California’s latest property insurance regulations: A positive move forward?

Customers of property insurance across the country are facing a difficult situation because of insurers restricting new business and sending termination warnings because of the rising costs of heightened catastrophic occurrences driven by climate change.

Strict regulatory limits have driven insurers out of high-claim jurisdictions like California and strained the business models of property and/or casualty insurance. Specifically, the laws in effect today, which are based on laws issued in 1988, prohibit insurers from factoring in reinsurance costs and from taking climate change into account when calculating rates. It has become more challenging for insurers to fairly value property hazards as a result.

People are in a difficult situation because P&C insurers are leaving California. The California FAIR Plan and other backstop coverage choices are becoming increasingly popular among individuals who are having difficulty finding inexpensive insurance. Over the past few years, however, the number of customers using the FAIR Plan has more than doubled. Its insolvency would force all California’s regulated insurance companies to split the expenses, which would further incentivize them to move their business elsewhere.

To draw insurers back to the state, California Insurance Commissioner Ricardo Lara has made new regulatory proposals in response. Even though there have been differing opinions on the suggested modifications, they provide consumers and the industry’s comeback some hope.

What changes are being made?

In determining rates, the new regulations would permit insurers to utilize catastrophic modeling that takes into consideration the anticipated effects of climate change, reinsurance costs, and measures to reduce the risk of wildfires. Additionally, the new regulations would force insurers to write a greater proportion of their policies—that is, at least 85% of their statewide market share—into wildfire-prone areas.

The effects of these changes on consumers

To save consumers from unjustified rate increases, California has historically outlawed these modeling techniques. But the 35-year-old state laws are out of date for the sector as wildfires become more devastating.

Relaxing regulations could encourage insurers to return to the state and enable them to better manage their risk of catastrophic occurrences, which would increase consumer competition and possibly aid in long-term rate stabilization. Particularly for houses in high-risk zones, these modifications would also expand the availability of coverage.

The definitive result for property insurance and consumers

Should things stay the same, insurers will keep pulling out of California, leaving customers with no choice but to go without insurance, depend on the FAIR Plan, or purchase excess and surplus lines insurance—which would probably come with a hefty premium load.

This needs to change, and these new regulations might represent a significant advance for customers. They are merely the start of initiatives to reach a settlement with insurers, bring back customer access to coverage, and revitalize the market. They would also give the FAIR Plan much-needed relief, allowing it to function once more as a last-resort alternative. However, there are several drawbacks with them, including higher premiums and a lack of openness on the data that insurers would use to consider climate change.

By December 2024, Lara wants to have the regulations written. All parties involved in this process will need to work together continuously, but it is a significant step in the right direction and a major shift in the industry.

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