California is going through an insurance crisis, largely due to the effects of natural disasters and climate change. Catastrophic weather events, higher construction costs, global inflation, and greater reinsurance premiums have pushed insurers to limit exposure or withdraw from the market completely.  

Two of the state's largest insurance carriers, which represent over 27% of the admitted insurance market in California, and other insurers, announced they would stop issuing homeowners and commercial property policies in California. Over the past 10 years, homeowners insurance companies have performed much worse in California compared to the rest of the country. Over that time, they have a direct underwriting profit of 3.6% countrywide, compared to -13.1% in California.

On September 21, 2023, California Governor Gavin Newsom issued an executive order regarding these climatic changes and events and their effect on the insurance industry, stating that climate change has resulted in more frequent wildfires of greater intensity, and has also increased the occurrence and severity of winter storms. These extreme weather events have contributed to billions of dollars in insurance rate increases in the California market.

Seeking to improve insurance market conditions for consumers, the executive order requests Insurance Commissioner Ricardo Lara to take prompt regulatory action to strengthen and stabilize California's marketplace for homeowners insurance and commercial property insurance. Commissioner Lara has since launched the Sustainable Insurance Strategy, a package of executive actions aimed at improving insurance choices and protecting California residents from increasing climate threats. It marks the largest insurance reform In California since the passage of Proposition 103 nearly 35 years ago. 

The California FAIR Plan, meant to be the insurer of last resort, has become the only option in many areas of the state, and has increased to 3% of the California market. The number of new and renewed FAIR Plan policies in 2021 was more than 10 times the total in 2018. Rate filings are increasingly complex and can take longer than 6 months to review. The Sustainable Insurance Strategy seeks to improve on these areas. Key elements of the plan include:

  • A plan to transition homeowners and businesses from the FAIR plan into the normal insurance market, with commitments from insurance companies to write at least 85% of their statewide policies in high wildfire risk areas.
  • Giving FAIR Plan policyholders who comply with the Safer from Wildfires regulation priority for translation to the voluntary market.
  • Increasing data reporting by the FAIR Plan to monitor progress toward reducing its policyholders
  • Directing the FAIR Plan to expand commercial coverage to $20 million per building to close insurance gaps for homeowners associations and affordable housing
  • Ordering changes to the FAIR Plan to prevent it from going bankrupt, including building its reserves and financial safeguards, in the case of an extraordinary catastrophic event
  • Exploring incorporating California-only reinsurance costs into rate filings, protecting consumers from paying costs of other global catastrophes.
  • Improving rate filing procedures and timelines.

 

The news release on this program can be found here.

 

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