California Moves to Allow Climate Risk in Cat Models, Ratemaking

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California Insurance Commissioner Ricardo Lara announced today the next milestone in the state's Sustainable Insurance Strategy with a proposed catastrophe modeling regulation that would expand the allowable use of catastrophe models (currently limited to earthquake) to include wildfire and flood lines for homeowners and commercial insurance lines.

Focusing on wildfire, the regulation would also allow forward looking data by specifying that any model must incorporate the best available scientific information on risk mitigation at the property, community, and landscape scales, including risk mitigation. This proposal breaks with three decades of state regulations that have allowed insurers to apply a catastrophe factor to insurance rates based on historical wildfire losses, without considering the projected impact of climate change or regional/local investments in risk mitigation.

“My Sustainable Insurance Strategy is intended to address decades-long neglected issues. Under outdated rules, the growth of climate-driven mega fires has supercharged insurance costs for many Californians while making insurance harder to find,” said Commissioner Lara. “We can no longer look solely to the past as a guide to the future. My strategy will help modernize our marketplace, restoring options for consumers while safeguarding the independent, transparent review of rate filings by Department of Insurance experts, which is a bedrock principle of California law.

Insurers in California currently must set annual premiums based on claims over the previous 20 years. Lara’s proposal would ease a restriction on insurers using climate related projections of future damage to set premiums - and would bring California in line with most other states, where property insurers are using increasingly sophisticated climate models to forecast damage from wildfires, storms and flooding.

The proposal reflects a growing threat to insurability in California. State Farm, the largest property insurer in California, announced last year that it would no longer write new policies in the state. Seven of California’s 12 largest property insurers have limited their coverage. Most recently in February, The Hartford, a small insurer in California, stopped writing new homeowners’ policies in the state.

As private insurers retreat, there has been an explosion in applications to the state's insurer of last resort. The FAIR Plan now insures $320 billion worth of a property - a sixfold increase from $50 billion in 2018.

“We are one event away from a large assessment,” Victoria Roach, president of the California FAIR Plan, told a state legislative committee March 13th. “There’s no other way to say it, because we don’t have the money on hand [to pay every claim] and we have a lot of exposure.” A large assessment, estimated at $2 billion or more, could be the costliest in U.S. history due to the size of the state and large amount of property located in wildfire-prone areas.

The American Property Casualty Insurance Association (APCIA) issued a statement in support of the California changes.

“We commend Commissioner Lara for prioritizing this important reform. As Californians grapple with record inflation and become increasingly vulnerable to climate-driven extreme weather, including catastrophic wildfires, this is a critically needed tool to help identify future risks more accurately and set rates that reflect our new reality,” said Mark Sektnan, APCIA’s vice president for state government relations.

Sektnan added “More accurate ratemaking will help restore balance to the insurance market and ensure all Californians have access to the coverage they need. We look forward to working with the Department of Insurance on implementing this forward-looking solution and other desperately needed reforms to fix the insurance crisis.”

California's move is consistent with recommendations of the bipartisan Wildland Fire Mitigation and Management Commission, a directive from Congress under the Infrastructure Investment and Jobs Act. The Commission recommended significantly changing the approach to mitigating and managing wildfires; strengthening partnerships and collaboration between government, non-governmental entities, and the private sector; utilizing scientific research-based technology and modeling; increasing investments for resilience and focus on pre-fire mitigation and post-fire recovery; utilizing prescribed fire for resource purposes; and supporting and improving the fire workforce, provide a comprehensive solution to reduce the risk of wildfires.

The Department of Insurance will hold a public workshop to take input on the proposed regulation on April 23, 2024, at 2PM/PT. Register here.

The draft regulation can be reviewed here:

Source: California Dept of Insurance,