Live In A Fire Risk Area? Here's How Your Home Insurance Is Changing

Insurance companies can now use the climate crisis as a factor when setting home insurance prices in California. They can also add a California-only reinsurance rate to premiums, according to a new plan announced by state Insurance Commissioner Ricardo Lara.

So what does this mean?

Since Prop. 103, passed in 1988, insurance companies in California could only use historical data when setting a price for your home insurance in the state. But in the past year, seven of the 12 major insurance companies have either paused or restricted business in California because they could not base pricing on the increased wildfire risk because of the climate emergency crisis.

Under the new rules proposed yesterday, insurance companies can use future forecasts, including climate risk predictions, to write new policies, but they can only do so if they sell insurance plans to those who live in fire risk areas.

Strain on the FAIR plan

Lara said these insurance reforms — the first in more than 30 years — are necessary because without them the current system is putting a strain on the state’s insurance plan, also known as the FAIR plan. It's not funded by tax dollars, rather it is paid for by companies who choose to do business in California.

The FAIR plan has become the first insurer of choice for some homeowners, especially those in fire risk areas, instead of the last resort as it was intended to be, Lara said.

“Today, there are parts of the state with no insurance company, won't even return a consumer's call, and the only option is the FAIR plan. That will change under this agreement,” he said.

Now, an insurance company will have to write an average of 85% of its statewide market share in fire risk areas.

The new changes are necessary, Lara said, to address the changes brought on by the climate emergency crisis.

“California's current regulatory framework does not meet our current needs,” he said. “We need to update regulations and have them be more focused on current market conditions in order to effectively protect consumers.”

More changes

Another change coming to insurance regulations: Lara announced the state is exploring allowing companies to build California-only reinsurance costs into their prices.

Reinsurance is when insurance companies buy insurance to cover the plans they’ve sold. (Yes, insurance to cover insurance plans.) But under Prop. 103, the cost of reinsurance could not be passed on to the consumer. Now, it could.

“I want to underscore that Californians will not pay for the cost of hurricanes, fires and floods across the nation and around the world,” Lara said.

Insurance companies won’t be able to formulate the forward forecasting models in a vacuum. Lara said his department will have oversight in the process. He has directed his department to complete all reforms by December 2024.

Discounts on offer

Under the Safer from Wildfires regulation, insurance companies must give discounts to homeowners who have taken steps to protect their homes from wildfires, including upgrading windows and installing fire-resistant vents.

For years, Lara said, if you have taken mitigation actions, that has not been reflected in your rate.

What does this mean for your bill

Consumer Watchdog said the new rules will lead to higher insurance premiums.

“The use of catastrophic modeling and adding of reinsurance costs to premiums has pushed Florida premiums up 2 to 3 times higher than California’s,” said Jamie Court, president of Consumer Watchdog. “California is in danger of becoming Florida with these changes that mimic the failed strategies in the Florida.”