New Details Announced on Sustainable Insurance Strategy
June 13, 2024
This week, Insurance Commissioner Ricardo Lara released further details of his Sustainable Insurance Strategy, which aims to increase the writing of homeowners and commercial insurance policies in areas of the state with high wildfire risk.
The updated draft regulations specify the commitments insurance companies must meet to use forward-looking catastrophe models for ratemaking. Specifically, if companies wish to use catastrophe modeling for setting rates, they must either offer policies in high-fire-risk areas equivalent to at least 85% of their statewide market share or increase the number of plans in high-fire-risk areas by 5%. Additionally, insurance companies utilizing catastrophe models must consider the wildfire mitigation measures taken by policyholders.
To qualify as a plan in a high risk area, the policy must be located in a county or ZIP code that has been identified as distressed, undermarketed, and high risk. A county is labeled “distressed” if more than 20% of residences with fewer than five units are classified “high” or “very high” risk by CAL FIRE. These areas will be re-evaluated annually. The qualifying counties are as follows: Alpine, Amador, Butte, Calaveras, Del Norte, El Dorado, Humboldt, Lake, Lassen, Marin, Mariposa, Mendocino, Modoc, Mono, Monterey, Napa, Nevada, Placer, Plumas, San Luis Obispo, Santa Cruz, Shasta, Sierra, Siskiyou, Tehama, Trinity, Tuolumne, and Ventura.
The Department will host a workshop on July 26, to discuss the proposed regulations. There will be public comment available, and CSAC encourages counties to participate.
Workshop Regarding Catastrophe Modeling and Ratemaking
June 26th, 2024 | 2:30-4:30pm
Via Zoom | Register for the workshop
Catastrophe Modeling
Catastrophic or probabilistic modeling is widely used by insurance companies across the country to estimate potential catastrophic losses. These models draw from past wildfire data to predict the likelihood of future fires, generating thousands of possible catastrophe scenarios for insurers to use to inform how they set their rates. However, California has prohibited the use of these models when requesting rate increases from the CDI. As a result, insurers must rely solely on historical data for rate setting.
The exclusion of catastrophe modeling raises concerns that rates may not accurately reflect the realities of climate change-driven losses, population migration to high-risk areas, or unforeseen increases in building costs. Nonetheless, some stakeholders, particularly consumer groups, worry that the opaque nature of catastrophe models reduces transparency in the rate-setting process.
Sustainable Insurance Strategy
Last fall, Commissioner Lara announced his Sustainable Insurance Strategy, a collection of actions aiming to stabilize the state’s insurance market, with regulations in place by December 2024. The Department plans to introduce another major part of the Strategy in July to allow insurance companies to incorporate a reinsurance cost component in their rate filings. It has also been said that in July there will be a plan released to require the FAIR Plan to increase coverage to $20 million per structure for larger homeowners’ associations, condo associations, farms, and other businesses.
The Sustainable Insurance Strategy includes four key goals:
- Increase Availability in At-Risk Areas
- Commitment from companies to write a minimum of 85% of their statewide market share in historically underserved areas
- Modernize FAIR Plan
- Goal of returning FAIR Plan members to market
- Priority given to homes and businesses that mitigate wildfire risk
- Expand commercial coverage limits to $20 million per structure, to address coverage gaps especially around HOAs and multi-family housing
- Update Rate Review Filing Timelines
- Aim to increase clarity & certainty for industry
- Allow Catastrophe Models and Mitigation
