Directive Aims To Bring More Fire Insurance Options To High Risk Areas
Sonora, CA — It is commonly known that getting fire insurance is harder in the Mother Lode than in many other parts of the state.
In response to an increase in mega fires over the past decade, there has been a spike in people being dropped from coverage and forced to sign up for the California Fair Plan.
A new directive from California Insurance Commissioner Ricardo Lara is aimed at bringing back more insurance options. Insurers will be required to ramp up home coverage in high-risk areas if they want to keep doing business in other parts of California.
“Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change,” says Lara.
According to details provided by Lara’s office, insurers will have to start increasing their coverage by 5% every two years until they hit the equivalent of 85% of their market share.
To help insurance companies make up losses, the state will allow them to pass the costs of reinsurance on to Californian customers.
Companies like to buy reinsurance to avoid huge payouts in case of natural disasters or catastrophic losses. California is the only state that doesn’t currently allow the cost of reinsurance to be passed on to policyholders.
The non-profit Consumer Watchdog group, however, is warning that the change will also drive up insurance costs.
Jamie Court, president of Consumer Watchdog, says, “Tellingly the commissioner did not do a cost impact analysis of his plan on consumers. That’s because this plan is of the insurance industry, by the insurance industry, and for the industry. The Commissioner has left no opportunity for public comment on the regulation before it is final, by issuing it on an emergency basis.”
Lara, however, argues that the change is “historic, adding, “With input from thousands of residents throughout California, this reform balances protecting consumers with the need to strengthen our market against climate risks.”
The directive takes effect starting in 30 days.
Additional details regarding the changes, provided by the Insurance Commissioner’s office, are below:
What it means: Insurance companies must increase coverage in wildfire-prone regions, ensuring they write policies for at least 85% of their statewide market share, with annual increases until the threshold is met.
More coverage for Californians in wildfire-distressed areas: All homeowners insurance companies must increase the writing of comprehensive policies in wildfire distressed areas equivalent to no less than 85% of their statewide market share, whereas there is no current legal requirement today for insurers to provide any coverage in high-risk areas. Companies will have to continue to increase by 5% every two years until they meet this threshold.
Cost caps: 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.
Greater efficiency: Establishing 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.
California-only costs: The regulation limits costs to California-only, so consumers do not pay for the cost of Gulf Coast hurricanes or Midwest windstorms.
Reliable rates: 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, insurance consumers are paying balloon premiums and rate spikes after major wildfires, without increased availability.
Prevents “model-shopping”: “Model shopping” describes when insurance companies choose one model that produces higher rates for consumers, and another that lowers their reinsurance costs. To prevent model shopping, the regulation requires insurance companies utilize the same model for both. This promotes more consistent approaches to assessing risks, and balances the scales for consumers.
Largest insurance reform in 30 years: The new regulation is the final major element of the largest insurance reform in 30 years for California. The Department held multiple workshops and hearings in 2024, including a meeting on December 5 which was attended by more than 500 people and received 70 verbal and written comments which helped shape this regulation. Commissioner Lara has met with tens of thousands of Californians in all 58 counties across the state since taking office as well as testifying at four legislative briefings about his Sustainable Insurance Strategy over the past year.
