The California Department of Insurance (CDI) on Monday released the final Net Cost of Reinsurance in Ratemaking Regulation, which requires insurance companies for the first time to increase coverage in high-risk areas, ensuring more options for Californians while limiting the costs passed on to consumers.
“Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change,” said California Insurance Commissioner Ricardo Lara. “This is a historic moment for California.”
The new regulation is part of Lara’s Sustainable Insurance Strategy, which he said targets specific state challenges and will help build 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,” Lara said.
Reinsurance — a financial tool that helps insurance companies manage their risk portfolios associated with the policies they write to homeowners and business owners — has become an increasingly important component for how insurance companies operate in high-risk and distressed areas, including California, as climate risks escalate across the nation, the CDI said.
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 the state’s insurance market, said the department.
Under the new regulation, insurance companies must increase coverage in wildfire-prone regions, ensuring they write policies for at least 85 percent of their statewide market share, with annual increases until the threshold is met.
All homeowners insurance companies also must increase the writing of comprehensive policies in wildfire distressed areas equivalent to no less than 85 percent of their statewide market share. Currently, there is no legal requirement for insurers to provide any coverage in high-risk areas. Now, companies will have to continue to increase by 5 percent every two years until they meet this threshold, according to the reg.
Additionally, the regulation treats reinsurance like other insurance company expenses allowed under Prop. 103 today — such as claims handling or agent commissions — by establishing an industry-wide standard cost of reinsurance and capping the amount of reinsurance costs that can be charged to consumers. Companies spending more than the industry standard cannot pass these costs onto their policyholders.
The regulation also establishes a standard cost based on an index of what insurance companies spend encourages them to be efficient and compete for the best price for reinsurance, so consumers get the best value.
Among other provisions, the regulation limits costs to California-only, so consumers do not pay for the cost of Gulf Coast hurricanes or Midwest windstorms, according to CDI, and the regulation goes hand-in-hand with forward-looking wildfire catastrophe models that can better predict future rates.
Under the current system of historical data, for instance, insurance consumers are paying balloon premiums and rate spikes after major wildfires, without increased availability.
The American Property Casualty Insurance Association (APCIA), the primary national trade association for home, auto, and business insurers, applauded the state regulation.
“Incorporating reinsurance into ratemaking is one of several critically needed reforms to stabilize California’s insurance market,” said Laura Curtis, APCIA assistant vice president of state government relations. “California is the only state that does not allow reinsurance in ratemaking.”
Curtis said APCIA appreciates Lara taking this step as a part of his Sustainable Insurance Strategy.
“We look forward to carefully reviewing the regulation and working with the department to ensure it effectively improves access and availability to insurance for all Californians,” she said.