California bends rate rules to rebuild homeowners insurance

California will make concessions to homeowner insurers on rate setting rules in return for statewide coverage guarantees, a market strategy released by California regulators shows.

“We are at a major crossroads on insurance after multiple years of wildfires and storms intensified by the threat of climate change,” said California's insurance commissioner Ricardo Lara. “I am taking immediate action to implement lasting changes that will make Californians safer through a stronger, sustainable insurance market.”

In the pending deal, California will allow insurers to base rate filings in part on catastrophe models, most notably for wildfire, not just the historical loss experience as demanded by regulations to date.

"Regulations on catastrophe modelling will allow for long-term sustainability of coverage and rates," the California Department of Insurance said in a presentation released alongside the announcement.

California will further begin investigating options for incorporating California-only reinsurance costs into rate filings. Public meetings on the matter are planned.

Homeowner rates will additionally be required to show discounts for homeowners adhering to mitigation and hardening requirements.

And rate setting procedures may be greased. Plans speak of unspecified improvements to rate filing procedures plus bolstered staffing in the rate approval department.

In return, insurance carriers will be forced to maintain a market share in areas designated as high-risk at no less than 85% of the market share they hold nationwide, the plan indicates.

It may be a tight-nosed deal: benefits only accrue to growth-oriented carriers. “Companies can only utilise new tools if they increase writing” and have clear targets for depopulating the state's residual insurance scheme, the FAIR Plan.

Depopulation from the FAIR Plan will follow unspecified executive action tied to the new market share requirements. FAIR Plan policyholders who comply with the new wildfire resilience regulations will have first priority for transition to the market.

California had given signals that some form of changes were in the works. Release of the market strategy followed hot on the heels of an executive order by California Governor Gavin Newsom urging prompt regulatory action.

Inclusion of cat modelling in rate proposals had been on the table during a series of recent public hearings.

Action took on increased likelihood as a slew of the state's top insurers took action since 2022 to limit their California exposure.

State Farm, the market leader with a 21.2% market share, paused new policies. The state's #2, Farmers with a nearly 15% market share, limited new policy writing to 7000 per month. Allstate, USAA, Travelers, Nationwide and Chubb - all in the state's top twelve which combined for 85% of the market - also announced restrictions from 2022.

California's ten-year direct incurred loss ratio through 2021 came to 73.9%, 14.2 points above the national average, NAIC data compiled by Lara's office showed.

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