By Megan Fan Munce, SAN FRANCISCO CHRONICLE
https://www.sfchronicle.com/california/article/home-insurance-wildfire-model-19768876.php
California regulators and academic researchers have launched a partnership to develop what they say would be the nation’s first public model for predicting wildfire losses.
Private models are already key tools in the insurance world, where companies use them to make decisions about the risk of specific properties — ultimately impacting who they offer insurance to and who they don’t. California has historically banned carriers from using wildfire models to price insurance, though new regulatory changes that take effect later this year will change that.
Consumer groups have raised concerns that the forward-looking private models, which are crafted by third-party companies such as CoreLogic and Verisk, could overestimate risk and overcharge consumers.
The new regulations would require the private models to be reviewed by the California Department of Insurance before they can be used in prices. While the department cannot regulate which properties insurers choose to cover, including how companies use models to make such decisions, it does have the ability to oversee the role those same models play in rate-making.
By crafting its own public model, with the help of experts from California universities, the Department of Insurance says it will be able to benchmark private models to ensure they are fair and accurate.
“If we do this right, (we) can be a standard-bearer for all the Western states, Alaska and Hawaii, who are working to do something similar,” Insurance Commissioner Ricardo Lara said Tuesday at a hearing of the state Assembly Insurance Committee. “We’re being bold. We’re being innovative.”
The public model will also become a resource for local governments to understand wildfire risk and safety, Insurance Commissioner Ricardo Lara told state lawmakers.
The first step will be to form a strategy group chaired by Eric Riggs, dean of the College of Natural Resources & Sciences at Cal Poly Humboldt, who will invite researchers across the state to participate, including from the California State University and University of California systems.
Insurers and the department have said that the forward-looking models are key in an environment where climate change is increasing the frequency and severity of natural disasters such as wildfires.
At a separate Tuesday hearing held by the Department of Insurance to discuss its regulations to allow models to help with price-setting, representatives of both consumer groups and the industry generally cheered the announcement of a public model.
But Karen Collins, vice president for property and environmental at the American Property and Casualty Insurance Association, worried that “subjective discretion” could lead researchers to develop a model that predicts the lowest possible prices.
To combat that, Collins called for the department to publish detailed and documented standards for all models to be held to.
“We believe this would help ensure a rigorous, though consistent, set of protocols for testing model output and input in order to assess the reasonableness, consistency and reliability of the results for ratemaking purposes,” she said.
Carmen Balber, executive director of the consumer group Consumer Watchdog, also argued having a public model didn’t fully address her group’s concerns that private models lack public transparency, given that the department’s review of them will happen confidentially in order to protect companies’ proprietary information.
But the department has said its review, while confidential, will ensure that the models themselves are accurate and that insurance companies are using them fairly to influence prices.
Lara told the Insurance Committee on Tuesday that he was hiring additional staff to oversee the model review process.
Florida is the only other state with a public catastrophe model, which it uses to estimate wind hazards, engineering vulnerabilities and potential insured losses. That model took five years and millions of dollars to create, according to the California Department of Insurance. Private models exist for other catastrophes, such as earthquakes and the fires that can follow.
The strategy group will meet for the first time in October with the intention to release recommendations on technical needs, use opportunities and potential funding sources for a public wildfire model by April 2025.