SACRAMENTO, Calif. — Proposed reforms to California’s insurance regulations took a key step forward Friday, officially entering the public comment period required before they can be enacted.
The proposed regulation will allow insurance companies to use forward-looking, so-called ‘catastrophe modeling’ when asking the California Department of Insurance (CDI) to approve requested rate hikes. Each model is comprised of computerized calculations simulating potential catastrophic events.
Currently – and for the past three decades, since the passage of California’s last major reform of insurance industry regulations, Proposition 103 – insurers have only been allowed to use historical modeling, looking at the past 20 years’ worth of climate data when justifying increases to customers’ premiums. Under Prop 103, insurance companies must get approval from CDI before raising customers’ premiums.
Using catastrophe modeling, insurers argue, will allow them to more accurately price their products. CDI also says forward-looking modeling will allow companies to better take into account wildfire mitigation efforts done by either an individual homeowner or – in the case of a Firewise community – an entire neighborhood.
“Over the past several years, the state has put billions toward wildfire mitigation efforts and homeowners have made significant investments in home hardening,” California Insurance Commissioner Ricardo Lara said in a news release Friday. “Under Prop. 103’s existing regulatory framework, this is not accounted for by our existing retrospective, past-focused models for ratemaking. We want consumers to reap the full benefits of these efforts through modern, forward-looking models on how rates are calculated.”
In order to utilize catastrophe modeling, the proposed regulation says, a company must agree to write more policies in wildfire-distressed areas. Earlier this year, CDI published a map (pg. 9) of areas where wildfire risk is highest – and therefore, where more homeowners are forced to turn to the California FAIR Plan, a state-mandated, bare-bones ‘insurer of last resort.’ How many more policies an insurer must write in these areas depends on a number of criteria laid out in the regulation.
Consumer advocacy group Consumer Watchdog argues catastrophe modeling will lead to higher rates for policyholders, with price increases coming at a faster pace. They worry the calculations used in these proprietary models from private companies will amount of a ‘black box,’ where policyholders won’t know which factors are going into rate increase requests.
In order to balance transparency with protecting proprietary information, the CDI’s regulations allow for public inspection of each company’s catastrophe model before the state approves it for use. However, participants in this review must sign a nondisclosure agreement and a CDI representative overseeing the process may limit which proprietary information someone has access to – as long as they’re not a CDI employee or consumer advocacy group.
These proposed reforms come as hundreds of thousands of Californians find homeowners insurance increasingly unaffordable and unavailable, many left with the sole option of the FAIR Plan. In recent years, seven of California’s largest homeowners insurance companies – and many smaller ones – have paused or limited business in the state, citing rising wildfire risks due to climate change, the increased cost of building materials and state regulations that don’t allow them to raise rates fast enough to keep up with these growing costs and risks.
Gov. Gavin Newsom issued an executive order Sept. 21, 2023, urging Commissioner Lara to act quickly to address this crisis. Hours later, Lara held a news conference, where he announced what his department calls the Sustainable Insurance Strategy. There, he laid out bullet points of the reforms he planned to propose, with a promise to have them implemented by the end of 2024.
The regulation going into public comment period Friday was among the reforms Lara laid out last September. Details of those reforms have come throughout the year, with various public input meetings and legislative committee hearings.
“Climate change is affecting every part of our lives, making insurance harder to find and more costly for those at the greatest risk. With climate-driven mega-fires burning across the state, it is clear that relying on decades-old regulations only hurts our ability to prepare for the future,” Lara said. “My strategy will help modernize our marketplace, restoring options for consumers while safeguarding the independent, transparent review of rate filings by my Department’s rate regulation experts.”
The CDI is now accepting written comment on the proposed regulation, which can be submitted to CDIRegulations@insurance.ca.gov. There will be a virtual public hearing at 10 a.m. Sept. 17. Details are HERE.
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