California considers new rules for property insurance pricing

California is contemplating new regulations for property insurance pricing. The California Insurance Commissioner, Ricardo Lara, has introduced a set of executive measures with the goal of enhancing property insurance availability across the state. Termed the “Sustainable Insurance Strategy,” this initiative is being hailed as the most significant insurance reform since Proposition 103 was ratified almost 35 years ago, aimed at safeguarding consumers against unjust insurance rates and practices. It represents a comprehensive strategy to modernize California’s insurance market.

The impetus for this overhaul comes after several of the state’s major insurance companies recently announced their decision to cease writing new homeowners’ policies due to escalating risks associated with natural disasters and rising construction costs. The plan seeks to address these issues, which are exacerbated by climate change, including global inflation and increased expenses for rebuilding, thereby contributing to California’s insurance crisis.

Commissioner Lara expressed the urgency of the situation, given multiple years of wildfires and storms intensified by climate change, stating, “We are at a major crossroads on insurance after multiple years of wildfires and storms intensified by the threat of climate change. I am taking immediate action to implement lasting changes that will make Californians safer through a stronger, sustainable insurance market. The current system is not working for all Californians, and we must change course. I will continue to partner with all those who want to work toward real solutions.”

In support of Commissioner Lara’s efforts, California Governor Gavin Newsom issued an executive order urging swift regulatory action. Governor Newsom emphasized the necessity of a balanced approach to protect homes and businesses across the entire state while maintaining fair pricing and protection for Californians.

The key regulatory components of the plan include:

1. An executive move by Commissioner Lara to transition homeowners and businesses from the state-mandated FAIR (Fair Access to Insurance Requirements) Plan, which offers basic fire insurance coverage for high-risk properties unable to find coverage in the traditional market, back into the standard insurance market. Under this plan, insurance companies are required to commit to covering at least 85% of their statewide market share in high wildfire risk communities.

2. Granting FAIR Plan policyholders who engage in wildfire mitigation efforts under the state’s Safer from Wildfires framework priority access to the standard market.

3. Streamlining the department’s introduction of new rules for the evaluation of climate catastrophe models that consider the benefits of wildfire safety and mitigation measures at state and local levels.

4. Directing the FAIR Plan to expand commercial coverage to $20 million per building to close insurance gaps for homeowners’ associations and condominium developments.

5. Holding public meetings to explore the inclusion of California-specific reinsurance costs in rate filings.

6. Enhancing rate filing procedures and timelines by recruiting additional department staff to review rate applications from insurance companies.

7. Increasing data reporting by the FAIR Plan to the department, legislature, and governor to monitor progress in reducing its policyholders.

8. Implementing changes in the FAIR Plan to safeguard against bankruptcy in the event of an extraordinary catastrophic event, including building reserves and financial safeguards.

Notably, real estate associations in California, including the California Association of Realtors and the Silicon Valley Association of Realtors, have expressed support for these actions, as they recognize the importance of ensuring access to critical and reliable property insurance for homeowners in the state.