California, with a population of 39 million, has 43.5% of residents owning their own homes. Many of these homeowners are struggling to find insurance for their properties, particularly as wildfires continue to devastate the state. This has led to numerous insurance companies being reluctant to issue new policies.
California’s Insurance Commissioner, Ricardo Lara, believes that reforms to the state’s insurance laws through the Sustainable Insurance Strategy will attract insurance companies back. But what exactly is this strategy and how can it benefit California homeowners?
Over the past five years, California has seen 6,269 wildfires that burned 995,829 acres of land, resulting in property losses amounting to $18.7 billion during that period.
Insurance companies have taken notice, with 7 out of the 12 largest insurers in California restricting new homeowner policies and opting not to renew others. These companies include State Farm, Allstate, Farmers, USAA, Travelers, Nationwide, and Chubb.
Existing customers have also seen rate hikes. For instance, State Farm was approved for a 20% rate increase effective from March 15, 2024, following a record 84% homeowner loss ratio in the first nine months of 2023.
California is in need of action, and the answer lies in the Sustainable Insurance Strategy.
In 2023, the California Department of Insurance introduced the Sustainable Insurance Strategy, a plan aimed at reforming the state’s insurance market.
Lara and other supporters argue that the strategy will attract insurance companies back to the market, provide more insurance options to protect consumers, and ensure resiliency and sustainability in the face of climate risks to stabilize the insurance market.
The strategy consists of several components, including the FAIR Plan, which serves as a safety net for homeowners who have suffered or are at risk of losses but do not qualify for regular insurance coverage.
All licensed insurers in California provide basic fire insurance, collectively shouldering the burden of insuring homeowners in high wildfire risk areas. Each insurer contributes based on its market share.
While FAIR Plan offers limited coverage compared to standard policies, supplemental coverage can be purchased outside of the plan.
Despite being a last resort rather than a long-term solution, 95% of homeowners enrolled in the FAIR Plan choose to renew their policies.
The Sustainable Development Plan aims to transition more homeowners and businesses out of the FAIR Plan and into the regular insurance market by requiring insurers to hold at least an 85% statewide market share in high wildfire risk communities.
This strategy also mandates expanding commercial insurance limits to $20 million under the FAIR Plan, bridging insurance gaps for homeowner associations and apartments to meet the state’s housing goals and cater to other large businesses’ insurance needs.
The integration of the Advanced Catastrophe Plan will be used in the rate approval process, improving prediction and preparation for climate-related disasters.
Historically, insurers have calculated catastrophe insurance rates based on wildfire losses, leading to significant rate spikes and balloon premiums after major wildfire disasters. These rules failed to consider certain climate-related risks or risk mitigation measures taken by communities.
In March, the California Department of Insurance announced its Comprehensive Catastrophe Plan, expanding the plan’s scope to include wildfires, terrorism, and floods for both homeowners and commercial insurance.
Prior to this, the Catastrophe Plan was only applicable for earthquake losses and post-earthquake fires.
The Comprehensive Catastrophe Plan assesses the financial impact of potential disasters beyond historical loss data, incorporating environmental factors revealed by the latest scientific research.
These proposed regulations will provide Californians with more stable rates, greater policy availability as insurance companies increase coverage, enhanced supervision by the insurance department, and safer communities. The plan reflects government and homeowner efforts to mitigate catastrophic risks.
Unlike all other states, California is the only one requiring insurers to use historical loss data from 20 years ago. Including the Catastrophe Plan has garnered a positive response from insurance companies as Ricardo Lara states that the current requirements are outdated.
Will the Sustainable Insurance Strategy persuade insurers to cover more policies? The plan is set to roll out in December.
The information contained in this article represents the views and opinions of the author and is for general informational purposes only. The Epoch Times does not provide investment, tax, legal, financial planning, real estate planning, or other personal financial advice. The Epoch Times makes no guarantee of the accuracy or timeliness of the content.