The state of California has released a new regulation that aims to ease the home insurance crisis in the state. Insurance Commissioner Ricardo Lara has spearheaded a package of reforms that will now allow insurers to charge homeowners higher premiums to cover the costs of reinsurance, which helps protect them from catastrophic wildfire claims. This is the first time insurers in California can include the cost of reinsurance in their premiums, though it is a common practice in other states.
The regulation is intended to make the home insurance market more attractive for insurers, who have been pulling back due to wildfire losses. The new rule will help ensure Californians have access to a reliable insurance market that doesn’t retreat from communities vulnerable to wildfires and climate change.
In order to take advantage of the new rule, insurers will need to increase their writing of comprehensive home policies in wildfire-distressed neighborhoods by 5% every two years until their policies are equivalent to 85% of their statewide market share. The regulation also allows insurers to use “catastrophe models” to set premium rates, predicting the likelihood and costs of disasters like wildfires.
While California has experienced several large wildfires this year, including the Franklin and Mountain fires, the losses were not as severe as in previous years. Insurers faced significant losses from fires in 2017 and 2018, prompting many to stop writing new home policies. However, Farmers Insurance recently announced plans to increase the number of homeowners policies it writes, citing Lara’s reforms as a positive development for the industry. The new regulation is still pending review before becoming law.
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