Will Major Wildfire Coverage Reform Salvage California’s Insurance Crisis? 
Will Major Wildfire Coverage Reform Salvage California’s Insurance Crisis? 
Earlier this week, California Insurance Commissioner Ricardo Lara announced a landmark strategy aimed at expanding wildfire coverage options for Californians in high-risk areas. 

The initiative is the latest step in Lara’s Sustainable Insurance Strategy, designed to address the state’s ongoing insurance crisis and restore coverage options while maintaining the integrity of California’s insurance market.

Governor Newsom has supported the reform proposal, saying, “This is another critical action to help fix California’s decades-old insurance crisis. It will help homeowners who face higher threats of wildfire get the coverage they need, while also easing pressure off of the state’s FAIR Plan. As the climate crisis has rapidly intensified, the insurance system hasn’t been seriously reformed in 30 years – this is part of our strategy to strengthen our marketplace and get folks the coverage they need.”

Crisis in Coverage

The reform comes at a critical time as ten major insurers have withdrawn services or announced their exit from California, leaving hundreds of thousands of customers without insurance options amid increasing threats from natural catastrophes. Allstate recently said it is considering a return to the market. The company’s reentry hinges on the California Department of Insurance’s approval to incorporate catastrophic modeling in their rate increase proposals.

But the exodus has left many residents, like Heidi Lange from Paradise, California, grappling with skyrocketing insurance premiums. After rebuilding her home post-2018 wildfire, Lange saw her annual home insurance premium jump from $1,200 to $9,750, highlighting the dire situation for homeowners in wildfire-prone areas.

Maps and Modelling

Geospatial maps reveal approximately half of California is classified as distressed due to high wildfire risk. This includes all of far northern California, nearly the entire Sierra Nevada, Napa and Marin counties in the Bay Area, most of the Central Coast, and parts of Southern California.

Officials have determined these areas based on the latest Cal Fire hazard maps, which rate the fire danger as “high” or “very high.” They also considered counties where 20% or more of homes are at high risk, ZIP codes where the FAIR Plan covers at least 15% of insurance policies, and places where insurance costs are very high compared to local incomes, as measured by a new “affordability index.”

The new regulations will require larger insurance companies to cover 85% of their market share in these wildfire-prone areas. For example, if a company holds 50% of all homeowners’ policies in California, it must cover 42.5% of properties in distressed areas. Smaller and regional insurance companies are not held to this standard to avoid placing undue burden on them. However, the state is asking these smaller companies to increase their market share of policies in wildfire-prone areas by 5% over the next two years.

The change is intended to ease the reliance on the California FAIR Plan, the state’s insurer of last resort, which has been overwhelmed by a surge of new policyholders.

Commissioner Lara called the reform “crucial” for helping residents and business owners in high-risk wildfire zones, where the California FAIR Plan has become the primary option rather than the last resort it was intended to be.

Industry Response and Challenges

The insurance industry has faced significant challenges, with companies citing increased wildfire risk, inflation-driven reconstruction costs, rising reinsurance prices, and outdated state regulations as reasons for their withdrawal. State Farm, for instance, has highlighted the historic increases in construction costs, rapidly growing catastrophe exposure, and a challenging reinsurance market as key factors driving their decision to halt new policies.

According to the Insurance Information Institute (Triple-I), California’s homeowners’ insurers paid out more than twice as much in claims and expenses as they collected in premiums during 2017 and 2018, largely due to wildfire-related losses. This has created a lasting impact on market conditions, with the combined ratio for California’s homeowners’ insurers reaching alarming levels of 241.9 in 2017 and 213.4 in 2018.

Regulatory and Market Outlook

Unlike other states, California’s insurers cannot price risk based on future expectations due to Proposition 103, a regulation set by voters in 1988. This has limited the ability of insurers to adjust premiums appropriately, contributing to the financial strain on the industry.

Market forecasts remain pessimistic, with a recent Insurtech Insights poll revealing that only 28% of respondents believe a solution is imminent for California’s residents. Jim Jensen, a retired property insurance expert, noted the shift from Replacement Value (RV) to Actual Cash Value (ACV) coverage as a significant change, driven by economic pressures and increasing costs.

Speaking to press about the move, Commissioner Lara said: “Californians, in every corner of our state, are frustrated with outdated regulations and desperate for change. Whether you live in the Sierra or the foothills, along the coast or in a city, California is not a ‘one-size-fits-all’ place, and we need to be inclusive. We are enacting a major reform that will result in insurance companies writing more policies, so if you are stuck on the FAIR Plan because of your unique wildfire risk, there will be help for you.”

He continued: “We are addressing this crisis of insurance availability head-on. For the many Californians who live anywhere where wildfires are a threat, my strategy will increase their options while requiring insurance companies to take their wildfire safety actions seriously.“

The Future of Coverage

The public workshop scheduled for June 26 aims to discuss the new regulatory text and gather input. Following the workshop, the California Department of Insurance will review feedback before finalising the catastrophe modeling regulation, expected to be adopted by the end of the year. This reform package seeks to balance the need for adequate coverage in high-risk areas with the sustainability of the insurance market amid increasing wildfire threats.

Commissioner Lara’s announcement marks a pivotal step in the state’s efforts to enhance insurance options for Californians facing the growing threat of wildfires. However, the path forward remains challenging, as the industry and regulators work to find sustainable solutions in an era of escalating natural disasters.

He added: “This builds on my first-in-the-nation ‘Safer from Wildfires regulation’ by requiring insurance companies take into account wildfire mitigation efforts at the individual property, community and regional level.”

By Joanna England

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