What to Know About California's Proposed New Rules for Insurance Companies

Months after California’s home insurance market was rattled by major companies pausing or restricting their coverage, the state’s top regulator said Thursday that he would write new rules aimed at persuading insurers to continue doing business here.

Since last year, seven of the 12 largest insurance companies in California have either stopped issuing or restricted the number of new homeowners policies — leaving many Californians with fewer options for insuring their homes and businesses.

State lawmakers failed to reach a legislative solution last week, which prompted Gov. Gavin Newsom to issue an executive order on Thursday urging California Insurance Commissioner Ricardo Lara to resolve the situation. The plan essentially allows insurers to consider climate risks when setting their rates and to raise those rates in exchange for issuing more policies.

Here’s a look at what Lara has proposed and how it would affect the state’s insurance market.

What are the rules for insurance companies in California?

Unlike most states, California heavily regulates its property insurance market.

In 1988, voters in the state approved Proposition 103. It said insurance companies had to get permission from the state Department of Insurance before they could raise their rates.

When setting their rates, insurance companies cannot consider current or future risks to a property. They can only use historical data.

Insurance companies also buy insurance themselves, a process known as reinsurance. Companies are not allowed to consider their reinsurance costs when setting rates for California homeowners.

What’s the problem?

Climate change has intensified wildfires in California. Of the 20 most destructive fires in state history, 14 have occurred since 2015, according to the California Department of Forestry and Fire Protection.

Insurance companies say that because they can’t consider climate change in their rates, it makes it difficult to truly price the risk for properties. They also are having to pay more for reinsurance, which they cannot recoup from ratepayers.

Many insurers have responded by pausing or restricting new business in the state. They’ve also opted to not renew insurance coverage for some homeowners.

When homeowners who need insurance can’t get it from private insurance companies, they must purchase policies from the state’s Fair Access to Insurance Requirements (FAIR) Plan. Insurance companies doing business in California must put money into a fund to pay for coverage under the FAIR Plan.

The number of people on the FAIR Plan has nearly doubled in recent years. Both state regulators and insurance companies are worried about this trend. If the fund were to go insolvent, insurance companies would have to cover the cost.

What’s the state’s plan?

Insurance Commissioner Ricardo Lara said he will write new rules that would let insurers consider climate change when setting their rates. He has also pledged to consider rules that would let them look at some of their reinsurance costs.

The rules requiring insurance companies to get permission from the state to raise their rates would not change.

Lara said the state will only let companies use these new rules if they write more policies for people who live in areas threatened by wildfires. He said this means companies must write policies in these areas of no less than 85% of their statewide market share. That means if a company insures 20 out of 100 homes, the company would have to also write 17 policies for homeowners in an area threatened by wildfires.

How will this affect insurance rates?

Some consumer groups, including the California-based Consumer Watchdog, say that allowing insurance companies to consider climate change in their rates will lead to dramatically higher prices for homeowners. They argue that the percentage of homeowners who have been forced into the FAIR Plan is far less than the number who will see higher rates now.

But Lara said the new rules could also benefit homeowners. He said insurance companies could also consider improvements that owners have made to make their homes more resistant to wildfires. Companies could also consider the billions of dollars in public money that the government has spent to better manage forests and reduce wildfire risks.

If the rules work and more companies stay in California’s insurance market, it could increase competition for customers — potentially holding rate increases in check.

When would the new rules take effect?

It would take a while for state regulators to write the rules. The process includes lots of time for insurance companies and consumer groups to give their input. Lara said he has given the department a deadline of December 2024 to have the new rules completed.