California unveils landmark sustainable insurance strategy

California insurance commissioner Ricardo Lara has unveiled a package of reforms that aims to alleviate the state’s troubled insurance market, including changes to the FAIR Plan and a deal with insurers that allows more people to transition back to the regular insurance market.

Billed as the largest insurance reform since state voters’ passage of Proposition 103 nearly 35 years ago, California’s Sustainable Insurance Strategy is a comprehensive plan to protect Californians from increasing climate threats while ensuring the long-term stability of the commercial market.

California Governor Gavin Newsom has signed an executive order urging prompt regulatory action to enact the reforms.

Multiple years of losses due to wildfires and other climate change-driven disasters have prompted some carriers to stop issuing new home and commercial property insurance policies in the state, limit their coverage, or non-renew existing policyholders.

The pullouts have pushed more people to the FAIR Plan, which was originally intended as an insurer of last resort but has since become the only option for some areas in California.

What is in California’s sustainable insurance strategy?

The plan involves transitioning more homeowners and businesses from the FAIR Plan back into the normal insurance market by requiring insurers to write no less than 85% of their statewide market share in high wildfire risk communities.

That means if an insurance company writes 20 out of 100 homes statewide, it must write 17 out of 100 homes in a distressed area, a Press release from the insurance commissioner’s office stated.

The string of measures also includes:

• Giving FAIR Plan policyholders who comply with the Safer from Wildfires regulation first priority for transition to the normal market, enhancing the state’s overall wildfire safety efforts
• Expediting new rules for the review of climate catastrophe models that recognize the benefits of wildfire safety and mitigation actions at the state, local, and parcel levels
• Directing the FAIR Plan to further expand commercial coverage to $20 million per building to close insurance gaps for homeowners’ associations and condominium developments to help meet the state’s housing goals and to provide required coverage to other large businesses in the state
• Holding public meetings exploring incorporating California-only reinsurance costs into rate filings
• Improving rate filing procedures and timelines by requiring insurance companies to submit a complete rate filing, hiring additional department staff to review rate applications and inform regulatory changes, and enacting intervenor reform to increase transparency and public participation in the process
• Increasing data reporting by the FAIR Plan to the department, legislature, and governor to monitor progress toward reducing its policyholders
• Ordering changes to the FAIR Plan to prevent it from going bankrupt during an extraordinary catastrophic event, including building its reserves and financial safeguards

Governor Newsom stressed that it was critical for California’s insurance market to work to protect homes and businesses “in every corner of the state.”

“A balanced approach that will help maintain fair prices and protections for Californians is essential,” the governor said in a Press release. “I look forward to continuing to work with Commissioner Lara and others to strengthen our marketplace and protect Californians.”

Governor @GavinNewsom just signed an executive order to help strengthen California's property insurance market.

Climate change threatens our communities and livelihoods — it's critical California’s insurance market protects homes and businesses throughout the state. pic.twitter.com/CwD9FdBn6Z

— Office of the Governor of California (@CAgovernor) September 22, 2023

Commissioner Lara said California is at a major crossroads on insurance after years of natural catastrophe losses.

“The current system is not working for all Californians, and we must change course. I will continue to partner with all those who want to work toward real solutions,” Lara said.

Industry reacts to California’s sustainable insurance strategy

The American Property Casualty Insurance Association (APCIA) has lauded the new measures and promised to work with California’s department of insurance to improve the stability of the state’s insurance market.

“We want to thank Governor Newsom for his Executive Order outlining needed reforms to address California’s insurance crisis. We also want to commend Insurance Commissioner Ricardo Lara for his commitment to regulatory reforms. We urgently need to begin enacting reforms to try and repair the insurance market and protect consumer access to coverage,” said Denni Ritter, APCIA department vice president for state government relations, in a statement.

“California’s 35-year-old regulatory system is outdated, cumbersome and fails to reflect the increasing catastrophic losses consumers and businesses are facing from inflation, climate change, extreme weather and more residents living in wildfire prone areas.  The actions announced by the Commissioner are the first steps of many needed to address the deterioration of the insurance market.

“Everyone understands that California’s insurance market is in a spiraling crisis that requires immediate policy solutions to protect consumer access to the coverage they need.

“We will continue to work with the insurance commissioner, the governor, the California legislature and other stakeholders to promote meaningful reforms, including the assurance of timely approval of adequate rates that bring stability and availability to the market so Californians can access the insurance they need to protect their homes, cars, and businesses.”

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