SACRAMENTO, Calif. (CN) — California’s insurance commissioner on Monday issued his final major change in a yearlong process to reform industry regulations and expand coverage in high-risk areas.
Insurance companies must increase their coverage in wildfire-prone regions, under the new rules. That means insurers will have to offer comprehensive policies in those areas equivalent to at least 85% of their statewide market share, and grow their share by 5% every two years until they meet the threshold.
For example, an insurer that writes 10% of all policies statewide must have 8.5 out of 100 policies in high-risk areas, said Michael Soller, deputy insurance commissioner, in an interview with Courthouse News.
Soller said that doesn’t mean insurers will shift existing policies from low- to high-risk areas, but instead will lead to more policies being written.
Insurers must grow their share by 5% every two years until they meet the 85% threshold.
Currently, there’s no requirement in California for insurance companies to offer coverage in high-risk areas.
“Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change,” insurance commissioner Ricardo Lara said in a statement. “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.
California and the West face massive wildfires each year. In 2018, the Camp Fire exceeded 150,000 acres and destroyed the town of Paradise in Northern California. Almost 19,000 structures were destroyed.
This year, the Park Fire, which started near Paradise, became the fourth-largest in the state’s recorded history at almost 430,000 acres. It destroyed over 700 structures.
Lara hailed reinsurance as a tool that will help insurers increase their coverage to people in high-risk areas. He said it’s existed for centuries, noting 14th Century merchants would use several insurers to cover risky ocean voyages.
All states except California allow reinsurance costs to be included in rates. The new regulation will change that, treating reinsurance like other expenses. It will establish an industry standard cost for reinsurance and cap the cost consumers can face.
According to Lara, this will enable insurers to expand their coverage and write more policies in regions with higher fire risk.
Laura Curtis, assistant vice president of state government relations with the American Property Casualty Insurance Association, praised the move in a statement.
“Incorporating reinsurance into ratemaking is one of several critically needed reforms to stabilize California’s insurance market,” Curtis said. “California is the only state that does not allow reinsurance in ratemaking. We appreciate Commissioner Lara for taking this step as a part of his sustainable insurance strategy. We look forward to carefully reviewing the regulation and working with the department to ensure it effectively improves access and availability to insurance for all Californians.”
The industry standard for reinsurance will lead insurers to become more efficient and foster competition for the best reinsurance price, which will benefit consumers, Lara said. The regulation also limits costs to the Golden State, meaning Californians won’t pay for disasters in other parts of the country.
The Monday announcement falls on the heels of a Dec. 13 regulation affecting wildfire catastrophe modeling. If insurers want to include that modeling in their ratemaking, they must increase the policies they offer in underserved regions.
Lara sees the Dec. 13 and Monday regulations as working hand in hand, since people who buy insurance face balloon premiums and rate spikes after a major wildfire, with no additional availability of coverage.
The regulations are the result of a series of workshops and public hearings throughout the year. Lara in January told a legislative panel that he intended to make a series of regulatory changes, as people were finding it more difficult to obtain insurance.
One of those tweaks was ensuring insurers’ applications for rate changes moved quickly through the bureaucratic system.
Insurers at a March meeting expressed support for Lara’s changes, though some feared they would add confusion and uncertainty.
Lara in August issued a bulletin stating that his department would increase the speed and transparency of rate-change application review. That bulletin included the creation of a data reconciliation tool that insurers must complete when submitting their applications for review.