By Megan Fan Munce, Sriharsha Devulapalli, SAN FRANCISCO CHRONICLE
https://www.sfchronicle.com/california/article/insurance-regulations-map-19508877.php
A proposed regulation unveiled Wednesday aims to encourage insurance companies to write more policies in areas of California that have been ravaged by both wildfires and the state’s insurance crisis. (opens in new tab)
Over the past few years, fire-prone areas in the Sierra Nevada foothills and Napa and Santa Cruz counties have seen thousands of homeowners lose insurance coverage as insurance companies look to reduce their exposure to wildfire risk. This new regulation would require insurers to write more policies in these “distressed” areas in exchange for changes in how companies determine their prices.
The Department of Insurance determined which areas will benefit from the requirement based on a combination of three criteria: wildfire risk, affordability of insurance and number of policies with the FAIR Plan — a state-created but privately-run insurer meant to be a last resort for those unable to find coverage anywhere else.
Some areas are just certain ZIP codes. Others are entire counties.
In exchange for writing more policies in these areas, companies will be permitted to set their prices based on catastrophe models — computer–modeled projections of what risk might look like in the future.
Under current California law, insurance companies are only allowed to calculate their pricing based on historical data about property losses. Catastrophe models would allow insurers to instead use projections of future risk, which the industry has argued would allow them to better respond to increasing risks associated with climate change.
But in order to use those models, companies will need to write a certain number of policies — a percentage that corresponds to at least 85% of their statewide market share — in the designated distressed areas. State Farm, for example, insures about 20% of all homes in California. Under the regulation, the company would be required to cover 17% of all homes in distressed areas in order to use catastrophe models.
The department marked a ZIP code as distressed if Cal Fire has designated as it as high or very high wildfire hazard severity zone and one of the following is true: either at least 15% of residential properties are insured by the FAIR Plan or it meets an affordability index calculated based on the average price of insurance and per-capita income.
Counties are considered distressed if more than 20% of their housing units are defined as high or very high wildfire risk.
“We know that wildfire (risk) doesn’t follow any lines or maps, and we know that coastal, urban and rural areas all look very different. People can live across the street or down the block, but have a completely different reality when it comes to their fire risk,” Insurance Commissioner Ricardo Lara said in a press briefing Wednesday. “That is the complexity and diversity of California’s geography and the reality of our insurance marketplace.”
The maps will be updated at least once a year with new data, according to the department. In the Bay Area, only Napa and Marin counties are considered distressed. However, ZIP codes in Sonoma and San Mateo counties were individually designated as distressed.
Smaller companies and commercial insurers will also be asked to increase the number of policies they write in wildfire-prone areas by 5%. That includes the ZIP codes and counties designated as distressed, but also certain urban areas with moderate to high fire risk and a large number of FAIR Plan policies.
The regulation is the latest step in Lara’s Sustainable Insurance Strategy — a set of regulations aimed at solving the state’s insurance crisis due to take effect in December. The strategy includes a previously released regulation that would govern how companies use catastrophe models (opens in new tab) and a reform aimed at streamlining the application process (opens in new tab) for companies to adjust their prices.
Future regulations yet to be released will also create a system for insurers to pass on the cost of reinsurance — insurance for insurance companies — to consumers, though it would be limited only to the cost of reinsurance for California policies.
California is the only state in which insurers do not currently have the ability to use catastrophe modeling or the cost of reinsurance when setting their rates, according to the department.
Carmen Balber, executive director of consumer advocacy group Consumer Watchdog, said even if companies do write more policies, the price of those policies is still in question. Industry experts have said that the use of catastrophe models and reinsurance costs will likely raise rates, at least in the short-term.
Balber stressed that the regulation’s success would depend not only on whether it could get companies to write more policies, but whether those policies would be affordable.
Lara touched on the issue of affordability Wednesday, but acknowledged that insurers have already begun raising their prices without these tools available. In March, State Farm raised its rates an average of 20% (opens in new tab). AAA was also approved earlier this year (opens in new tab) to raise rates in both northern and southern California.
“My strategy is focused on fixing the availability problem,” he said, later adding, “We know that having available insurance is also about having available insurance. Under Prop 103, insurance companies are raising their rates legally, but many are not writing policies.”
The department will hold a public workshop on July 26 to take feedback on the regulation. Lara has promised that all parts of the Sustainable Insurance Strategy will be enacted by the end of the year.
