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

California Insurance Commissioner Ricardo Lara announced the final major step in his Sustainable Insurance Strategy, issuing a historic regulation aimed at restoring stability to California's insurance market while addressing the growing risks of wildfires and climate change.

The new Net Cost of Reinsurance in Ratemaking Regulation requires insurance companies — for the first time — to increase coverage in high-risk areas, ensuring more options for Californians while limiting the costs passed on to consumers. The regulation works hand-in-hand with other reforms Lara has spearheaded that will have the effect of increasing insurance coverage options for Californians across the state.

"Californians deserve a reliable insurance market that doesn't retreat from communities most vulnerable to wildfires and climate change," said Lara. "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."

Reinsurance is a financial tool that is part of how insurance companies manage their risk portfolios associated with the policies they write to homeowners and business owners.

Its roots date back to the 14th century, when merchants and traders sought ways to spread the risks of perilous ocean voyages, often relying on multiple insurers to cover their ventures. Today, as climate risks escalate across the nation, reinsurance has become an even more imperative component of insurance companies operating in high-risk and distressed areas, including California.

Modernizing regulations around reinsurance will enable insurance companies to expand coverage and write more policies in communities across the state facing greater risk, ensuring stability and resilience in our insurance market.

All other states except California allow for costs of reinsurance in rates and, in 2023, the first systematic review of climate risk strategies by Ceres and the California Department of Insurance revealed that reinsurance is the primary strategy most insurance companies use to continue to write and expand coverage in higher risk parts of California and across the country.

What it means

Insurance companies must increase coverage in wildfire-prone regions, ensuring they write policies for at least 85 percent of their statewide market share, with annual increases until the threshold is met.

More coverage for Californians in wildfire-distressed areas

All homeowners insurance companies must increase the writing of comprehensive policies in wildfire distressed areas equivalent to no less than 85 percent of their statewide market share, whereas there is no current legal requirement today for insurers to provide any coverage in high-risk areas. Companies will have to continue to increase by 5 percent every two years until they meet this threshold.

Cost caps

The regulation treats reinsurance like other insurance company expenses allowed under Proposition 103 today – 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.

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.

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.

Reliable rates

The regulation goes hand-in-hand with forward-looking wildfire catastrophe models that can better predict future rates. Under the current system of historical data, insurance consumers are paying balloon premiums and rate spikes after major wildfires, without increased availability.

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 model shopping, the regulation requires insurance companies utilize the same model for both. This promotes more consistent approaches to assessing risks, and balances the scales for consumers.

Largest insurance reform in 30 years

The new regulation is the final major element of the largest insurance reform in 30 years for California. The department held multiple workshops and hearings in 2024, including a meeting on Dec. 5 which was attended by more than 500 people and received 70 verbal and written comments which helped shape this regulation.

Lara has met with tens of thousands of Californians in all 58 counties across the state since taking office as well as testifying at four legislative briefings about his Sustainable Insurance Strategy over the past year.

Lara announced on Dec., 13 that he had finalized a wildfire catastrophe modeling regulation with a requirement for insurers to increase their policy offerings in underserved areas of the state as a condition of incorporating catastrophe modeling into ratemaking.

These two regulatory efforts work together, with other Sustainable Insurance Strategy reforms, to increase the availability of homeowners and commercial insurance policies in wildfire distressed areas.