California moves to expand insurance options in wildfire-prone areas

California’s insurance department is throwing what could be a lifeline to homeowners in fire-prone areas after announcing new regulations aimed at expanding coverage options.

The rule change was announced late last week and comes as the state faces a home insurance crisis.

It allows insurers to use a model that looks at future and potential catastrophes to set rates, rather than depending on historic wildfire data. In exchange, it requires insurers to increase coverage in these areas and account for efforts to fire-proof homes and communities when setting rates.

"Outdated rules have contributed to rate spikes and balloon premiums following major wildfire disasters without fully accounting for the growing risk caused by climate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," Insurance Commissioner Ricardo Lara's office said in a statement.

The rule is part of a growing response to insurance companies leaving California and insurers dropping homeowners across the state due to wildfire risk. Some of the state’s largest insurance companies already left or stopped taking new policies in recent years — although State Farm last week said it will soon resume offering coverage.

New regulation requirements

California didn't previously require insurance companies to provide coverage anywhere in the state, according to the state's department of insurance. But that’s no longer the case. Under the new regulation, major insurance companies must write comprehensive policies in "wildfire distressed areas" for at least 85% of their statewide market share. For example, the department of insurance explained that if a company covers 20 homes out of 100 throughout the state, it must write policies for "17 out of 100 homes in a distressed area.”

Insurance companies have two other options for meeting minimum coverage requirements.

Michael Soller with the insurance department said the goal is to get more people back into comprehensive coverage and off of California's last-resort FAIR insurance plans, which are available to homeowners who can't access traditional insurance.

" Success is more insurance companies writing more policies for the people who need them the most," he said.

Concerns about transparency

Some watchdog groups are criticizing the insurance commissioner's new move, saying it doesn't require companies to reveal how they set rates.

 "What the commissioner's [proposing] is guaranteed to raise insurance rates based on these secret algorithms, but it is not guaranteed to get more Californians covered again," said Carmen Balber, the executive director of Consumer Watchdog.

Pedro Nava with the state's non-partisan Little Hoover Commission agreed.

" In order to ensure that there's fairness for everybody involved, that there has to be a way to examine what's essentially a black box that the insurance companies use," he said.

But Soller said the new regulation requires review and approval of insurance companies' catastrophe models.

" The companies that have these models are going to have to come in and subject themselves to really a rigorous inspection," he said.

Building a public catastrophe model

One issue, though, is that the state currently doesn't have its own models to compare company proposals to, according to Eric Riggs, the dean of Cal Poly Humboldt's College of Natural Resources and Sciences.

" The [California Department of Insurance] has no means to go back and check some of those assumptions, nor does the public," he said.

Riggs is leading a group of researchers tasked by the state insurance department with exploring what it would take to develop a public catastrophe model for wildfire risk in California. Their recommendations are due in April.

" We can help insurers and homeowners both agree on what it costs to insure a home, a property, a community, and understand the total risk and therefore cost picture for living here," Riggs said. "I think doing all that will be very useful, because it's been a bit of a guessing game."