Commissioner Lara invites public input on final phase of new wildfire modeling regulation

In a California “first,” insurance companies will write more policies in wildfire distressed areas

August 16, 2024 —Insurance Commissioner Ricardo Lara is inviting public input as he begins the final phase of approving a “first of its kind” catastrophe modeling and ratemaking regulation that will help restore options for all Californians and prepare for the reality of climate change. Today, the Office of Administrative Law published the regulation online, marking the beginning of a public comment period that will conclude with a hearing convened by Commissioner Lara on September 17. The regulation has received strong public support in two previous public meetings the Department has held. 

Today’s announcement marks the latest step to enacting Commissioner Lara’s Sustainable Insurance Strategy to safeguard the integrity of the state’s insurance market -- keeping California on track for a December 2024 goal of enacting the state’s largest insurance reform in over 30 years.

The regulation posted today details the commitments that insurance companies must make in future rate filings to write more policies in wildfire distressed areas as a condition for using wildfire catastrophe modeling to more accurately assess wildfire risks they will write. The regulation also provides for the public review of models used in ratemaking, as required under California law. This marks two “firsts” for the state’s regulation of insurance rates: The first time insurance companies will commit to cover higher risk homes in wildfire distressed areas, and the first use of forward-looking wildfire catastrophe modeling.

Commissioner Lara’s strategy addresses major limitations of Proposition 103, passed by voters in 1988. Under that law, insurance companies are free to propose rates at any level needed to cover future losses but, unlike public utilities, are not required to cover all residents. With the combination of increasing climate risks, rising costs of repair and rebuilding, and global economic forces, major companies have increased rates while pulling back from higher-risk properties, resulting in areas where the FAIR Plan is now the only option for consumers. In July, the Department released a first-ever map showing where FAIR Plan policies have grown and the traditional insurance market has retreated. The proposed regulations released today focuses on reversing FAIR Plan growth as a result of insurance companies committing to write more in high risk areas through the use of wildfire catastrophe models in ratemaking.

For the past 30 years, California regulations have required insurance companies to apply a catastrophe factor to insurance rates based on historical wildfire losses over the past 20 years. These outdated rules have contributed to rate spikes and balloon premiums following major wildfire disasters without fully accounting for the growing risk caused by climate change or risk mitigation measures taken by communities or regionally, as a result of local, state, and federal investments.

According to the public notice published today: “While using historical experience may have allowed insurers to accurately project losses in prior eras, insurers and others working in the insurance field note that the progression of increased risk of loss due to wildfire, extreme weather events, and other climate risks, now renders historical experience increasingly unsuitable to accurately project losses.”

The Department of Insurance will hold a virtual public hearing to take input on the proposed regulation on September 17, 2024, at 10AM/PT. Written comments can be submitted to [email protected].gov.