California Insurance Commissioner Ricardo Lara finalized a regulation that mandates insurers to expand coverage in wildfire-prone areas while capping costs passed to consumers. This regulation is part of Lara’s Sustainable Insurance Strategy, aiming to stabilize the state’s insurance market amid increasing wildfire risks.
The new rule integrates the Net Cost of Reinsurance into ratemaking, marking a significant shift for California. Unlike other U.S. states, California previously did not allow reinsurance costs to factor into rates.
Now, the Department of Insurance (DOI) says this change will encourage insurers to maintain coverage in high-risk areas while reducing rate spikes for homeowners. The regulation still requires final review by the Office of Administrative Law before it takes effect.
A 2023 study found that reinsurance is the primary tool insurers use to continue offering policies in high-risk regions, particularly in wildfire-prone California. As climate risks grow, reinsurance has become essential for insurers operating in distressed areas. The DOI emphasized that updating regulations will allow companies to write more policies in at-risk communities, ensuring greater market stability.
Lara highlighted the importance of the reform: “Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change.”
This is a historic moment for California. My Sustainable Insurance Strategy focuses on addressing today’s challenges while building future market resilience.
California Insurance Commissioner Ricardo Lara
The regulation requires insurers to offer comprehensive homeowners policies in wildfire-prone areas at a level equal to at least 85% of their statewide market share. Companies must increase coverage by 5% every two years until they meet this threshold. Previously, no such requirement existed.
To limit consumer costs, the regulation caps the amount insurers can pass on for reinsurance, treating it like other expenses allowed under Proposition 103, such as claims handling and agent commissions. The DOI says this will encourage insurers to seek competitive reinsurance rates. Importantly, the regulation ensures California policyholders won’t bear the costs of disasters in other regions, such as Gulf Coast hurricanes or Midwest windstorms.
The rule also aims to improve the accuracy of rate predictions by promoting the use of forward-looking wildfire models rather than relying solely on historical data. Current reliance on outdated data has led to inflated premiums and sudden rate hikes after major wildfires.
The regulation also addresses “model shopping,” a practice where insurers use different risk models to maximize profits. Under the new rule, insurers must apply the same model for both setting premiums and calculating reinsurance costs. This change is intended to create consistency in risk assessments and reduce volatility in the market.
Laura Curtis of the American Property Casualty Insurance Association welcomed the reform: “Incorporating reinsurance into ratemaking is a critical step to stabilize California’s insurance market. California is the only state that hasn’t allowed reinsurance in rates. We appreciate Commissioner Lara’s efforts as part of his Sustainable Insurance Strategy.”
Curtis noted that the association will continue working with the DOI to ensure the regulation effectively improves access to insurance in high-risk areas.