Does a new report offer a way out of California’s home insurance crisis?

As insurers hike rates and cancel policies for thousands of homeowners across California, a new state report has proposed a series of reforms to prevent the property insurance market from cratering amid increasingly catastrophic wildfires — but some consumer advocates say it doesn’t go far enough.

The report, released this week, is the result of a law Gov. Gavin Newsom signed last year calling for new state strategies that encourage insurance companies to expand coverage while keeping premiums affordable.

Officials with the California Earthquake Authority, the quasi-public entity behind the report, said the goal was to offer policymakers a wide range of options — from regulatory updates to creating a state-run wildfire insurance program.

“None of the options is necessarily easy,” said CEA Chief Executive Tom Welsh. “They require balance and trade-offs across the board.”

The report comes as insurers, citing “outdated” regulations and rising wildfire risk, have retreated from fire-prone areas throughout the state. Some of the largest insurance providers, including State Farm and Allstate, have even paused writing new home policies anywhere in California.

Some consumer advocates are skeptical that the report will lead to more affordable insurance options. Los Angeles-based Consumer Watchdog said the report ignored solutions it argues are necessary to protect homeowners, such as requiring insurers to cover properties that meet wildfire safety standards.

“The report has blinders on and fails to address the full spectrum of solutions,”  the group said in a statement.

Expanding coverage

Already, state regulators are phasing in new rules to incentivize providers to write more policies. The most significant change is a new framework that allows insurers to use climate change models to justify rate increases, provided companies agree to cover additional homes in high-fire-risk areas.

While regulators have credited the changes with convincing insurers — including Mercury, CSAA and USAA — to expand coverage, some consumer advocates argue the reforms will lead to soaring rate increases without a meaningful expansion of coverage.

The report found that the framework, known as the Sustainable Insurance Strategy, lacks mechanisms to enforce rules requiring insurers to add policies in fire-risk areas. Under the current framework, it could take decades for some insurers to meet mandated coverage targets, the report found.

It recommends strengthening the California Department of Insurance’s authority to enforce those mandates, possibly by allowing it to revoke approvals for rate increases should insurers fail to meet their coverage goals.

In a statement, the Department of Insurance did not directly respond to those recommendations, saying it is continuing to review the report. The department added it “continues to work with leaders at local, state, and federal levels to make communities more resilient from wildfires.”

An ‘underinsurance’ crisis

One of the key findings of the report is that many policies fail to provide sufficient coverage to rebuild homes destroyed by wildfires. The issue, in this case, isn’t that insurers aren’t paying claims in full — it’s that homeowners are unaware of how much coverage they need to ensure their insurance company pays for a total rebuild.

After destructive blazes such as last year’s Los Angeles wildfires, rebuilding costs often surge with demand, the report found, making policies even less likely to cover them fully.

The report recommends that insurers be required to disclose full replacement cost estimates to policyholders and that the estimates be regularly updated.

The Department of Insurance said Insurance Commissioner Ricardo Lara is sponsoring a bill “directly attacking the problem of underinsurance,” in part by requiring accurate rebuilding cost estimates.

Fixing the FAIR Plan

As insurers have pulled back coverage in recent years, hundreds of thousands of homeowners in fire-prone areas have enrolled in the FAIR Plan, the state’s last-resort insurance program for high-risk properties, raising serious concerns about its financial sustainability.

The FAIR Plan is a state-mandated program that’s operated and financed by private insurers offering bare-bones fire and other disaster protection.

The report found that because the state insurance department has been slow to approve rate increases for the FAIR Plan, the cost of its policies in some areas has been comparable to that of traditional coverage options. In turn, many homeowners are opting into the FAIR Plan rather than turning to it as a last resort, contributing to a rapid expansion that officials warn has jeopardized its ability to pay claims.

To reverse this trend, the report recommends that the state insurance department establish an expedited rate-approval process for the FAIR Plan.

The Department of Insurance did not provide a comment on the FAIR Plan recommendations. The FAIR Plan did not immediately respond to a request to comment.

A public wildfire insurance program

Perhaps the boldest proposal in the report is a blueprint for launching a state-run wildfire insurance program that all homeowners would pay into, thereby guaranteeing universal coverage for catastrophic blazes.

By separating wildfire coverage from traditional home policies — which would continue to be offered — insurance companies would be more willing to return to fire-prone areas, the report found.

The California Earthquake Authority serves a somewhat similar role in earthquake insurance, though homeowners are not mandated to buy its coverage and its policies are underwritten by private insurers. But according to Federal Emergency Management Agency, even though 90% of the country’s earthquakes are in California, only 10% of the state’s residents have earthquake insurance. Consumer advocates have criticized the policies for their high costs.

Critics of public disaster insurance programs argue they saddle the public with the greatest insurance risk, while private companies benefit from only having to offer more profitable, scaled-back home coverage. They also note that a wildfire insurance program in California would likely require tens of billions of dollars to launch, at a time when the state faces a long-term budget deficit.

The report estimates the state would need to invest around $25 billion. It suggested the state could raise money through a combination of sources, including bond proceeds and policyholder fees.

What’s next?

In addition to addressing the insurance market, the Natural Catastrophe Resiliency Study also outlines strategies to mitigate wildfire risks and rein in electricity costs as the state works toward its climate goals. In compiling the report, the Earthquake Authority received input from state and local agencies as well as insurance and climate experts, consumer advocates and industry groups.

With the report released, it’s now up to lawmakers, the governor and the insurance department to decide whether to pursue the recommended reforms. In November, California voters will elect a new insurance commissioner, who would play a critical role in adopting any of the proposals.

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