California had a historic summer in 2024 with its most severe wildfire season in 16 years. The Park Fire, which began in late July, burned more than 400,000 acres and went down in history as the fourth-largest wildfire in state history. Meanwhile, Insurance Commissioner Ricardo Lara is working to put out a different kind of fire: California’s ongoing home insurance crisis.
Beginning in late 2022, California’s largest insurance companies have been gradually scaling back their insurance offerings. In response, Chairman Lara introduced the Sustainable Insurance Strategy to expand access and restore stability to California’s home insurance market. The strategy is the most extensive overhaul of state insurance regulation in nearly 35 years. Bankrate’s insurance editorial team has scrutinized the details to identify the potential impacts for homeowners across California.
What is a sustainable insurance strategy?
First announced in September 2023, the Sustainable Insurance Strategy is a series of executive actions aimed at stabilizing California’s home insurance market. Chairman Lara’s strategy was released shortly after Governor Gavin Newsom issued an executive order calling for “expedited regulatory action” to “improve the efficiency, speed, and transparency of the rate approval process.”
In this case, “sustainable” means multiple things. The strategy aims to stave off a market-wide crisis, improve access to insurance, and address the ongoing threat of climate change. To do so, the California Department of Insurance (CDI) is tackling the problem on multiple fronts. The long-term goal of the Sustainable Insurance Strategy is to make home insurance more affordable and accessible for Californians, but this can only happen if more insurance companies write policies in the state. To get insurers to start writing policies again, a few things need to happen first.
Disaster modelling permission
Part of the strategy also involves changing the way insurers calculate premiums: Catastrophe modeling allows insurers to use predictive algorithms, new scientific research, historical data and computer simulations to more accurately forecast the economic impact of catastrophes and set premiums accordingly.
Prior to the implementation of the Sustainable Insurance Strategy, insurers could only use historical data when setting home and wildfire premiums. As a result, home insurance premiums in California can skyrocket after a natural disaster occurs. This occurs when widespread losses deplete insurer reserves and insurers increase premiums to cover those losses and restore financial stability.
Catastrophe modeling isn’t entirely new — California insurers currently use it for earthquake and post-earthquake fire losses, but not for wildfires. The hope is that by giving insurers more flexibility and perhaps precision in setting claims, they’ll bring new business back to the state.
My Sustainable Insurance Strategy aims to address a problem that has been neglected for decades. Under outdated rules, an increase in climate-driven massive fires has made premiums skyrocketing and insurance harder to find for many Californians…We can no longer rely solely on the past as a guide to the future. My strategy will restore consumer choice and help modernize the marketplace while protecting a bedrock principle of California law: independent and transparent review of rate filings by the Department of Insurance’s experts.
— California Insurance Commissioner Ricardo Lara
Catastrophe modeling does not give insurers free rein to raise premiums as much as they like based on “black box” computer algorithms. The California Department of Insurance has said it will closely monitor these models to ensure they comply with California consumer protection laws. Additionally, to begin using catastrophe modeling, insurers must agree to other provisions of the Sustainable Insurance Strategy, namely those that only require them to increase the availability of insurance across the state.
Parts of this strategy are already underway: Insurance Commissioner Lara recently announced that CDI is forming a strategy group with California Polytechnic State University, Humboldt, to develop a public wildfire disaster model, the first of its kind in California and across the nation.
“The public model will serve as a benchmark for my department to ensure insurance rates are fair and accurate, will be a trusted source of data for local governments to improve wildfire safety, and will be a rich educational and career opportunity for students and researchers,” Lara said in a statement. The strategy group is expected to begin meeting in October 2024 and share its recommendations with CDI by April 2025.
Potential impact on home insurance: More insurance companies will write policies in California, making home insurance premiums more predictable and stable.
Catastrophe modeling may allow insurers to more accurately forecast future losses and stabilize rates. However, because the Sustainable Insurance Strategy is still being rolled out, it is too early to tell exactly how homeowners across the state will be affected. Rates are subject to change, but whether rates are lower or higher will depend on which insurers return to the state and agree to market competition.
Expanding insurance coverage for high-risk homeowners
There are several conditions to catastrophe modeling. In exchange for allowing insurers to conduct wildfire catastrophe modeling, the insurers must agree to write at least 85% of their new policies in historically underserved areas. The California Department of Insurance requires this condition from the 12 largest residential insurers in the state. These insurers are:
- State Farm
- farmers
- Berkshire Hathaway (owns Geico)
- Allstate
- Auto Club (part of AAA)
- Traveler
- Liberty Mutual
- CSAA (also part of AAA)
- mercury
- Chub
- progressive
- America
Insurers should not only agree to write more home insurance policies where they are needed, but also to take wildfire prevention regulations into account when setting premiums. This includes measures such as building fire-proof barriers around the home, trimming trees and bushes, installing non-flammable screens over attic vents, double-glazing, etc. Essentially, homeowners who have taken steps to make their homes more fire-resistant should see the price of their home insurance reflect that.
Potential impact on home insurance: More insurers will write policies in areas with high wildfire risk.
It remains to be seen how the measures of this strategy will affect pricing. Catastrophe modeling may result in higher premiums initially. However, as more insurers operate in a given area, market competition may be able to drive down premiums to more affordable levels. Offering home insurance discounts for fire-resistant homes could also help to reduce high home insurance premiums.
Reducing the burden of the FAIR Plan
California’s FAIR Plan is, in the words of the insurer’s president, Victoria Roach, in peril. During a state legislative hearing in March, Roach said, “If a major event were to occur, we would rely on the self-insurance market, which is already in a precarious position, to cover losses.”
Remember, the FAIR Plan was created by the state, but is financially backed by California’s private insurance companies. So if the FAIR Plan receives too many claims to pay after exhausting its reserves, reinsurance, and hazard bonds, its private backers must foot the bill. The last time the FAIR Plan failed to pay its private backers was in 1994 during the Northridge earthquake, which caused an estimated $32 billion in damages and was the ninth most expensive natural disaster in history. After the Northridge earthquake, 93 percent of home insurance companies left the state and earthquake losses were no longer covered.
The FAIR Plan hasn’t had to turn to private companies since then, even in the aftermath of the Camp Fire in 2018. But the FAIR Plan remains in a tough spot: In an interview with the San Francisco Chronicle in June, Roach revealed that the plan has about $385 million in reserve funds, far short of the $393 billion at risk.
FAIR Plans can ask private insurers for financial assistance if they can’t afford to pay claims on their own. Private insurers are then left to pay those losses. The Sustainable Insurance Strategy aims to change that. Under the new regulations, insurers can only pay half of FAIR Plan losses (up to $2 billion, $1 billion for residential claims and $1 billion for commercial claims). The other half will be recovered from California residential policyholders, with the insurance commissioner’s approval. However, homeowners will not be billed for commercial FAIR Plan losses.
Potential impact on home insurance: Could have a negative impact on home insurance premiums
To be sure, this is a big “what if” plan: So far, the FAIR Plan has not had to solicit cash from the private insurers that support it, but the strategy’s provisions are arguably more for the benefit of insurance companies than for California homeowners.
“The whole idea of the original rating formula is that participating insurers, not consumers, make up the shortfall,” said Amy Buck, executive director of United Policyholders, a consumer-focused advocacy group. “But we understand that the (insurer) FAIR Plan mandate is another driver of insurer underwriting cuts in California, and that’s why that part of the sustainable insurance strategy is being negotiated. We would like to see the full rate reporting part and the CAT model part, as well as the 85% increase in underwriting rates in distressed areas, implemented before further reforms.”
Modernizing the FAIR Programme
One of the key points of the Sustainable Insurance Strategy is to improve the FAIR Plan, not eliminate it. As long as there are ultra-high risk properties in California, we need the FAIR Plan. The Sustainable Insurance Strategy seeks to increase commercial insurance coverage limits from $20 million per building to $20 million per building and $100 million per location, primarily to help condo owners.
Increasing FAIR plan limits is a patch, not a solution. There is a tension between continuing to increase risk for FAIR plans (which increases risk for admitted insurers, especially in areas that no longer voluntarily write insurance) and trying to bring them back into the voluntary market. But there aren’t many options at this point. Rates for non-admitted insurers are not regulated, so pricing can be brutal, especially for condos.
— Amy Bach, Executive Director of United Policyholders
Potential impact on home insurance: More regulated premiums for apartment owners.
Before turning to FAIR Plans, many homeowners looking for insurance may turn to surplus insurers. Although these insurance companies are completely legal, they are not bound by the same rules and regulations as regular licensed insurance companies, especially when it comes to pricing. While surplus insurers can charge policyholders significantly higher rates than average, some homeowners have no other choice if they can’t find insurance in the standard market. The idea is that condo owners with limited insurance options can turn to FAIR Plans, whose rates are more regulated, rather than relying on the unregulated (and sometimes unaffordable) surplus insurance market.
Speed up the rate approval process
Like other states, California has a “pre-approval” system for insurance rate applications. This means that you must submit a “pre-approval” request before your insurance rates can change (increase). or Before a rate reduction can be applied to homeowners’ insurance premiums, the California Department of Insurance must give the company permission. Under Proposition 103, insurance companies are entitled to an expedited rate approval process, but that doesn’t seem to be the case in reality.
Proposition 103 provides that if the CDI takes no action within 180 days of a rate application, the application will be approved. However, the CDI will typically ask the insurer to waive its right to expedited rate approval. If not, the CDI can either approve the application or hold a hearing. Because the 180-day period is typically too short for the CDI to fully review a rate application, in most cases they choose to hold a hearing, which can take a minimum of a year.
To avoid more than a year of bureaucratic limbo, most insurers have opted to waive Proposition 103 rights. But the end result won’t be much quicker: It takes an average of 236 days for a home insurance application to be approved in California, making California the 49th slowest state for premium approvals. Colorado is last, at 444 days.
This system is too slow, and the Sustainable Insurance Strategy aims to speed it up. Ideally, the premiums charged to homeowners should accurately reflect both the risk of the property and the cost to the insurer. If premiums fail to keep up with either of these metrics, insurers may suspend operations in California.
Potential impact on home insurance: California home insurers speed up rate approvals
To speed up the rate approval process, CDI is creating a data reconciliation tool. The tool will act as a checklist for insurers, allowing them to provide all the information needed for rate change applications up front, cutting out some of the back and forth. Speeding up rate applications is something insurers have been asking for. Like catastrophe modeling, this tool could bring insurers back to California.
We have worked closely with the Insurance Commissioner and fully support these measures to modernize the rate application process in line with the timeline outlined in Proposition 103. This is part of the state’s larger package of solutions to ensure Californians have adequate access to insurance and combat market exodus that harms consumers. These are necessary steps to address California’s insurance crisis.
— California Governor Gavin Newsom
What’s next for California homeowners?
The sustainable insurance strategy is expected to be fully implemented by December 2024, an ambitious goal given the slow-moving insurance industry. While much of the strategy is still just a regulatory document, it has attracted interest from insurance giants Allstate and State Farm.
The first two companies to exit the California home insurance market could also be the first to return. State Farm filed for an average 30 percent rate increase in late June 2024. Allstate filed for a 39.6 percent increase in January but was approved for an average 34 percent increase. Allstate policyholders will see the new rates go into effect in November 2024.
When will relief come for California homeowners? In an interview with Fox News, Deputy Insurance Commissioner Michael Soler said relief for homeowners could arrive by early 2025. While rising insurance premiums may not be what California homeowners want, it is what insurance companies need to write new policies in the state. And now the California Department of Insurance finds itself in the difficult position of trying to encourage insurers to write new policies while not putting undue financial strain on homeowners.
What if I can’t find insurance in California?
Even in tough insurance markets, there are a few things you can do to secure home insurance.
- They cast their nets widely. Sticking to only well-known brand-name insurance companies can limit your options. Many insurance companies still operate in California, and getting quotes from companies you’re less familiar with may help you find the right company.
- Contact a broker, maybe even one in another city. If you’re a Los Angeles homeowner looking for insurance, try calling a broker in Sacramento (or vice versa), as brokers in other cities may be familiar with different local insurance companies and may be able to help you secure coverage.
- Contact the California Department of Insurance. If you’ve been dropped by your insurance company and are struggling to find alternative options, CDI’s Home Insurance Finder may be a useful tool to help you find an insurance company that will provide your services.
