Tod Johnson stands in front of his house in South Lake Tahoe, California, on Aug. 31, 2021, a day after the city was ordered to evacuate because of the fast-growing Caldor Fire. He spray-painted his house, which is not insured, hoping that firefighters would help save it if the fire reaches his neighborhood. (Terry Chea/AP Photo)
California insurance regulators hope that new rules on forward-looking risk modeling, paired with a requirement for companies to write more policies in risky wildfire areas, will stem the state’s insurance crisis, brought about by years of disastrous fires and high inflation.
The new regulations, submitted Thursday for final approval by the state Office of Administrative Law, allow insurance companies to use forward-looking modeling that incorporates the effects of climate change when they are setting their rates.
Insurance companies have sought that ability for years in California, the only state that bars it. Existing regulations force companies to use only historical data to predict future loss, but that data is increasingly worthless as climate-driven disasters, such as wildfires, intensify. A historical approach also makes it impossible to account for how mitigation — such as nearby firebreaks or prescribed burns — may lessen future risk.
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As a condition of using these models, the new regulation requires that companies increase the writing of comprehensive policies in areas identified as “wildfire distressed” and account for mitigation steps taken by homeowners, businesses and communities. The Department of Insurance aims to require companies to write at least 85% of their statewide market share, meaning that if a single company held half of all policies in the state, it would need to offer coverage to 42.5% of homeowners in wildfire-distressed areas. Currently, there is no current legal requirement for insurers to write any coverage in high-risk areas.
“My new regulation will make insurance more available across the state,” Insurance Commissioner Ricardo Lara said in a statement.
New growth on trees in Big Basin Redwoods State Park in Boulder Creek on Aug. 17, 2021, one year after the CZU Lightning Complex wildfire swept through the area. (Beth LaBerge/KQED)
“As California experiences more intense climate impacts, technology will tell us where the risks truly are and accurately price rates that reflect mitigation and hardening investments.”
The bet is that increasing coverage will lead to more business competition between insurance companies and may help moderate prices. And potentially, the ability to incorporate mitigation steps could lead to increased fire safety and drive down losses.
“I appreciate Commissioner Lara for moving this forward,” said State Sen. Bill Dodd from Napa. “It’s a complex problem, and there isn’t a panacea, but this is one part of the equation that has the ability to help. It will be critical that insurance companies are held accountable towards renewing and writing new policies.”
If approved, the new regulations should take effect by Jan. 1.
Can a public model create more trust?
Hand in hand with the new regulations, a strategy group made up of experts from the fields of climate, insurance and wildfires will create recommendations for a public wildfire catastrophe model by April. Cal Poly Humboldt is leading the effort, which presented its goals at a workshop Friday.
A major concern of critics is that private catastrophe models are proprietary black boxes, not open to review, scrutiny or feedback. The goal of creating a public model for California is to allay some of those concerns.
While companies might not employ a public model in setting their rates, such a model potentially could be a benchmark to compare one private model against another. Regulators could, in the future, use this to ensure customers are getting a fair deal. The state of Florida, where hurricane damage has driven a similar insurance crisis, already has a public catastrophe model.
The new regulations drew criticism from Rep. John Garamendi (D-Walnut Grove), a former California insurance commissioner. He said in a TV news interview that Lara had failed to stand up to insurance companies and should step down from the post.
Garamendi, who served as commissioner from 1991 to 1995 and 2003 to 2007, has long criticized Lara’s Sustainable Insurance Strategy, an effort to update California’s inflexible pro-consumer regulations that the insurance industry said make it difficult to do business in the state.
Last November, Garamendi spearheaded a letter sent to Lara, signed by members of California’s congressional delegation, urging him to use his “power to stabilize the statewide insurance market … to immediately and quickly review the proposed rate increases under any new risk modeling to determine if they are necessary, adequate, and not excessive for consumers.”
“We also believe it would be beneficial to use that power to require that the insurance industry provides adequate, affordable coverage in every part of the state,” the letter continued.
When questioned by KQED exactly how the current Department of Insurance could require the insurance industry to offer adequate, affordable coverage in all parts of the state without addressing the industry’s complaints, Garamendi failed to provide a clear answer and became frustrated, raising his voice.
In the days following, at least one of the signatories to the letter pulled back. “I wanted to let you know that I agree with your approach and hereby rescind my previous support for the original letter,” wrote Rep. Juan Vargas (D-San Diego) in a letter to Lara dated Nov. 29, 2023. “Your outlined approach seeking to […] modernizing decades-old regulations that are ignorant of modern climate change can help solve California’s current insurance market challenges.”
Whether the new regulations will work to ease the current crisis in the state’s insurance market will take months to years to determine. Insurance companies have signaled that they are keen to expand business once new regulations are implemented, and they feel their rates accurately reflect the cost of covering homes in the fire-prone Golden State.
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