(Airdate: 2024-03-15) FOX - KTVU - Insurance reform: More competition or higher rates?

Published Date: 03/15/2024

California’s Insurance Reform Crossroads: Will New Rules Bring Relief — or Higher Rates?

California’s homeowners insurance crisis has reached a defining moment. After years of catastrophic wildfires, floods, and insurer withdrawals, the state’s Department of Insurance is taking a bold step: allowing insurers to use predictive computer models to set rates.

The reform, unveiled by Insurance Commissioner Ricardo Lara, is part of a larger effort to stabilize California’s collapsing insurance market — one where traditional insurers have either paused new business or left entirely.

But as FOX KTVU’s veteran reporter Tom Vacar explored in his March 15, 2024, segment, the move has sparked fierce debate. Will these new rules restore competition and bring insurers back? Or will they open the door to higher premiums for millions of Californians?

The Crisis: “Change California’s Insurance Laws or We’re Out of Here”

California’s insurers have been sounding the alarm for years. Rising losses from wildfires, storms, and inflation have made the market increasingly unsustainable under the state’s strict regulatory framework.

Vacar summarized the situation bluntly:

“By their own conduct — raising rates, canceling policies, refusing to sell new ones — insurers essentially laid down a gauntlet: Change California’s insurance laws, or we are out of here.”

The state’s largest insurers — including State Farm, Allstate, and Farmers — have dramatically reduced their exposure, especially in high-risk wildfire areas. That exodus has left hundreds of thousands of homeowners dependent on the FAIR Plan, California’s insurer of last resort.

The FAIR Plan Becomes the “Insurer of First Resort”

Once a safety net for homeowners unable to find private coverage, the California FAIR Plan has now become the primary insurance option for many.

Insurance expert Karl Susman, who represents multiple carriers statewide, explained how severe the shift has been:

“Currently, upwards of 90% of traditional insurers are writing few, if any, policies at all,” Susman told KTVU. “So the FAIR Plan — often called the insurer of last resort — has become the insurer of first resort.”

He added that the FAIR Plan’s growth has been staggering:

“They’ve gone from 7,000 brokers to over 52,000 in the last three or four months.”

That explosion underscores just how far the private market has shrunk. And while the FAIR Plan fills a vital gap, it’s also expensive and limited, covering only basic fire protection unless homeowners buy supplemental “wrap-around” policies.

The system, in other words, is buckling under pressure.

The Commissioner’s Response: A Push for “Reliable, Competitive, and Available” Insurance

Facing this crisis, Commissioner Ricardo Lara announced an ambitious goal: to restore reliable, competitive, and available homeowners insurance by the end of 2024.

At the heart of that plan is a major regulatory shift — one that would allow insurers to use computer-based catastrophe modeling to justify their rate filings.

“Key to that,” Vacar explained, “is adopting insurance industry-created algorithms that will allow insurers to predict fire risk down to individual homes.”

This means insurers would no longer have to rely solely on historical loss data, as required under Proposition 103, the landmark 1988 law that has defined California’s insurance regulation for decades.

Instead, they could project future risk based on real-time environmental, geographic, and structural data — allowing them to set premiums with far greater precision.

“From that,” Vacar said, “they will set individual rates based on what might happen in the future.”

How It Works: Fire Risk, Modeled to the Property Level

Under this system, insurers could evaluate each property based on factors like:

• Topography (slope, elevation, vegetation density)
• Proximity to fire-prone areas
• Building materials and defensible space
• Home-hardening measures (e.g., fire-resistant roofs, enclosed eaves, cleared brush zones)

Susman said this could finally reward proactive homeowners with risk-based discounts — something long missing from California’s flat, ZIP-code-based pricing model.

“It’s going to be: What have you done to make your home safer from wildfires?” he explained.

That means a homeowner who invests in fire-safe construction, defensible space, and mitigation measures could see meaningful premium reductions under the new system.

Industry Optimism — and Consumer Skepticism

The insurance industry has welcomed the commissioner’s proposal with cautious optimism.

“The carriers are signaling that they’re cautiously optimistic,” Susman told KTVU. “They’re happy with the first set of regulations.”

For insurers, the ability to use catastrophe modeling represents long-overdue modernization — aligning California with national standards used in states like Florida, Colorado, and Texas, where predictive modeling has been essential for managing weather-related risk.

But not everyone is convinced.

Harvey Rosenfield, founder of Consumer Watchdog and the original author of Proposition 103, voiced strong opposition.

“The software programs will inevitably allow them to seek far higher rates than are justified,” Rosenfield warned.

He argued that catastrophe models — many of which are proprietary — lack transparency and accountability.

“That specifically would allow the insurance companies to propose these models without public scrutiny,” he said. “And there’s nothing in this regulation that requires them to reduce anybody’s rates or sell more insurance to people they won’t sell to now.”

The Central Question: Competition vs. Cost

The tension at the heart of this reform is clear: Will modeling-driven pricing restore market participation or drive rates even higher?

Supporters say this reform is essential to bring insurers back into California — and that competition will ultimately lower premiums.

Critics, however, fear that once insurers gain freedom to use predictive algorithms, they’ll raise rates across the board — especially in high-risk regions — making affordability even worse.

Vacar summarized the stakes:

“Insurers agree that these rules are necessary and that the commissioner will have the authority to protect consumers. But this is going to be a big fight.”

Indeed, the coming months are expected to bring intense debate as regulators, insurers, and consumer advocates negotiate the final details of the modeling framework.

Why This Matters: A System on the Brink

California’s insurance challenges go far beyond rate disputes. Without major reform, the state risks an insurance collapse — one where millions of homeowners are forced onto the FAIR Plan or left uninsured.

That scenario would threaten not only consumer protection but also real estate values, mortgage markets, and disaster recovery efforts.

By giving insurers a way to price risk more accurately, the new rules could help reverse the exodus of carriers — particularly those hesitant to write in wildfire-prone regions.

Susman called the reform a necessary step toward equilibrium.

“The goal,” he said, “is to create reliable, competitive, and available homeowners insurance again — and this is how you start.”

Balancing Transparency and Innovation

Critics like Rosenfield aren’t wrong to worry about oversight. Predictive modeling, by its nature, relies on complex proprietary algorithms developed by private firms like AIR Worldwide, CoreLogic, and RMS.

That raises legitimate questions:

• How will regulators validate these models?
• Will consumers have the right to challenge rate increases derived from them?
• And will insurers be required to pass on savings to homeowners who harden their properties?

Commissioner Lara’s office has pledged that all models will remain subject to Department of Insurance review and approval, with transparency measures in place to protect consumers.

Still, as Rosenfield warned, ensuring fairness will require ongoing vigilance.

“There’s nothing in this regulation that requires insurers to reduce rates,” he said, “or to sell more insurance to people they won’t sell to now.”

What Homeowners Should Know

For homeowners, the key takeaway is that change is coming — but its effects will take time.

If implemented successfully, the new modeling framework could:
✅ Encourage insurers to reenter the market.
✅ Reward home-hardening and wildfire mitigation.
✅ Improve long-term availability of private coverage.
✅ Gradually reduce dependence on the FAIR Plan.

However, homeowners in high-risk areas may still face short-term premium increases as insurers recalibrate pricing to reflect true risk levels.

In the meantime, experts recommend:

• Maintaining your current policy — don’t let it lapse.
• Documenting mitigation improvements (e.g., cleared vegetation, new roofing).
• Consulting your broker to explore available discounts and updated coverage options.

The Road Ahead: Reform in Motion

California’s new modeling regulation is just one piece of a larger reform effort under the Sustainable Insurance Strategy, which also includes streamlined rate approvals and incentives for insurers that expand coverage in wildfire-prone regions.

The ultimate goal is balance — a system that safeguards consumers without driving away the companies that insure them.

As KTVU’s report made clear, this isn’t just about algorithms or rate filings. It’s about rebuilding a functional, fair insurance ecosystem in one of the most disaster-prone states in the country.

The question now is whether California can strike that balance before the market tips too far to recover.