New reinsurance regulation launched to increase home insurance access in California wildfire-risk areas

A new regulation has been launched aimed to expand insurance access for Californians amid increasing climate risks, this includes increased coverage for wildfire-prone regions by factoring reinsurance costs into the provision of this insurance.

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Under the Net Cost of Reinsurance in Ratemaking Regulation, all homeowners insurance companies will be required to increase coverage in wildfire-prone regions, which will entail factoring in the cost of reinsurance.

According to the California Department of Insurance (CDI) announcement, they have to ensure they write policies for at least 85% of their statewide market share, and will have to continue to increase by 5% every two years until the threshold is achieved.

Currently, there is no legal requirement for insurers to provide any coverage in high-risk areas, the CDI stated.

The regulation aims to control reinsurance costs for consumers by treating them similarly to other insurance expenses.

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It establishes an industry-wide standard for reinsurance costs, and any expenses exceeding this standard cannot be passed on to policyholders.

This approach mirrors how Proposition 103 currently regulates expenses like claims handling and agent commissions, the CDI explained, ensuring that consumers are protected from excessive reinsurance costs.

Except for California, all other states allow incorporating reinsurance costs into insurance rates.

A 2023 study by Ceres and the California Department of Insurance highlighted that reinsurance is the primary strategy used by insurers to maintain and expand coverage in high-risk areas, both within California and nationally.

“As climate risks escalate across the nation, reinsurance has become an even more imperative component of insurance companies operating in high-risk and distressed areas, including California. Modernizing regulations around reinsurance will enable insurance companies to expand coverage and write more policies in communities across the state facing greater risk, ensuring stability and resilience in our insurance market,” the CDI stated.

By limiting costs to California-specific events, the regulation prevents consumers from being charged for the impact of hurricanes in the Gulf Coast or Midwest windstorms, the CDI noted.

The new reinsurance regulation complements the CDI’s recent update to wildfire catastrophe modelling rules for insurers, which requires them to increase their policy offerings in California’s underserved areas as a condition of incorporating catastrophe modelling into ratemaking.

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Commenting on the new reinsurance regulation, Insurance Commissioner Ricardo Lara said: “Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change.

“This is a historic moment for California. My Sustainable Insurance Strategy is focused on addressing the challenges we face today and building a resilient insurance market for the future.

“With input from thousands of residents throughout California, this reform balances protecting consumers with the need to strengthen our market against climate risks.”

In recent years, a number of insurers have pulled back from California due to fears of massive losses from wildfires and other natural disasters.

For example, State Farm pulled out of 72,000 California insurance policies in March this year. In May, the insurer announced it would stop writing commercial and residential property in the state.

Like State Farm, Allstate had also stopped offering new policies in California, citing climate conditions as its main challenge. Earlier this year, the insurer confirmed that it will return to writing policies in the state when reforms are enacted.

Farmers Insurance, another insurer that had restricted its coverage in California, has also announced it will resume offering coverage for multiple lines of insurance in the state to new customers.