While California law does not require property owners to carry insurance, most do so to protect against risks like wildfires, or are obligated by mortgage lenders to maintain coverage. However, there’s also no law compelling insurance companies to offer coverage in the state, even though many are eager to do business in the country’s largest concentration of insured properties.
For decades, insuring California’s homes, farms, and businesses was a straightforward transaction between willing buyers and sellers. But with the rising frequency of wildfires, even in winter months, insurers are becoming less willing to offer coverage in fire-prone regions.
Last Friday, as wildfires ravaged the seaside town of Malibu, Ricardo Lara, California’s insurance commissioner, introduced a significant part of his plan to address the state’s growing insurance crisis. The proposal would allow insurers to use computer modeling to predict future risks when setting premiums, while requiring them to offer coverage in high-risk areas in proportion to their market share. Until now, rates were set based on past losses.
“Giving people more choices to protect themselves is how we will solve California’s insurance crisis,” Lara said, highlighting the importance of moving away from traditional models in light of climate change. He added that insurers will also be required to account for efforts by property owners and communities to reduce risks, such as fire hardening measures.
Lara’s proposal has garnered support from environmental groups, farmers, and some insurers. However, it has been sharply criticized by Consumer Watchdog, a group that advocates for greater transparency in insurance regulation. “Full transparency is what keeps insurance rates honest, but Lara’s rule will allow insurers to raise rates based on secret algorithms without expanding coverage as promised,” said Carmen Balber, the group’s executive director.
The new regulations will take effect in January. Farmers Insurance, California’s second-largest property insurer, has already committed to expanding its coverage in response to Lara’s actions. The American Property Casualty Association, a trade group, has also voiced support, emphasizing that California will continue to maintain a rigorous regulatory process to ensure rates align with the actual cost of claims.
While the new rules are central to Lara’s strategy, other measures are still in the works. These include bolstering the FAIR Plan, California’s last-resort insurer for those unable to secure coverage, speeding up approval processes for insurance rate cases, and allowing insurers to factor reinsurance costs into their rates.
Lara’s proposed changes may lead to higher premiums, but maintaining a functional insurance market is crucial for the state’s economy. Without insurance, the real estate market — both residential and commercial — could collapse, forcing property owners to bear the financial burden of fire losses on their own.
Although Lara’s plan is not without its flaws, no alternative solution has been proposed, including by Consumer Watchdog. Lara should be commended for attempting to tackle one of California’s most pressing crises.