To hear insurance companies tell it, homeowners insurance policy premiums in California are so low the companies can't bear the risk of writing policies as wildfires become more prevalent.
The result is that many homeowners and renters are currently "going bare," doing without insurance coverage and risking financial ruin. The state has been tinkering with its regulations and has now approved new rules that will let insurers add in "reinsurance" costs when they set their rates.
"Reinsurance" is basically the insurance that insurance companies buy to cover themselves against major disasters that would otherwise bankrupt them. All other states in the U.S. allow insurers to add this cost into their premiums but, in the name of consumer protection, California has prohibited it until now.
The result is that seven of the 12 largest insurers have been limiting their exposure in California in recent years, canceling hundreds of thousands of policies.
Today, Insurance Commission Ricardo Lara said that California would allow reinsurance costs to be added into premiums while also requiring insurers to write more policies in high-risk areas.
"A reliable model"
“Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change,” said Lara in a press release. “This reform balances protecting consumers with the need to strengthen our market against climate risks.”
Under the new policy, insurance companies must increase coverage in wildfire-prone regions, ensuring they write policies for at least 85% of their statewide market share, with annual increases until the threshold is met.
It imposes cost caps on reinsurance. The regulation treats reinsurance like other insurance company expenses — 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. Companies spending more than the industry standard cannot pass these costs onto their policyholders.
The new provision adds to changes made earlier this month, that let insurance companies use so-called "catastrophe models" to set rates instead of forcing them to rely only on historic data. Homeowners who "harden" their structure against fire can be granted discounts under the new pricing plan.
California has seen more wildfire activity this year, although total acreage burned is below the five-year average.