California’s Insurance Commissioner Ricardo Lara announced a new regulation on Monday that will require insurance companies to provide home coverage in high-risk fire-prone areas if they want to continue doing business in the state. This rule aims to ensure that insurance is available to residents in areas affected by wildfires. Insurers will have to increase their coverage by 5% every two years until they reach 85% of their market share. Major insurers like State Farm and Allstate had stopped offering policies in California due to concerns over wildfires and other natural disasters.
In exchange for increasing coverage, insurance companies will be allowed to pass on the costs of reinsurance to consumers in California. Reinsurance is typically purchased by insurers to protect against large payouts in the event of natural disasters. California is the only state that does not currently allow these costs to be passed on to policyholders. However, opponents of the regulation argue that this could lead to a 40% increase in premiums and may not require policies to be written quickly enough. A cost analysis for the potential impact on consumers was not provided by the state.
Consumer advocacy groups like Consumer Watchdog have criticized the new regulation, stating that it primarily benefits the insurance industry without adequately considering the impact on consumers. The rule is currently under review by the Office of Administrative Law and is expected to take effect within 30 days. California Insurance Commissioner Ricardo Lara emphasized that the goal of the regulation is to create a more stable insurance market that does not retreat from communities vulnerable to wildfires and climate change.
The new regulation is part of Commissioner Lara’s efforts to encourage insurers to continue operating in California. Another rule introduced earlier this month allows insurers to consider climate change when setting their prices, which was previously not permitted. The ultimate goal of these regulations is to reduce the number of homeowners relying on the California Fair Access to Insurance Requirements (FAIR) Plan, which serves as a last resort for those unable to obtain coverage from traditional insurers. The number of policies on the FAIR Plan has more than doubled in recent years, reaching nearly 452,000.
California has experienced increasingly destructive wildfires in recent years due to hotter and drier conditions caused by climate change. The 2018 fire in Paradise, California, resulted in 85 deaths and the destruction of thousands of homes, leaving many residents struggling to find insurance. Some residents, like Paradise Mayor Steve Crowder, have resorted to enrolling in the FAIR Plan, where coverage may not adequately protect their homes and belongings. Despite efforts to bring back insurers by implementing new safety standards, high insurance premiums have pushed some residents to forgo coverage altogether. Although Mayor Crowder welcomes the state’s new regulations, he remains cautious about whether they will effectively address the insurance crisis in California.
