California Insurance Commissioner Ricardo Lara announced the enforcement of a regulation aimed at expanding insurance coverage in wildfire-prone areas of the state, where insurers have fled and homeowners have struggled to find coverage in recent years.
The head of California's Department of Insurance (DOI) said Friday the state will now allow insurers to use catastrophe models to determine rate increases in hopes of stabilizing the market. In turn, insurers will be required to increase comprehensive coverage in fire-prone areas to at least 85% of their market share.
"Giving people more choices to protect themselves is how we will solve California’s insurance crisis," Lara said in a statement. "For the first time in history we are requiring insurance companies to expand where people need help the most."
The DOI said that for 30 years prior to the rule change, the state required insurers to use historic wildfire losses to determine a catastrophe factor for rates, which resulted in premium spikes following disasters.
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With the use of the catastrophe models, which predict future losses, insurers will be able to consider climate change risks and also take fire risk mitigation measures into account.
The aim is to attract insurers to these high-risk areas and provide more market choices than California's bare-bones FAIR Plan, which many home and business owners have been left with as a last resort in the absence of other options.
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Regulators hope the ability to raise rates more quickly will spark a return of insurers that have left the state. Under California's previous rules, it could take years for insurance companies to receive approval to increase premiums.
Several insurance companies have paused sales of new home insurance policies in California in recent years due to wildfires and higher costs of doing business in the state. Now, of the top 12 insurance companies in California, only five are still writing new policies.
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After State Farm, the largest insurer in California, announced earlier this year that it would cut 72,000 home and apartment policies in California because of inflation, regulatory costs and increasing risks from catastrophes, Lara called the situation "a real crisis."
FOX Business' Sunny Tsai contributed to this report.
