Sustainable Insurance Strategy

Frequently Asked Questions

What is California’s Sustainable Insurance Strategy, and why is it important?

California's Sustainable Insurance Strategy, spearheaded by Commissioner Ricardo Lara, represents a pivotal effort to overhaul our state's insurance market, ensuring it thrives for the benefit of all Californians while addressing the escalating climate crisis. As Commissioner Lara aptly puts it, "In order for us to fully withstand climate change, we need all state insurance markets to thrive, including Florida, Hawaii, Colorado, and others that are seeing major challenges. With climate change, we are all connected." This underscores the interdependence of states in facing climate challenges.

What prompted the need for this strategy?

Commissioner Lara's strategy arises from a convergence of factors, including the climate crisis, rising inflation, and unprecedented challenges in California's insurance market. As he notes, "Unlike public utilities, which must provide service to all residents, insurance companies do not have that requirement. That is one of the limitations of Proposition 103, passed by voters in 1988." These challenges necessitate a comprehensive approach to address insurance market stability and consumer protection.

What are the three main goals of California’s Sustainable Insurance Strategy?

Commissioner Lara's strategy sets forth three primary goals, with a clear commitment to consumer protection and insurance market sustainability:

• Accessible Insurance for Californians: This goal emphasizes the importance of making insurance available and affordable, especially in high-risk areas affected by climate change.
• Create a Resilient Insurance Market: The strategy aims to fortify the insurance market's resilience in the face of climate change and economic fluctuations, ensuring it can effectively weather these challenges.
• Protect Communities from Climate Change: Implementing measures to shield communities from the devastating impacts of climate change, such as wildfires and other natural disasters, is a paramount objective.

How will the strategy improve insurance availability in distressed areas?

Commissioner Lara's strategy includes a groundbreaking agreement for insurance companies to commit to writing at least 85 percent of their statewide market share in wildfire-distressed underserved areas. To quote Commissioner Lara directly, "My plan calls for insurance companies to write no less than 85 percent of their statewide market share in currently underserved areas, thus expanding options and returning people from the FAIR Plan to the admitted market." This commitment aims to reverse the trend of a growing FAIR Plan and bridge the insurance gap in these areas.

How will the 85 percent commitment for insurance companies work in practice, and what consequences will they face if they do not meet this commitment?

The 85 percent commitment obligates insurance companies to write at least 85 percent of their statewide market share for homes and businesses in wildfire distressed areas where the FAIR Plan has become the only option for many people. The Department of Insurance will monitor insurance companies' alignment with this commitment when they submit rate filings. If an insurer fails to follow through with their commitment, they will either be required to meet it or face enforcement measures, including addressing excessive rates.

What is the role of the "Safer from Wildfires" regulation in this strategy?

The "Safer from Wildfires" regulation, as Commissioner Lara affirms, plays a pivotal role in the strategy by ensuring that homes and businesses complying with this regulation receive priority when transitioning back to the normal insurance market. This regulation encourages safety measures and makes insurance more accessible for those who implement them, aligning with the strategy's core goals.

What is the role of catastrophe modeling in California's Sustainable Insurance Strategy, and why is it essential?

Catastrophe modeling plays a crucial role in the strategy by helping insurance companies accurately assess and price climate-related risks, such as wildfires. By using forward-looking catastrophe models, California aims to ensure that insurance rates reflect the benefits of investments in wildfire safety and mitigation, ultimately improving insurance pricing transparency and fairness.

How will catastrophe modeling be used to address climate-related risks in insurance pricing?

The strategy introduces forward-looking catastrophe models that prioritize wildfire safety and mitigation. These models will reflect the benefits of investments made in wildfire safety efforts, such as home hardening and prescribed fire. Commissioner Lara states, "We will introduce regulations to improve the rate review process and to utilize forward-looking catastrophe models prioritizing wildfire safety, mitigation, and expanding insurance access for consumers." This approach ensures that insurance pricing aligns with the evolving risks associated with climate change.

What is the significance of exploring California-only net reinsurance costs in rates?

As Commissioner Lara emphasizes, exploring California-only net reinsurance costs in rates is about ensuring that Californians do not bear the financial burden of disasters occurring outside the state. It's a critical step to manage climate-related risks effectively while safeguarding California consumers. To quote Commissioner Lara directly, "Californians must not pay the costs of East Coast hurricanes or Midwest floods."

How will California ensure that insurance companies do not pass on the costs of disasters occurring outside the state to Californians?

California is determined to prevent Californians from bearing the financial burden of disasters occurring outside the state. The strategy emphasizes the incorporation of California-only net reinsurance costs in rates, ensuring that insurance companies don't pass on the costs of events like East Coast hurricanes or Midwest tornadoes to Californians. This commitment is a priority in the regulatory process.

How will the Department of Insurance ensure the implementation and enforcement of these measures?

The Department of Insurance, under Commissioner Lara's leadership, will rigorously oversee the implementation and enforcement of these measures. This includes prior approval and binding rate agreements with insurance companies, a controlled regulatory process to ensure transparency and compliance, and increased staffing to oversee these crucial regulatory changes. Commissioner Lara states, "We will enforce requirements for complete rate applications and increase staffing to oversee these important regulatory changes."

What is the timeline for implementing these measures?

The timeline is immediate and urgent, with the aim of completing all necessary changes by December 2024. Some elements of the strategy will be executed even sooner to address pressing consumer and market issues. Commissioner Lara stresses the urgency of these reforms, given the challenges posed by climate change.

How does this strategy build upon past actions by Commissioner Ricardo Lara?

Commissioner Ricardo Lara has a track record of proactively addressing insurance market challenges to benefit consumers. The Sustainable Insurance Strategy builds upon these actions, representing a comprehensive approach to tackle evolving market challenges, particularly in the context of climate change. As Commissioner Lara notes, "These initiatives prioritize the interests of California consumers by strengthening insurance options and making the market more resilient."

How can stakeholders, lawmakers, and the public get involved in supporting this strategy?

Commissioner Lara encourages active involvement from stakeholders, lawmakers, and the public in shaping and supporting the Sustainable Insurance Strategy. Public input is a vital component of the regulatory process, and Commissioner Lara is committed to transparency and collaboration. As he emphasizes, "Public input is vital to making good policy. All groups will have an opportunity to have their voices heard through the regulatory process – and I will work with all who are constructive and want to help find real solutions." Engaging in public meetings, providing input during rulemaking processes, and staying informed about progress through periodic reports are key ways to contribute to the success of the strategy.

What is the primary goal of California's Sustainable Insurance Strategy in relation to the state of Florida's insurance market?

The primary goal of California's Sustainable Insurance Strategy is to expand insurance access, create resilient markets, and protect communities from climate change impacts in California, which has its own specific risk profile and insurance rules compared to other jurisdictions. In pursuing our goals in California, the strategy recognizes that we need to ensure that all state insurance markets, including Florida's, thrive and remain resilient in the face of climate change challenges. Commissioner Ricardo Lara emphasizes that with climate change, all states are interconnected, and the strategy aims to address the major challenges faced by states like Florida.

How does California's approach to insurance market stability differ from Florida's, and why is it significant?

California's approach to insurance market stability differs from Florida's by focusing on insurers committing to write more policies in California while incorporating catastrophe modeling and California-only net reinsurance costs in rates. This approach aims to incentivize insurance companies to write coverage in high-risk areas, reward risk reduction, and align their pricing with the state's specific risks, which sets it apart from Florida's strategies. The significance lies in creating a more sustainable and accessible insurance market.

What steps are being taken to protect consumers and improve insurance availability in high-risk areas?

Several steps are being taken to protect consumers and improve insurance availability in high-risk areas. One key initiative is the requirement for insurance companies to commit to writing at least 85 percent of their statewide market share in wildfire distressed areas where the FAIR Plan has become the only option for many people. Additionally, measures such as promoting wildfire safety, encouraging insurers to depopulate the FAIR Plan, and incorporating catastrophe modeling in rate-making all contribute to more insurance availability in distressed areas.

How does California plan to balance affordability and sustainability in its insurance market?

California aims to balance affordability and sustainability by fostering a competitive insurance market. By encouraging insurance companies to expand their business in the state, the strategy intends to increase availability. Recognizing and rewarding wildfire safety efforts and expanding coverage options are among the measures that will create a system where consumers receive discounts and premiums that align with the risks they face. Reduced risks and increased availability is the path to more affordability.

What role does public input play in shaping and supporting California's Sustainable Insurance Strategy?

Public input is a vital component of the regulatory process and is encouraged by Commissioner Ricardo Lara. Stakeholders, lawmakers, and the public can actively participate in shaping and supporting the strategy by engaging in public meetings, providing input during rulemaking processes, and staying informed about progress through periodic reports. Commissioner Lara is committed to transparency and collaboration in developing effective solutions, and has already held two public workshops on questions related to the use of catastrophe models.

How does California's approach to insurance stability differ from creating a government-created property insurance company?

California's approach to insurance stability prioritizes community safety and consumer protection while ensuring that admitted insurance companies can offer coverage and maintain their financial stability. This approach seeks to incentivize private insurers to participate in the market, and provide incentives for risk reduction, rather than creating a government-created property insurance company, which Commissioner Ricardo Lara emphasizes he does not want.

What are the key challenges facing California's insurance market, and how does the Sustainable Insurance Strategy address them?

The key challenges facing California's insurance market include climate change, affordability, and accessibility. The Sustainable Insurance Strategy addresses these challenges by promoting wildfire safety, incorporating catastrophe modeling, encouraging insurance companies to write policies in high-risk areas, and implementing measures to directly address these key challenges for Californians.