In a significant move to address climate change-induced challenges, California’s top leaders have unveiled sweeping reforms aimed at stabilizing the state’s insurance system. This development marks a crucial shift for one of the nation’s most disaster-prone regions, boasting one of the world’s largest insurance markets.

These transformative actions, instated through executive decrees, come in response to a tumultuous year that witnessed seven of the state’s top 12 insurance carriers, including industry giants Allstate and State Farm, scaling back coverage due to the escalating threats posed by wildfires and the soaring costs associated with such risks. These carriers have argued that homeowners’ premiums no longer align with the risks they face.

The implications of California’s actions could reverberate nationwide, as insurance companies across the United States grapple with the evolving perils brought about by climate change.

In what California Insurance Commissioner Ricardo Lara has dubbed a “historic agreement” between regulatory bodies and the insurance industry, his department is forging closer collaborations with insurers to expedite the assessment and adjudication of rate-increase requests, which currently consume six months. This effort aims to better price homes at risk and encourage residents to fortify their properties against wildfires. It also seeks to curb the rapid growth of California’s FAIR plan, which, as Lara observed, has become the “first resort” rather than the “last resort” for many residents.

One notable industry victory is California’s reversal of its stance on prohibiting insurance companies from employing forward-looking catastrophe models, a practice standard in most other states, to enhance rate accuracy. Previously, the state exclusively permitted carriers to use historical 20-year data for policy pricing.

Explaining this shift, Amy Bach, executive director for United Policyholders, a consumer group, clarified that regulators had concerns that insurance companies might misuse sophisticated catastrophe models to exaggerate area risk levels, subsequently charging consumers more. Lara emphasized the need for transparency in data usage by insurers and underscored the department’s authority to retract rate increases if misuse is detected.

Acknowledging the urgency of the situation, Lara described the current regulatory framework as inadequate for California’s present needs, underscoring that it has been detrimental to consumers and has exposed them to danger.

California faces an ongoing challenge in coping with a rapidly evolving climate crisis—how to ensure that homeowners can afford insurance as the cost of coverage for insurers surges, inevitably leading to increased costs for consumers. Similar challenges are being experienced by states such as Louisiana and Florida.

These measures aim to prevent California from following in the footsteps of Florida, where premiums have sharply risen due to recent legislation and rate hikes. In contrast, the average annual insurance cost for Californians stands at approximately $1,300, whereas residents of Florida pay an average of $6,000. Industry groups contend that given California’s vulnerability to major disasters and the high value of its homes, residents should be paying considerably more.

For years, California lawmakers have navigated a complex relationship with the insurance industry. Regulators have been hesitant to impose higher rates and enable carriers to incorporate intricate modeling data into their policy decisions. However, with the increasing frequency of catastrophic events, elevated insurance costs, and the rise in reinsurance expenses, carriers have expressed reluctance to undertake additional risk unless state regulations allow them to charge more and involve private companies in decision-making.

Lara’s comprehensive market reform, the most substantial since 1988, arises in response to lawmakers’ failure during the recent session to devise a solution that would relax regulations and raise rates while keeping insurance companies fully operational without unduly burdening consumers.

This market squeeze is driving more residents to seek coverage from the state’s insurer, the California Fair Plan, a phenomenon also observed in Florida, Louisiana, and other states.

As part of the reform package, California will mandate insurance companies to underwrite no less than 85% of their statewide market share in distressed areas, as identified by Lara. It aims to reduce the number of policyholders in the FAIR Plan and transition them back to private carriers. Additionally, commercial and HOA developments will be eligible for $20 million in coverage from the Fair Plan.

In support of these initiatives, Governor Gavin Newsom issued an executive order that essentially endorses Lara’s plans, authorizing the commissioner to take “emergency regulatory action” to enhance coverage options for consumers, particularly in underserved areas. This includes tailoring rates to maintain market competitiveness, streamlining the rate approval process, and facilitating the transition of policyholders out of the FAIR Plan to ensure its solvency.

Newsom’s executive order acknowledges industry concerns, such as insurers’ exposure to billion-dollar extreme weather events, rising construction repair costs, global inflation, and increased reinsurance premiums.

Although the state has sanctioned rate hikes, these adjustments have fallen short of what the insurance industry deems necessary to conduct business effectively in a disaster-prone state. Lara noted that homeowner insurance companies in California have underperformed compared to their national counterparts over the past decade.

Industry groups have welcomed California’s actions, emphasizing the need for comprehensive reform to address the deteriorating insurance market.

While Lara’s package represents a significant step, experts contend that certain essential elements are still missing. For instance, the FAIR Plan faces significant challenges, and further measures are needed to reduce the extent of coverage provided by the state insurer. Urgent action is also required to mandate homeowners to establish defensible spaces to mitigate fire risks, a measure on which the state is lagging.

Questions also remain about the speed at which Lara and the department can implement these reforms. Although the executive action enables the department to act swiftly and establish regulations urgently, homeowners are currently grappling with the peak of fire season and require immediate and comprehensive intervention.

“This is an emergency,” emphasized Michael Wara, a wildfire and insurance expert at the Stanford Woods Institute for the Environment. “By what process will Lara get this in place? How fast can he do this? Time is of the essence in all of this.”