Commissioner Lara issues landmark regulation to expand insurance access for Californians amid growing climate risks

Commissioner Lara issues landmark regulation to expand insurance access for Californians amid growing climate risks

Today, Commissioner Lara issued a landmark regulation to expand insurance access for Californians amid growing climate risks. The measure is the final major step in his historic Sustainable Insurance Strategy reform to stabilize California’s marketplace. The Office of Administrative Law is now reviewing the regulation for compliance and, once approved, it will become effective. Learn more here.

Today’s Action: The Department of Insurance has submitted a Net Cost of Reinsurance in Ratemaking Regulation requiring insurance companies — for the first time — to increase coverage in high-risk areas. Key components of the regulation are:

• More coverage for Californians in wildfire-distressed areas: Insurance companies must increase coverage in wildfire-prone regions, ensuring they write policies for at least 85% of their statewide market share, with annual 5% increases until the threshold is met. Under Prop. 103 there is currently no requirement to write policies.
• Cost caps: The regulation treats reinsurance like other insurance company expenses allowed under Prop. 103 – such as claims handling or agent commissions – by establishing an industry-wide standard cost of reinsurance and capping the amount of reinsurance costs that can be charged to consumers.
• California-only costs: The regulation limits costs to California-only, so consumers do not pay for the cost of Gulf Coast hurricanes or Midwest windstorms.
• Greater efficiency: Establishing a standard cost based on an index of what insurance companies spend encourages them to be efficient and compete for the best price for reinsurance, so consumers get the best value.
• Prevents “model-shopping”: “Model shopping” describes when insurance companies choose one model that produces higher rates for consumers, and another that lowers their reinsurance costs. To prevent this, the regulation requires insurance companies utilize the same model for both.
• Extensive public input: The submission follows several months of extensive public input, expert consultations, and meetings held by the Department.

Commissioner’s POV: “This is a historic moment for California. My Sustainable Insurance Strategy is focused on addressing the challenges we face today and building a resilient insurance market for the future. With input from thousands of residents throughout California, this reform balances protecting consumers with the need to strengthen our market against climate risks.”

Background: In the 36 years since Prop. 103 was passed in 1998, insurance companies have been allowed to raise rates on homeowners, businesses, and consumers without a requirement to offer coverage in wildfire-prone areas. This has been a root cause of our insurance availability crisis.

• The Sustainable Insurance Strategy strengthens Prop. 103 by establishing unprecedented coverage commitments from insurance companies to increase their policy offerings in underserved areas as a condition of incorporating catastrophe modeling and reinsurance into ratemaking.
• This move is aimed at stabilizing the insurance market and expanding options for homeowners and businesses in high wildfire-risk areas.
• By increasing insurance availability, the Department’s approach aims to achieve greater affordability and stability within California’s insurance and real estate markets.

What’s next: The Department is implementing the Sustainable Insurance Strategy to bring relief to Californians. The Department will accept petitions starting January 2, 2025, to evaluate wildfire catastrophe models. Once a model has undergone a pre-application required information determination, insurance companies can use that model in a rate filing listing their commitments to write more policies. The Department expects the process to be complete within months. Click here to read more about this action.