California preps use of cat models in wildfire & flood insurance pricing

California will extend the allowable use of catastrophe models in insurance pricing, adding wildfire, terrorism, and flood lines to the roster of homeowners and commercial lines where modelled estimates can tweak historical averages when setting prices. 

A draft regulation released by the state insurance commissioner’s office adds those key perils to a list that had been restricted to earthquake and resulting fire. By law, all other perils have been priced exclusively on historical data. Defence and cost containment expense also sneak into the equations. 

The to-date rules “have contributed to rate spikes and balloon premiums following major wildfire disasters without fully accounting for the growing risk caused by climate change or risk mitigation measures,” the commissioner's office admitted in its review of the proposal. 

The proposed rule would give the commissioner leeway to allow for additional cat modelling use in other lines, but also to veto models that don't make the grade. 

The extension of cat modelling in insurance pricing is a centrepiece of the Commissioner Ricardo Lara's “Sustainable Insurance Strategy,” a response to sharp rate hikes and insurer pullbacks from the state. 

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