Lara Releases Next Wildfire Insurance Steps

Last week, Insurance Commissioner Richardo Lara released his plan to
expand homeowner fire insurance to areas threatened by high or very high
risk of wildfires.

“Californians in every corner of our state are frustrated with outdated
regulations and desperate for change,” said Lara in his June 12
statement. “Whether you live in the Sierra or the foothills, along the
coast or in a city, California is not a ‘one-size-fits-all’ place, and
we need to be inclusive. We are enacting a major reform that will result
in insurance companies writing more policies, so if you are stuck on the
FAIR Plan because of your unique wildfire risk, there will be help for
you.”

As companies request to include the costs of reinsurance in their rate
applications and to use computer modeling to predict wildfire threats,
the State will require the larger insurers to provide coverage in
insurance impoverished areas, such as the Hill, comparable to 85% of
their total statewide market share. For example, if a company insures
10% of the state, then it will be required to extend its coverage to
8.5% of the state areas with high wildfire threat.

Smaller companies will be expected to expand their coverage by 5%. But
that would be done by taking policies out of the FAIR plan.

Local zip codes, 92549 and 92561, are included in Lara’s list of areas
where this new policy will apply.

“This is another critical action to help fix California’s decades-old
insurance crisis. It will help homeowners who face higher threats of
wildfire get the coverage they need, while also easing pressure off of
the state’s FAIR Plan,” Gov. Gavin Newsom said in a press release
following Lara’s announcement. “As the climate crisis has rapidly
intensified, the insurance system hasn’t been seriously reformed in 30
years – this is part of our strategy to strengthen our marketplace and
get folks the coverage they need.” 

Currently, Proposition 103, which was approved in 1988, allows insurance
companies in California to choose where they will write policies.
Consequently, as the risk of wildfire has increased, these companies are
limiting their coverage in the areas of the state deemed more risky,
especially with the continued threat of climate change.

One result of private companies withdrawing from the wildfire threatened
areas is that California’s FAIR plan becomes the sole insurance option,
according to the State’s Department of Insurance.

Lara’s proposal will require insurance companies to detail in future
rate filings where they are writing policies. The DOI will hold them
accountable. Further, Insurance companies using catastrophe models also
will be required to take into account the steps taken by policyholders
to mitigate wildfire risk.

Currently California only allows historic fire costs to be used to
assess rate increases. The companies want to use models that address
future fires and their size and costs. In April, the CDI released a a
proposal and requested public comment.

“We all know the status quo in the insurance market isn’t acceptable,
said St. Sen. Bill Dodd (D-Napa) in response to Lara’s presentation. “.
. . We’ve got to attack this problem from multiple angles by reducing
wildfire risk and addressing the impacts of inflation and ratemaking on
the insurance market. Advancing and refining these proposed regulations
is another piece of the puzzle for creating a functional, fair,
sustainable insurance system in California.”

In developing this proposal, the DOI identified ZIP Codes in wildfire
hazard areas of where more than15% of policies are written by the
California FAIR Plan. Next, it identified areas where insurance premiums
are high, above $4 per $1,000 of coverage. Finally, the DOI worked with
CAL FIRE to identify wildfire hazard zones, especially where mitigation
is needed and where it has been employed.

“This type of coordination and alignment between state agencies is a
critical part of our success in preparing communities for wildfire,”
said State Fire Marshal Daniel Berlant in the press release.
“Commissioner Lara’s work aligns with CAL FIRE’s wildfire mitigation
efforts and builds on major investments the state is making to protect
residents.”

Lara’s statement also identified two future steps. On June 26, the DOI
will hold a workshop to discuss how insurance companies would use
catastrophic modeling in their future rate applications. Public comments
may be submitted by June 27 to [email protected]

In July, the DOI plans to issue a proposed regulation to allow insurance
companies that take on greater risks in California to incorporate a
reinsurance cost component in their rate filings to cover those risks.