California Adopts New Regulations to Address Home Insurance Crisis

California Adopts New Regulations to Address Home Insurance Crisis

Firefighters try to keep flames from a burning home from spreading to a neighboring apartment complex as they battle the Camp Fire in Paradise, Calif., on Nov. 9, 2018. (Justin Sullivan/Getty Images)

Travis Gillmore

Travis Gillmore

9/22/2023

Updated: 12/30/2023

Policy adaptations announced Sept. 21 by the California Department of Insurance aim to increase availability and bring insurers back to the state, following Gov. Gavin Newsom’s executive order (pdf), issued the same day, requesting the department’s commissioner act to address the state’s insurance crisis.
“It is critical that California’s insurance market works to protect homes and businesses in every corner of our state,” Mr. Newsom said in a press release announcing his order. “A balanced approach that will help maintain fair prices and protections for Californians is essential.”
Announced at a press conference led by Ricardo Lara, the insurance department commissioner, the new regulations will require insurers to carry 85 percent of their portfolios in high-risk areas, thus decreasing the number of properties in the so-called FAIR plan—an insurance option of last resort mandated by the state and backed by insurance companies that is more expensive for less coverage than traditional policies.
“[The FAIR plan has] become the first resort instead of the last resort it’s supposed to be,” Mr. Lara said during the press conference.
Changes also include how rates are calculated, allowing for forward-looking modeling systems and faster approval timelines—both factors that insurance companies have been requesting to restore profitability.
“There is no doubt that California is at an insurance crossroads,” Mr. Lara said during the press conference. “Making insurance more affordable is becoming critical for our entire economy.”
Noting that 12 companies account for 85 percent of all insurance coverage in the state, and seven have paused or stopped writing new policies since 2022, the commissioner said a lack of insurance availability is affecting communities and businesses alike.
State Farm and Allstate announced they were no longer accepting new policies earlier this year, with the businesses accounting for approximately 27 percent of the state’s market, according to insurance department data.
A pedestrian walks by an Allstate Insurance office in San Francisco on June 9, 2023. Allstate Insurance is following the lead of State Farm Insurance and discontinuing homeowners insurance for California residents. (Justin Sullivan/Getty Images)

A pedestrian walks by an Allstate Insurance office in San Francisco on June 9, 2023. Allstate Insurance is following the lead of State Farm Insurance and discontinuing homeowners insurance for California residents. (Justin Sullivan/Getty Images)

Other insurers, representing another 36 percent of the market, also began limiting the number and type of policies written, further complicating availability, according to state officials.
Citing a growing number of cancellations and non-renewals—growing 28 percent statewide from 2019 to 2021 and 158 percent in high-risk areas over the same period—the governor’s executive order requests the commissioner take immediate action.
While no immediate recourse is provided for those who have experienced cancellations, Mr. Lara repeatedly stressed that the goal of the new rules is to bring homeowners out of the FAIR plan and back into the traditional insurance market.
Shortly after the order was signed, the commissioner acknowledged during the press conference the urgent nature of the matter and said the new regulations would be implemented by December 2024.
“We are truly living in unprecedented times. We are in uncharted territory, and we must make difficult choices,” Mr. Lara said. “The timeline is immediate and urgent. It’s not going to be easy or happen overnight.”
Issues related to insurance availability began in earnest following the eruption of fires across the state in 2017.
Since then, the 2018 Camp Fire—the state’s deadliest and most destructive, killing at least 85 and destroying more than 18,000 structures—and nine of the largest wildfires in state history have burned thousands of homes and charred millions of acres, according to Cal Fire statistics.
Homes leveled by the Camp Fire line Valley Ridge Drive in Paradise, Calif., on Dec. 3, 2018. (Noah Berger/AP Photo)

Homes leveled by the Camp Fire line Valley Ridge Drive in Paradise, Calif., on Dec. 3, 2018. (Noah Berger/AP Photo)

With billions of dollars in claims coming in rapid succession, and limited recourse to recoup losses with rate increases, some insurers chose to stop taking on more clients, according to experts.
Inflation further complicated matters, as repair and reconstruction costs skyrocketed including fuel, materials, and labor, the commissioner noted.
Costs for reinsurance—which is insurance purchased by insurers to cover losses—ballooned, as well, increasing the cost of doing business and leading to a loss of profitability in the industry, according to the insurance department.
Seeking to address these concerns, new regulations will allow participating insurers to utilize California-only reinsurance rates, thus allowing for risks to be localized avoiding hurricane and flood-related costs in other states. Such is designed to improve affordability for consumers by lowering their costs.
As most home mortgages require full coverage insurance, the lack of availability is impacting consumers and preventing families from building generational wealth, according to Mr. Newsom’s executive order.
One group in support of the new regulations suggests the changes will allow more families to qualify for home purchases.
“Having insurance is an absolute condition for homebuyers obtaining a mortgage,” said Susan Milazzo, California Mortgage Bankers Association CEO. “The agreement that Commissioner Lara has reached to expand insurance availability across our state means more Californians can be able to achieve the dream of homeownership knowing they will have better access to the insurance they need.”
The new proposal also includes changes to the FAIR plan, expanding coverage to $20 million per structure, thus allowing homeowners associations and condominium owners access to full coverage insurance that prior regulations prevented, according to the commissioner.
Farms and businesses reporting substantial losses over the past years, due to wildfires that were never reimbursed due to various policy limitations, now will have more opportunities to secure insurance, as the new regulations are designed to increase availability for such operations.
Orange County's Blue Ridge Fire approaches homes in Yorba Linda, Calif., on Oct. 27, 2020. (John Fredricks/The Epoch Times)

Orange County's Blue Ridge Fire approaches homes in Yorba Linda, Calif., on Oct. 27, 2020. (John Fredricks/The Epoch Times)

“California’s rural communities have been impacted by wildfires damaging farm structures and crops and by farmers and ranchers being denied insurance coverage to protect their properties,” said Jamie Johansson, California Farm Bureau Federation president. “Farm Bureau supports the effort to restore competition to California’s insurance market to get insurers doing business in those areas, again.”
The new announcement builds on the department’s “Safer from Wildfires” regulations that created mandated discounts for property owners that hardened structures with mitigation efforts—including brush reduction and fire-resistant material upgrades.
Some Northern California residents said they are hopeful the new rules will help improve communication between insurers and property owners related to mitigation strategies.
“It’s encouraging to see that something is being done,” Warren Ware told The Epoch Times Sept. 22. “We spent thousands of dollars and even more hours clearing brush, doing what we can, and we still ended up on the FAIR plan—which isn’t very fair.”
Mr. Ware has lived with his wife Linda in Mendocino County for nearly five decades, and as owners of several rental properties in areas deemed at high risk for wildfire, they have been dropped by multiple insurance companies since 2017.
The Wares said they currently pay more than five times what they used to for less coverage, before problems began when fires encroached on their property in Potter Valley, California, in October 2017.
With support from the governor through his executive order, the commissioner said the time for change is now.
“It’s important that we all understand that this is a crisis that we are in,” said Mr. Lara, the insurance commissioner.
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Travis Gillmore

Travis Gillmore

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Travis Gillmore is an avid reader and journalism connoisseur based in California covering finance, politics, the State Capitol, and breaking news for The Epoch Times.

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