers, because we just lived through this with the Caldor Fire…. The hope is that this catastrophe modeling will take such things into consideration.”

Dave Winnacker, Fire Chief, Orinda-Moraga Fire Protection District: “The parcel- and community-level mitigations included in CDI's Safer from Wildfire Framework, and the very similar parcel level mitigations included in the IBHS Wildfire Prepared Home, represent a science-based approach to creating fire-adapted communities that can be in or adjacent to the inevitable wildfire perimeters without experiencing catastrophic loss…. The science is crystal-clear, that at the community level we have agency to reduce wildfire risk using CDI's recommendations.”

Keith Fountain, commenting on behalf of The Palisades Tahoe Lodge Owners Association: “We’ve gone to great lengths to make our property safe from fire but we can't get insurance at a reasonable cost. And we look forward to you moving quickly to help establish a fair and competitive insurance market in California that recognizes our efforts, and our circumstances, through the modeling that these agencies do, or what other mechanisms you can impose upon them.”

Jolena Voorhis, commenting on behalf of the League of California Cities: “The wildfire mitigations that have been conducted by local governments, nonprofits, and homeowners are essential for public safety. These mitigation efforts require significant resources, and Cal Cities strongly believes that these costs be considered in the catastrophe modeling and the underwriting process.”

Notes:

• View the draft text of the catastrophe modeling regulation
• View the notice of virtual public hearing
• Catastrophe models are computerized processes that simulate potential catastrophic events. Catastrophe models have been rapidly evolving since their introduction in the 1980s, incorporating historical data, technology, scientific research, engineering methods, and statistical analysis to model complex scenarios and events. These highly sophisticated models are used in virtually all other states today, except California.

Source: CA. Dept. of Ins.