A week after the Legislature failed to find a solution or compromise on the recent deterioration of California’s home insurance market, Gov. Gavin Newsom and Insurance Commissioner Richardo Lara stepped up to the microphones and made dramatic announcements regarding this simmering problem.

In recent months, several very important insurance companies have either stopped writing new home policies in California or have withdrawn from the entire market. Consequently, the state’s backup agency, FAIR Plan, has been overwhelmed. It is now insuring 3% of the statewide market.

Lara said in his news conference, “[It] is becoming the insurer of first resort for many Californians and not the last resort as it was intended to be …

“No doubt California is at an insurance cross-roads,” Lara stated. “Making insurance more available is becoming critical for our entire economy. Urgent regulatory action is needed and we must work together on these solutions.”

Insurance companies have several reasons they are being priced out of the California market. The spiraling risk of wildfire is foremost. According to Lara, nine of the 10 largest state wildfires have occurred in the last 10 years.

Now, ever-rising construction costs and the global price of reinsurance — insurance policies that insurance companies, themselves, take out — are raising the cost of doing business here.

In May, when State Farm, which has the largest share of the California homeowner’s insurance market, announced it would stop issuing new policies, the reasons were stated in the press release: “State Farm General Insurance Company made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.”

Without any legislative action, the administration needed not only to ameliorate the situation but begin to turn it around. Following a variety of meetings with legislators and the industry, actions were announced.

In the morning of Sept. 21, Newsom issued an executive order to the insurance commissioner. He requested the commissioner “… take prompt regulatory action to strengthen and stabilize California’s marketplace for homeowners’ insurance and commercial property insurance …”

And he specified five goals, the first of which was to expand fire insurance choices for homeowners, especially in vulnerable areas. Among the other four, Newsom wanted to Improve the department’s rate approval process and, importantly, maintain the solvency of the FAIR Plan.

“… It is critical that California’s insurance market works to protect homes and businesses in every corner of our state,” Newsom said in his press release. “A balanced approach that will help maintain fair prices and protections for Californians is essential.”

That afternoon, Lara held his news conference to announce major reforms to the state’s regulation of the insurance market. He described them as the “largest insurance reform since voters passed Proposition 103 nearly 35 years ago.”

He stated his three “interlocking” goals were making insurance available to Californians, creating a resilient insurance market, and protecting communities from climate change.

To improve broader coverage, Lara will issue regulations requiring companies to write at least 85% of the number of policies in distressed or high-risk areas as they have in the rest of the state. Since State Farm has 21% of the statewide market, it will have to write 17.9% of the policies in the wildfire prone areas.

Consequently, the top 10 insurance companies have nearly 80% of the total market and will now be responsible for insuring 68% of the high-risk communities. The FAIR Plan and other higher-cost insurers will ensure the balance.

They must also begin to address actions that communities and homeowners take to reduce the risk of wildfire. In October 2022, Lara announced the development of new regulations that would require insurance companies to submit new rates that recognize the benefit of safety measures such as upgraded roofs and windows, defensible space and community-wide programs such as Firewise USA and the Fire Risk Reduction Community designation developed by the state’s Board of Forestry and Fire Protection.

To encourage companies to return to the state market, the Insurance Department also will issue new regulations that address catastrophic modeling. This will allow companies to incorporate future costs and dangers into rate requests. Currently, predicting future costs is not permitted.

Another change will allow insurance companies to include the cost of California-only reinsurance in rate requests. Lara’s proposal will not accommodate reinsurance costs caused by out-of-state issues.

Also, Lara is directing the FAIR Plan to raise its coverage limits to $20 million per structure. This will benefit homeowner associations and condominium developments. And he ordered changes to the FAIR Plan to prevent it from going bankrupt in the case of an extraordinary catastrophic event, including building its reserves and financial safeguards.

Another change to strengthen the FAIR plan and benefit homeowner, is offering

FAIR Plan policyholders who comply with the new Safer from Wildfires regulations priority for transition to the normal market. This will reduce the potential weight of costs on the FAIR Plan. (Visit https://www.insurance.ca.gov/01-consumers/200-wrr/Safer-from-Wildfires.cfm for more information.)

But these changes will affect insurance prices. The major companies already have requests for rate increases pending. For example, State Farm’s pending request is for a 28.1% increase. Also pending for several months are rate increase requests of 39.6% for Allstate, 30.6% for USAA and 29% for Liberty Mutual. Farmers received a 12.5% increase in August but has a 17.7% increase pending.

To achieve these goals and enforce the agreement with industry, Lara stated that the Department of Insurance will begin hiring more analysts and staff to improve rate proceedings. These funds are in the current budget. His intention is to have the new regulations and other changes in effect by December 2024.

Since 2022, of the top 12 insurance companies that cover 85% of the state insurance market, seven have paused or restricted new business despite rate increases, Lara said.

Falls Lake Fire and Casualty Company was the latest insurer to cease writing home policies in the state. But since spring, even the largest — State Farm, Allstate and Farmers Insurance — have all announced their withdrawal from California’s home insurance market.

In May, State Farm General Insurance Company, provider of homeowners insurance in California, announced, “[It] will cease accepting new applications including all business and personal lines property and casualty insurance, effective May 27, 2023 … State Farm General Insurance Company made this decision due to historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.”

State Farm’s withdrawal of property insurance affects new policies. It is not yet canceling existing policies, which has been a common reaction to the increasing number of wildfires.

“We urgently need to begin enacting reforms to try and repair the insurance market and protect consumer access to coverage,” said Denni Ritter, vice president for state government relations for the American Property Casualty Insurance Association in a press release after Lara’s announcements. “California’s 35-year-old regulatory system is outdated, cumbersome and fails to reflect the increasing catastrophic losses consumers and businesses are facing from inflation, climate change, extreme weather and more residents living in wildfire prone areas.

“The actions announced today by the Commissioner are the first steps of many needed to address the deterioration of the insurance market,” Ritter continued. “Everyone understands that California’s insurance market is in a spiraling crisis that requires immediate policy solutions to protect consumer access to the coverage they need.”

Newsom’s and Lara’s actions were well received across the aisle, too. In August, Republican Senate Minority leader Brian Jones (R-San Diego) said, “Our current market is on the brink of collapse and Californians are struggling to find and purchase affordable homeowners’ insurance. While the Legislature has failed to act, Insurance Commissioner Lara has the power to begin solving these problems under his current authority and we stand ready to work with him to fix this broken market.”

On Thursday, he responded to these actions, “I am encouraged to see the governor and Insurance Commissioner taking the insurance crisis seriously … The people of California need a stable insurance market and today’s executive order, along with the commissioner’s plan of action, is a step towards stabilizing the market.”

But not all are happy or support Lara’s efforts. The Consumer Watchdog, a nonprofit organization dedicated to providing voice for taxpayers and consumers, was clearly aghast at the proposed changes.

“Insurance companies are using their economic power to create shortages for the purpose of pressuring elected officials to change the rules that have kept insurance premiums in California stable, affordable and available for decades,’’ said Harvey Rosenfield, the author of Proposition 103. “Instead of enforcing those protections when they are needed most, the Insurance Commissioner has capitulated to the insurance industry demands, which will dramatically increase homeowner and renter insurance bills by hundreds or even thousands of dollars.”