By Alexander Cesta
On June 12, 2024, the California Department of Insurance (DOI) released an updated draft regulation to adopt section 2644.4.8 to Title 10 of the CCR — its latest action pursuant to Governor Newsom’s executive order directing DOI to “take prompt regulatory action to strengthen and stabilize California’s [insurance market],” and to “[m]aintain the long-term availability of homeowners… property insurance.” The proposed regulation advances Commissioner Lara’s Sustainable Insurance Strategy (SIS), aimed at modernizing ratemaking for insurance companies operating in the state. This update introduces significant modifications to the previously announced requirements for insurers utilizing catastrophe modeling. DOI states the policy’s goal is to “[safeguard] the overall health of the insurance market, comprised of consumers, homeowners and business owners, while ensuring long-term sustainability.”
As insurers withdraw from high-risk areas, significantly more homeowners have opened policies with The California FAIR Plan. The FAIR Plan, funded by mandatory contributions from insurance companies operating in California, provides basic fire coverage for homeowners who cannot find insurance elsewhere. However, as the number of policies under the FAIR Plan grows, so does the plan’s overall risk exposure. A September 3, 2024, bulletin from the DOI outlined that if the plan’s reserves are exhausted, any excess costs will be split between insurers and already struggling homeowners.
Lara’s SIS would be California’s largest insurance reform in over 30 years. Announced early this year, the policy would allow insurers to use catastrophe models (CAT models) to project future climate risks and set rates. Currently, insurers rely on historical data to account for disaster risk. The extreme wildfires in 2017 and 2018 greatly affected this data, and property insurance has been on the rise in California ever since. Proponents of the change say that under the current system, investments in wildfire mitigation often go unrecognized in the calculation of premiums. “Over the past several years, the state has put billions toward wildfire mitigation efforts, and homeowners have made significant investments in home hardening,” said Commissioner Lara. According to Lara, the proposed forward-looking models would attempt to account for those investments, potentially creating lower rates for some homeowners.
Proponents of the policy tout its potential benefits. They argue that catastrophe models would allow insurers to estimate the risks they take better and could help stabilize the insurance market. Mark Sektnan, vice president of state government relations for the American Property Casualty Insurance Association, stated, “[m]ore accurate ratemaking will help restore balance to the insurance market and ensure all Californians have access to the coverage they need.” According to Commissioner Lara, the goal is to prevent further withdrawal of insurers from the market and reward homeowners who have taken steps to reduce their risk.
Critics, including Harvey Rosenfield of Consumer Watchdog, express concern over the proprietary nature of these models. Unlike traditional rate-setting methods publicly available for review, catastrophe models are proprietary, and the companies that develop them do not allow consumers to see how their risk was calculated. Rosenfield argues that this lack of transparency could lead to unjustified rate hikes, leaving consumers in the dark about how their premiums are calculated. According to Rosenfeld, “models are cloaked in the guise of technological infallibility, but they are drafted, they’re written, they’re controlled by humans.” He also pointed out that these models have not proven helpful in Florida, where homeowners face some of the highest premiums in the country despite insurers’ use of catastrophe models. [29:1 CRLR 67–68; 29:2 CRLR 60–63]
In addition to concerns over the proprietary nature of the models, the updated regulation seems to give insurers more flexibility than initially proposed. While the policy outlines clear commitments for insurers to expand coverage in adopted section 2644.4.8(d), section 2644.4.8(j) allows them to design and propose their own alternative commitments if they are unable to meet those standards.
On August 16, 2024, DOI announced it would hold a public hearing on September 17, 2024, to gather input from stakeholders.