By Lisette Cruz

On December 30, 2024, the California Department of Insurance (CDI or the Department) published a news release announcing the new Net Cost of Reinsurance in Ratemaking Regulation. The regulation is the final major step in advancing CDI Commissioner Ricardo Lara’s Sustainable Insurance Strategy (SIS), which aims to restore stability to the California insurance market and increase coverage availability in high-risk and distressed areas amid growing climate-related challenges. The new regulation amends section 2644.25 to Title 10 of the California Code of Regulations (CCR). The Net Cost of Reinsurance in Ratemaking Regulation will allow insurance companies to consider the costs or benefits of reinsurance in their ratemaking calculations that may require an increase coverage in wildfire-prone regions by at least 85% of their statewide market share. Insurance companies will be required to increase coverage in distressed areas by 5% every two years until the minimum threshold is met. Further, the regulation is designed to classify reinsurance as an insurance company expense permitted under Proposition 103. It sets a standard cost of reinsurance that limits the costs passed on to consumers. Insurance companies exceeding the industry standard will be prohibited from charging policyholders excess costs.

Proponents for the regulation include Laura Curtis, assistant vice president of state government relations for the American Property Casualty Insurance Association, who has stated that “[i]ncorporating reinsurance into ratemaking is one of several critically needed reforms to stabilize California’s insurance market . . . California is the only state that does not allow reinsurance in ratemaking.” Further, in its Climate Risk Management in the U.S. Insurance Sector report, Ceres and CDI revealed that insurance companies find reinsurance coverage to be the leading factor in concluding that “climate risk is not a material threat or solvency concern for their company.” As a result, reinsurance as a ratemaking factor would motivate insurers to write and expand coverage in higher-risk areas throughout California and provide homeowners with more policy options.

Critics, including Jamie Court of Consumer Watchdog, express concern over the lack of transparency in the regulation, as it can “drive up home insurance rates by 40% to 50% without offering a substantive expansion in wildfire coverage.” Reinsurance in ratemaking in other states throughout the country has seen double-digit rate increases to policyholders’ insurance premiums, with an average increase of 33% in states with the most disaster risk. Court asserts that the burden on California homeowners in fire-prone areas will be more severe, where rate increases ranging from 50 to 200% have already been observed, with the new regulation potentially exacerbating these costs.