By Tina Keele, CIRMS, from Socher Insurance
In a September 19, 2024, interview with CalMatters, California Insurance Commissioner Ricardo Lara discussed the state’s ongoing efforts to restore stability to California’s insurance market. With insurers withdrawing from high-risk areas due to climate change and growing reinsurance costs, homeowners and businesses alike are struggling to find affordable coverage. Lara’s solution, known as the Sustainable Insurance Strategy (SIS), aims to reshape the insurance landscape in California. Here’s how.
The Need for Reform
California, the largest insurance market in the U.S. and fourth largest globally, is currently experiencing an insurance crisis, especially in wildfire-prone regions. Insurance companies have been exiting the market, leaving residents and businesses in high-risk areas vulnerable. Lara’s plan is designed to make insurance more available and affordable by addressing key regulatory and market inefficiencies.
Key Aspects of the Sustainable Insurance Strategy
Lara’s Sustainable Insurance Strategy is built around several core initiatives:
- Speeding Up Rate Reviews: California’s Department of Insurance (CDI) must approve any insurance premium rate increases before they can be implemented by the carrier, but the process is slow. It can take six to twelve months, or longer, leaving insurers stuck in a backlog. One of Lara’s top priorities is to accelerate the rate review process, so insurance companies don’t abandon the state while waiting for approval. Part of the solution is implementing a data reconciliation tool, which will ensure that both regulators and insurers “speak the same language” when sharing data, significantly cutting down on delays.
- New Catastrophe (Cat) Models: Wildfires have changed the risk landscape in California, and the models used to predict these risks need to evolve. Currently, insurers have private cat models that help predict wildfire behavior, but Lara plans to develop a public cat model in collaboration with CalPoly Humboldt and San Luis Obispo. This model, expected by 2025, will standardize how wildfire risks are evaluated and ensure insurers use accurate, community-focused data. Until then, insurers will be allowed to use their private models, provided they share the data for verification and meet certain thresholds for increasing their coverage of risks located in distressed areas. Large insurers will be required to write 85% of their business in wildfire-distressed areas to reduce reliance on the FAIR Plan and move more policies into the private market. For mid-sized carriers, he proposes to increase their business by 5% in distressed areas, and for commercial carriers, a 5% increase in the total insurable value (TIV) in distressed areas.
- Reinsurance Costs: Reinsurance, often referred to as insurance for insurance companies, is a contract between a reinsurer and an insurer. In this contract, the insurance company—known as the ceding party or cedent—transfers some of its insured risk to the reinsurance company. The reinsurance company then assumes all or part of one or more insurance policies issued by the ceding party.
One of the most notable changes is allowing insurers to factor in reinsurance costs — something California currently doesn’t permit. Reinsurance is critical for insurers, particularly in a state as large and disaster-prone as California. By aligning California’s regulations with other states, Lara hopes to lower the costs and uncertainty surrounding reinsurance, especially since climate change is making it harder for reinsurers to operate. A key part of the plan is creating a California-only reinsurance market, separate from global reinsurance risks, which could provide stability and predictability. - Fixing the FAIR Plan: The California FAIR Plan was created as a last-resort insurance option for those who couldn’t find coverage in the private market. However, Lara believes the plan needs to evolve. His proposed regulations include raising the maximum coverage limits and increasing insurers’ participation in the plan. He is also expanding coverage limits, especially for commercial properties like Homeowners Associations (Condos/Townhomes), YMCA locations and youth camps, which have been struggling to secure insurance.
Addressing Commercial and Residential Gaps
Lara stressed that California’s insurance issues don’t just affect homeowners—they impact commercial properties, non-profits, and landlords as well. Commercial properties, especially in urban and wildfire-prone areas, are facing a significant insurance gap. With SIS, Lara hopes to create a more interconnected insurance space where urban and rural areas alike can access affordable coverage.
In addition, the commissioner is focusing on community-wide mitigation efforts. By encouraging residents and businesses to work together on wildfire mitigation, such as clearing brush and hardening homes, entire communities can reduce their risk, and in turn, help reduce loss due to wildfire thus lowering insurance premiums. This approach recognizes that the risks faced by California communities are interconnected.
Challenges and the Road Ahead
Lara admits that reforming California’s insurance system is no easy task, and his efforts have “ruffled some feathers,” particularly among entrenched financial interests. However, he remains confident that SIS will improve the insurance market by the time his term ends in 2026. By implementing these reforms, Lara believes insurers will return to California, offering more affordable and available coverage.
Conclusion
Ricardo Lara’s Sustainable Insurance Strategy offers a multi-pronged approach to tackling the complex challenges of California’s insurance market. By speeding up rate reviews, allowing reinsurance costs to be factored into ratemaking, developing new catastrophe models, and modernizing the FAIR Plan, Lara’s strategy aims to create a more resilient and sustainable insurance system that benefits all Californians—from homeowners to businesses and beyond. Only time will tell how successful these reforms will be, but Lara is optimistic that his plan will stabilize the market and bring insurers back to the state.
This is a crucial turning point for the insurance industry in California, and the eyes of the nation are watching to see how this strategy unfolds.