California cuts insurance deal forcing home coverage in fire zones — but it could raise prices

After years of insurance woes for California homeowners living in wildfire-prone areas, Gov. Gavin Newsom and state officials are attempting to stabilize the market — although consumer advocates say their strategy could increase costs for residents.

Insurance Commissioner Ricardo Lara on Thursday announced his office had reached an agreement with homeowner and commercial property insurance companies that would push them to take on more customers in high fire-risk areas in exchange for allowing them to use catastrophe modeling to set premiums.

Lara’s announcement came after Newsom issued an executive order asking for “prompt regulatory action” to shore up the state’s insurance framework, which is collapsing under the strain of increasingly intense wildfires.

By December 2024, the California Department of Insurance will require insurance companies to write at least 85% of their statewide market share in fire-distressed areas selected by the commissioner. The companies must also help return homeowners using the California FAIR plan — considered the state’s “insurer of last resort” — to the regular insurance market.

The expensive state plan has become the only option for some homeowners looking to insure their property from fire damage after being dropped from their conventional plans or being denied coverage.

In exchange for underwriting riskier policies, companies will be permitted to use catastrophic modeling to set insurance rates, a practice Lara’s office did not previously allow. The companies will also gain the ability to pass reinsurance costs on to consumers.

Consumer Watchdog blasted the deal, saying Lara has “given into the industry’s demands,” and insurance companies will use the new modeling tools with “secret algorithms” to drive up consumer costs.

“The use of catastrophic modeling and adding of reinsurance costs to premiums has pushed Florida premiums up two to three times higher than California’s,” said Jamie Court, president of Consumer Watchdog, in a statement. “California is in danger of becoming Florida with these changes that mimic the failed strategies in the Florida.”

California Insurance Commissioner Ricardo Lara announces actions aimed at improving insurance choices and addressing the long-term sustainability of the state insurance market during a press conference at the state Capitol on Thursday. Hector Amezcua/
California Insurance Commissioner Ricardo Lara announces actions aimed at improving insurance choices and addressing the long-term sustainability of the state insurance market during a press conference at the state Capitol on Thursday. Hector Amezcua/

California insurance crisis

Newsom’s order and Lara’s announcement come just weeks after the governor and the commissioner failed to secure an eleventh-hour deal with lawmakers to stop California insurance providers from fleeing the state. Lara said some elements of the agreement he announced were the product of those legislative discussions.

California’s insurance crisis exploded after a wave of devastating wildfires in 2017 and 2018 caused billions of dollars in damages. Insurance companies dropped tens of thousands of policyholders living in wildland-urban interfaces. Those homeowners were then required to pay two to three times as much for alternate coverage.

Since then, two of California’s largest insurance providers, Allstate and State Farm, stopped selling new policies to homeowners across the state, regardless of whether they live in fire-prone areas. And Farmers Insurance announced it would start capping the number of new policies it underwrites.

In some rural parts of the state, homeowners can get insurance only through the state’s FAIR plan. This drives up costs significantly because homeowners then need to acquire separate policies for burglary and other typical risks.

When asked whether this agreement would push companies to come back to California, Lara said it’s “going to take time.”

“We’re going to wait to make sure that these regulations get done,” he said. “This is why I want to make sure we get it done within the year — so that then they could submit the rate filings now and move quickly on writing again, or continuing to write new business in California.”

The American Property Casualty Insurance Association, an industry trade group, called Lara’s changes “the first steps of many needed to address the deterioration of the insurance market.”

Denni Ritter, the association’s vice president for state government relations, did not mention whether the regulatory shifts would be enough to bring insurers back to the California market.

“We will continue to work with the insurance commissioner, the governor, the California legislature and other stakeholders to promote meaningful reforms,” Ritter said in a statement. “Including the assurance of timely approval of adequate rates that bring stability and availability to the market so Californians can access the insurance they need to protect their homes, cars, and businesses.”

Insurance and catastrophic modeling

Lara previously opposed allowing companies to use catastrophic modeling. He told The Sacramento Bee in February 2022 the practice “doesn’t reduce the risk.”

He said on Thursday he changed his mind because “we can no longer rely on historical data” due to the effects of climate change.

“Doing that, we’re actually putting consumers and communities in danger,” Lara said. “We need to be able to follow the science, we need to be able to use technology. But we also need to verify that.

“And that’s what we guarantee in this process.”

Lara said he “absolutely” thinks catastrophic modeling algorithms should be made available and promised a “public process” to make that possible.

“The other important thing is that the department will be able to verify these models to make sure they’re accurate,” he said. “So that’s an important distinction now that we currently do not have.”

When asked whether the regulation shifts would increase costs for consumers, Lara was vague. He emphasized the new tools would allow companies to take into account fire-safe renovations or “home-hardening” that owners have done to mitigate risk.

“We’re going to be able to (home) in on those properties that have done the mitigation and make sure that our rate analysts look at that and appropriately price the risk for that individual, especially if they’ve done the hardening,” he said.

Insurance exodus affects Californians

Sean Lomen, a Colfax city councilman and retired fire captain, said many of his friends and constituents who were policyholders for more than 30 years were dropped by their insurance providers in recent years.

“It seems insurance companies have drawn an arbitrary line at about 2,000 feet of elevation in the foothills and Sierra (Nevada) and are canceling policies,” he said. “They’re just taking their money and running.”

The city of Colfax adopted a defensible space ordinance last year that requires homeowners to remove hazardous debris and vegetation within 100 feet of a structure. Lomen said he’d like to see more insurance companies look at properties individually and take those proactive steps into account before making blanket decisions to drop homeowners in certain parts of the state.

“All of us in urban interface areas that bump up against U.S. forestland or state parks are kind of faulted for being close to these under-maintained areas, it seems like,” he said. “I think current measures taken by community members should be the heavier weight when looking at considerations on coverage.”

After the legislative deal imploded, Assembly Speaker Robert Rivas, D-Hollister, said that lawmakers would hold a series of public hearings this fall focusing on access to insurance coverage.

“Our mission has always been to ensure homeowners and businesses across California can access and retain comprehensive insurance coverage,” Rivas said in a statement.