By Megan Fan Munce, SAN FRANCISCO CHRONICLE
https://www.sfchronicle.com/california/article/home-insurance-wildfire-risk-19021575.php
A newly proposed regulation aims to draw insurers back to the state by allowing them to anticipate future wildfire risks when raising their rates.
The proposed rule change, released Thursday, would allow companies to submit catastrophe models for wildfires, floods and terrorism to the California Department of Insurance for approval. If approved, insurers could then use predictions from those models when requesting rate hikes for commercial or homeowners insurance.
Catastrophe modeling is currently only approved for earthquake insurance rates and fires resulting from earthquakes, according to the department. To calculate wildfire risk, California insurers depend on historical data, rather than models of what might happen in the future.
Before a model could be used, the department would have to certify that it is reliable and uses the best available scientific data for predicting risk. Insurers would also have to prove to the department that their proposed rate hikes make sense using their approved model.
The exact impact on rates won’t be clear until insurers start creating models, according to Michael Soller, deputy insurance commissioner for the department. But the department believes the policy will stabilize rates in the long term by preventing sharp hikes after major catastrophes, such as wildfires.
Amy Bach, executive director of the consumer advocacy group United Policyholders, said insurers have been campaigning across the country to be allowed to use catastrophe models in their rates.
She worried modeling software sold by for-profit companies to for-profit insurers could overestimate risk and raise rates higher than necessary. But Bach felt allowing insurers to use catastrophe modeling only with department approval struck a balance between giving insurers what they want with retaining oversight.
Soller said the review would also look specifically about whether insurers’ models incorporate and reward fire mitigation efforts — steps that homeowners, utilities and localities take to reduce the risk of a destructive wildfire in their area.
“It’s basically substituting one way of estimating for another way of estimating catastrophic losses that we think is going to be much more accurate and responsive,” Soller said.
The department said the policy aims to keep insurers in the state.
The proposed regulation is one part of Insurance Commissioner Ricardo Lara’s Sustainable Insurance Strategy — a multi-step plan to update California’s insurance regulations in the wake of a mass exodus of home insurers from the state. The Department of Insurance describes it as the state’s largest reform since Proposition 103 in 1988, which required the department to review and approve requests to hike insurance rates.
Carmen Balber, executive director of the consumer advocacy group Consumer Watchdog, worried that the regulation would harm the transparency guaranteed by Prop. 103. Any group or private individual can participate in the model review process, but must sign a confidentiality agreement, according to the regulation. The department confirmed that information about the models will be released in regular rate filings, but the regulation does not specify what exact information will be made public.
Balber argued anything less than full disclosure meant groups like Consumer Watchdog wouldn’t be able to adequately inform the public. She worried that some of the number-crunching behind the models would not be made publicly available, and “without that information, how can we be confident that the predictions of the model are fair?”
Soller said transparency was “built in” to the process via the review. The department’s review will determine whether each model is reliable and has justifiable results based on industry standards, he said.
The Department of Insurance will hold a public workshop on the regulation language on April 23 to seek feedback. If all goes to plan, the department plans for all of the Sustainable Insurance Strategy regulations to be enacted by the end of the year.
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