How California’s newly proposed property insurance rules are a step in the right direction

Property insurance customers nationwide face a challenging situation as insurers restrict new business and send termination notices due to escalating costs of intensified catastrophic events fueled by climate change.

In high-claim states such as California, stringent regulatory restrictions have strained property and/casualty insurance business models and pushed insurers out of the state. In particular, current law based on legislation passed in 1988 restricts insurers from considering climate change when setting rates and prevents them from factoring in reinsurance costs. This has made it difficult for insurers to accurately price property risks.

The exodus of P/C insurers from California has put everyone in a tough position. As consumers struggle to find affordable insurance, many have turned to backstop coverage options such as the California FAIR Plan. However, the number of consumers on the FAIR Plan has more than doubled in recent years. If it were to go insolvent, every regulated insurance company in California would have to share in covering the cost, further motivating them to take their business elsewhere.

In response, California Insurance Commissioner Ricardo Lara has proposed new rules to attract insurers back to the state. Although the proposed changes have received mixed reactions, they offer a glimmer of hope for consumers as well as hope for the industry's return.

What are the changes?

Lara's proposed rules would allow insurers to use catastrophe modeling that accounts for projected impacts of climate change and consider reinsurance costs and efforts to mitigate wildfire risk when setting rates. The proposed rules also would require insurers to write more policies in wildfire-prone areas — specifically in these areas of no less than 85% of their statewide market share.

How these changes will impact consumers

Historically, California has prohibited these modeling practices to protect consumers from excessive rate hikes. However, as wildfires grow more destructive, the state’s 35-year-old regulations no longer make sense for the industry.

Loosening restrictions could help insurers better manage their exposure to catastrophic events and incentivize them to return to the state, which would bring back competition for consumers and potentially help stabilize rates in the long term. These changes would also increase the availability of coverage, especially for properties in high-risk areas.

The ultimate outcome for property insurance and consumers

If nothing changes, insurers will continue to leave California and consumers will either go bare, be forced to rely on the FAIR Plan or resort to excess and surplus lines insurance, which will likely come with a lofty premium burden.

Something must change, and these proposed rules could be a breakthrough for consumers. They represent just the beginning of efforts to compromise with insurers, restore accessible coverage for consumers and rehabilitate the market. They would also provide much-needed relief to the FAIR Plan, which could once again serve as an option of last resort. That said, they don’t come without concerns, such as increased premiums and transparency issues around how insurers will use data to contemplate climate changes.

Lara aims to have the rules drafted by December 2024. This process will require ongoing collaboration from all parties, but it marks a big shift in the industry and a step in the right direction.

Liza Moran is regional sales leader, west region at Foundation Risk Partners. Contact her at [email protected].

© Entire contents copyright 2023 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.