'Risky in California' spurs push for home insurance overhaul

(Bloomberg) — California is prioritizing home insurance availability as it rewrites market rules to coax back insurers and ease a coverage crunch in a state ravaged by wildfires, said state Insurance Commissioner Ricardo Lara.

“In order for us to get to affordability, we have to get to availability first,” he said in an interview with Bloomberg Television.

Lara hammered out a deal with major insurers last month that will allow companies to consider future climate risks when setting prices, while also requiring them to offer more coverage in areas prone to wildfires. The deal, which Lara has described as California’s biggest insurance overhaul since 1988, aims to pull companies back into the state market after more than half the major insurers retreated amid rising costs.

The new plan carries the potential for much higher rates since it includes changes that could weaken the state’s consumer-friendly policies.

Under the new rules, which are slated to be completed by December 2024, insurers will be able to raise premiums based on current and future risks as long as they agree to provide a certain share of coverage in areas vulnerable to fires. The existing rules only allow them to consider historical data.

To soften the blow, California has been working on discounts that customers can receive if they meet certain risk-mitigation requirements, making it “a win-win for the insurance market and for the homeowner,” Lara said. At the same time, the state is looking at ways for Californians to pay for the state’s reinsurance risks.

“California historically has not allowed reinsurance to be passed through the rates, because quite frankly, we didn’t want to pay for what’s happening around the world,” Lara said. “But we also recognize that we cannot ignore the fact that it’s risky in California.”

Insurers under the new plan have agreed to write at least 85% of their statewide market share in high-risk zones.

“This agreement with the industry has guaranteed not only that we’re going to keep insurance running, but 85% of our wildfire-distressed areas are going to have the coverage that they need,” he said.

Climate change has exacerbated wildfire risk in California, prompting insurers to pull back from the nation’s most populous state. Over the past year and a half, seven of the 12 major companies — including State Farm General Insurance Co., USAA and Allstate Corp. — said they would stop issuing new homeowner policies or decline to renew existing ones. Many of these companies have already filed requests with the state insurance department to raise rates by as much as about 40%.

The exodus of private insurers has burdened home buyers across the state, even in regions where wildfire risk is low. But higher rates would add to the expense of owning a home in one of the country’s priciest real estate markets.

Homeowners who have been unable to find a policy through a private insurer have been forced to rely on the state’s FAIR plan, which offers minimal coverage and higher rates. Though the state-backed option is meant to be a last-resort policy, enrollments have sharply risen by 70% since 2019 to 272,846 homes in 2022.

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