Photo courtesy of AP.
California will allow insurance companies to take climate change into account when setting prices, the state’s chief regulator announced Thursday, raising concerns about huge losses from wildfires and other natural disasters. This measure is intended to prevent insurance companies from fleeing the state.
Unlike other states, California does not allow insurance companies to consider current and future risks when determining how much to charge. Instead, they can only consider what has happened with the property in the past to set the price.
As climate change makes wildfires, floods and storms more common, insurers say regulations are making it difficult to truly estimate real estate risks. That’s one reason why seven of the top 12 insurance companies operating in California have suspended or restricted new business in the state over the past year.
On Thursday, California Insurance Commissioner Ricardo Lara said the state would create new rules to allow insurance companies to consider the future when setting rates. But companies can only do this if they agree to create more policies for homeowners living in the highest-risk areas, such as communities threatened by wildfires. be.
“Modernizing the insurance market is not easy and will not happen overnight. We are truly in uncharted territory and have to make difficult choices in a rapidly changing world. “No,” Lara said at a press conference.
This rule change could mean higher tax rates for homeowners who have already seen significant increases. Eight insurance companies operating in California have requested rate increases of at least 20% this year, according to the California Department of Insurance.
Harvey Rosenfield, founder of the advocacy group Consumer Watchdog and author of a 1988 ballot measure that regulated insurance rates, said Lara’s announcement “will dramatically increase homeowners’ and renters’ insurance premiums. “It’s a dramatic increase of hundreds, maybe even thousands of dollars.”
But Lara said setting interest rates with an eye toward the future doesn’t necessarily have to be pessimistic. Insurers can also take into account things like the billions of dollars the country has spent to improve forest management and improvements homeowners have made to their homes to better withstand wildfires. All of this is not something insurers are allowed to take into account when setting premiums under current rules.
“Insurance companies are making a very strong case that the past is not as good a predictor of the future as it used to be,” said Amy Buck, executive director of United Policyholders, a national insurance consumer group. said. “I think the (insurance) department has done what it needs to do to restore a viable market. Right now, this state doesn’t have a viable market in many areas.”
California is not the only state where home insurance companies are struggling to survive amid natural disasters. Officials in Florida and Louisiana dealing with hurricanes and flooding have struggled to get companies to set policies. A recent report from the First Street Foundation found that about a quarter of all homes in the country are underinsured for climate risks. Florida allows insurance companies to consider climate risks, with limitations. States with less regulated insurance markets have insurance companies that incorporate current and future events into their models.
Wildfires have always been a part of life in California, where it only rains a few months of the year. But as the climate became hotter and drier, the fires became larger and more intense. According to the California Department of Forestry and Fire Protection, 14 of the 20 most destructive wildfires in state history have occurred since 2015.
Insurance companies are responding by not renewing insurance policies for many homeowners living in areas threatened by wildfires. Homeowners must then purchase fire insurance from the California Fair Access to Insurance Requirements (FAIR) Plan. All insurance companies doing business in California must pay into the fund to provide FAIR plan coverage.
The number of people participating in California’s FAIR plan nearly doubled in the five years ending in 2021, and that number has almost certainly increased even more over the past two years.
Lara said he plans to require insurance companies to insure at least 85% of their statewide market share in areas at risk of wildfires. That is, if a company writes insurance for 20 homes, he must write 17 new insurance policies for homeowners in areas affected by wildfires, and these people Must be excluded from his FAIR plan.
“This is a historic agreement between the Department of Insurance and insurance companies,” Lara said.
The Property Casualty Insurance Association of America, which represents insurance companies, called Lara’s action “the first of many steps needed to address a deteriorating market.”
“California’s 35-year-old regulatory system is outdated and cumbersome, and is undermining the growing and devastating losses consumers and businesses face due to inflation, climate change, extreme weather events, and the growing number of people living in wildfire-prone areas. “We haven’t been able to reflect that,” Vice President Denny Ritter said. The relationship with the state government said in a statement.
Jeremy Porter, co-author of the First Street Foundation’s report on climate risk, said the ability for insurers to factor climate change into pricing could lead to more competition in the state’s insurance market. He said there is.
“If this is done correctly, insurers will definitely be able to get back into the California market,” he said.
Some consumer groups, including Consumer Watchdog, say they are not opposed to insurers using forward-looking models to set rates. But they want to see what’s in that model. It’s unclear whether California’s new rules will allow that. State regulators will spend much of next year deciding what the rules will be.
Lara said he is committed to making these models available to the public.
“The ministry will be able to validate these models to ensure they are accurate,” he said.
