'Expect the unexpected:' Lara moves to safeguard Californians' financial future with new regulation

In a proactive effort to secure the financial stability of Californians, Insurance Commissioner Ricardo Lara has announced a groundbreaking regulation aimed at mitigating rising costs and safeguarding the nation's largest insurance market from ongoing catastrophic risks and technological threats.

The Long-Term Solvency Regulation will provide the California Department of Insurance with enhanced oversight tools to protect from risks that may arise in the coming years or even decades.

"Regulators around the globe are facing significant challenges due to rapidly changing climate conditions, which impact market stability and affect both affordability and availability," Lara said. "Technological advancements are advancing faster than our departmental resources, highlighting the shortcomings of our outdated regulatory frameworks. In this rapidly evolving landscape, we must expect the unexpected. It is crucial to anticipate future risks to improve preparedness and mitigation efforts, as well as to ensure that companies can meet their legal obligations to consumers."

The Long-Term Solvency Regulation aligns with the commissioner's work as a member of the International Association of Insurance Supervisors, where he contributed to the development of guidance for insurance supervisors on climate risks, as well as various reports and standards. The regulation focuses on solvency strategies and leverages the growing implementation of standardized climate risk disclosures by regulators worldwide, alongside UN-led efforts to establish the Principles for Sustainable Insurance and the Sustainable Development Goals.

Why it matters

Using global tools to safeguard Californians

Financial regulators from the Banque de France, the Bank of England, the Bank of the Netherlands, Canada's chief insurance regulator and the Monetary Authority of Singapore have participated in scenario analysis exercises.

This presents an opportunity for enhanced collaboration among regulators to promote sustainability in insurance markets and to develop frameworks for addressing emerging risks. As the largest sub-national insurance market in the world, California's regulator must actively engage and secure a seat at the table in global discussions on long-term risk analysis and solvency.

Robust financial oversight is essential for the security of Californians

The Department of Insurance supervises California-based insurance companies to ensure their stability and capacity to meet future obligations. According to the draft regulatory text released today, these companies must provide information to the department to strengthen consumer protection against unforeseen challenges.

Over the past three years, Lara has contributed to the technical guidance of the IAIS climate risk framework, which has informed this proposed regulation as well as existing regulations in Europe for the banking industry.

New information on impact of climate and technology

Insurance companies are significant institutional investors in the U.S., with approximately $8.2 trillion in assets reported in 2022. Their investment performance directly influences their capacity to underwrite new policies. The Long-Term Solvency Regulation requires documentation of risks and opportunities projected for 2030, 2040 and 2050, which could impact underwriting, investments, or operations.

Addressing cybersecurity and artificial intelligence

The regulation will also address the evolving landscape of cybersecurity, focusing on data quality, the use of large datasets and artificial intelligence.

Mitigating catastrophic risk

Companies will be required to share information on strategies to mitigate climate-related risks, such as extreme weather patterns and gradual market shifts expected to become pronounced by 2050. These risks include sea-level rise, changes in land use, and variations in water availability and agricultural productivity.

Enhancing stability amid transitions

The regulation will require information on transition risks associated with new technologies, particularly regarding the reduction of reliance on greenhouse gas-emitting technologies. Central to this effort are "stress tests" of climate risk scenarios for 2030, 2040, and 2050.

"In this new era of increasing risks, the role of the insurance industry must evolve from serving as a passive safety net to becoming a proactive enabler of resilience," said Daniel Murphy, Lead Financial Services Industry Partnerships and Climate Risk and Resilience Initiatives at the World Economic Forum. "Insurance regulators can help by encouraging long-range planning to better anticipate shocks before they lead to insurance crises for consumers."

"Managing climate risk is part and parcel of good risk management and of disaster risk reduction — but the past alone is not a reliable indicator of the future. This is why it is essential for insurers to assess different climate futures and their implications for their underwriting and investment portfolios," said Butch Bacani, Head of Insurance at the UN Environment Programme and Chair of the UN Forum for Insurance Transition. "By insuring and investing with foresight, insurers are better positioned to enhance long-term business resilience and company value, close the protection gap, contribute to financial stability, and support the transition to safer, more resilient and sustainable communities and economies."

"Scenario analysis is a critical risk management tool for navigating uncertainty," said Dr. Sean Carmody, Executive Director, Policy and Advice Division of the Australian Prudential Regulation Authority, the country's insurance regulator. "It helps institutions anticipate and prepare for emerging risks—such as the impact of a changing climate and rapid technological innovation—by exploring a range of plausible futures and identifying areas of vulnerability and strategies that can strengthen resilience in the financial system."

"With climate change escalating the risks of weather-related extreme events and new technology bringing uncertainty to markets, long-term planning by insurance regulators is needed," said Carolyn Kousky, Associate Vice President, Economics and Policy Analysis, at Environmental Defense Fund. "In order to preserve market stability, we must think longer term about the impacts of growing risks and the investments being made to mitigate them. To prevent surprises that can harm consumers, we need to be planning for a future that will look different from our past."

"Insurers play a crucial role in global markets and have a profound effect on our economies. As regulators, we need to be better equipped to navigate an uncertain future," stated Lara. "This regulation embodies my insights gained over the years, alongside those of my international regulatory colleagues. Together, we confront ongoing challenges, including climate disasters, technological changes, data constraints, and the urgent need for modern oversight and regulatory reform to safeguard our consumers and markets."

The Department of Insurance released draft regulatory text and will hold a workshop on Nov. 14, 2025, to hear input from the public.