California is taking a historic step to address its insurance crisis in wildfire-prone areas. Under a new state regulation announced recently, insurers withdrawing from high-risk zones must return if they wish to continue doing business in the state. This marks the first time California has mandated home insurers to provide coverage in such areas.
Key Provisions of the Rule
Insurance companies will be required to increase their coverage in high-risk regions by 5% every two years until they reach 85% of their market share. For instance, an insurer currently holding 20% of California’s insurance market must write at least 17% of its policies in wildfire-prone zones.
To offset the financial risk, insurers will be allowed to pass the cost of reinsurance — a safety net for catastrophic losses — onto consumers. California is the only state that previously barred insurers from factoring reinsurance costs into premiums.
Industry Challenges and Consumer Concerns
Major insurers like State Farm and Allstate have scaled back operations in California, citing mounting losses from wildfires and other natural disasters. The new rule aims to stabilize the market, but critics argue it may come at a steep cost to consumers. Opponents warn of potential premium hikes of up to 40% and contend that the rule does not compel insurers to expand coverage quickly enough.
“This plan is of the insurance industry, by the insurance industry, and for the industry,” said Jamie Court, president of Consumer Watchdog, highlighting concerns about the rule’s consumer impact.
A Struggle for Coverage
The changes seek to reduce reliance on the California FAIR Plan, a last-resort insurance option providing basic coverage. Enrollment in the FAIR Plan has surged, doubling since 2020 to nearly 452,000 policies. Many homeowners, like Paradise Mayor Steve Crowder, have faced soaring premiums and insufficient coverage under the FAIR Plan. Crowder’s family, forced onto the FAIR Plan, pays $5,000 annually for a policy that undervalues their home by $100,000.
While Crowder acknowledges the rule as a step forward, he remains cautious. “Let’s wait and make sure it happens before we get excited,” he said, reflecting widespread skepticism among his constituents.
Wildfires and Rising Risks
California’s worsening wildfire season underscores the urgency of these reforms. With 14 of the state’s 20 most destructive wildfires occurring since 2015, the need for reliable insurance has become critical. The devastating 2018 Camp Fire, which killed 85 people and destroyed 11,000 homes, exemplifies the growing threat posed by climate change.
Broader Changes on the Horizon
The regulation is part of a broader effort by Insurance Commissioner Ricardo Lara to ensure a sustainable insurance market in California. A related rule allowing insurers to consider climate change when setting rates is set to take effect later this week. Together, these measures aim to balance industry viability with consumer needs, ensuring Californians have access to essential coverage.
“Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change,” Lara said, calling the new rule a pivotal moment for the state.
As the rule undergoes review by the Office of Administrative Law, Californians and insurers alike await its implementation within the next 30 days. While the regulation offers hope for increased coverage in high-risk areas, its ultimate success will depend on the balance it strikes between affordability and market sustainability.