Facing a crisis, California insurance regulators cap largest rules change in 30 years

The California Department of Insurance announced Monday that the final step of its regulatory overhaul is in place after more than a year in the works, signifying the largest change in regulations for 30 years in an attempt to stem the state’s insurance availability crisis.

The overhaul, known as the Sustainable Insurance Strategy, held several components, including allowing companies to use wildfire catastrophe modeling in setting rates and a commitment from CDI to review rate filings more quickly with a new process.

“Can consumers get the insurance they need today? The answer, in all honesty, is no,” Insurance Commissioner Ricardo Lara said when announcing the overhaul in 2023. “Because climate change impacts are accelerating, we need to take action to expand insurance availability over the next 10 years.”

The regulation finalized Monday allows insurance companies to pass some of the costs of reinsurance on to their customers. Reinsurance is effectively insurance for insurance companies. Before the change, California was the only state that did not allow this.

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Regulators are allowing only California-related costs to be passed on, to protect consumers from paying for out-of-state disasters like Gulf Coast hurricanes.

The catch for the insurance industry is that to claim reinsurance costs, they must write more policies in areas where insurance is hard to get because of wildfire risk. And they have to keep increasing the number of policies written each year by 5% until they reach 85% of their statewide market share in wildfire-distressed areas.

For example, if a company held 50% of all home insurance policies in California, then they would need to write coverage for 42.5% of all homes in wildfire-distressed areas in order to be able to claim reinsurance costs. (The regulation allowing catastrophe models also requires companies to write more policies in wildfire areas where it’s currently difficult to get coverage.)

Although the regulation is now on the books, it will take some months before rates based on these new rules go into effect.