(Airdate: 2024-07-02) ABC - KXTV - CA Insurance Commissioner answers questions, talks reforms

Published Date: 07/02/2024

California’s Insurance Commissioner Answers the Tough Questions: What Homeowners Need to Know About the State’s Insurance Reform

As California’s insurance crisis continues to spread, homeowners across the state are desperate for answers — and this week, they finally got a chance to ask them.

In a virtual town hall hosted by ABC 10 Sacramento on July 2, 2024, California Insurance Commissioner Ricardo Lara fielded questions directly from frustrated homeowners about why their premiums are skyrocketing, why insurers are pulling out of certain zip codes, and when they might finally see relief.

“It’s a horrible situation right now,” admitted insurance expert Karl Susman, speaking with ABC 10’s Becca Habegger. “There’s no way to put it any other way.”

But amid the frustration, Lara shared some important developments — including new regulations that could reshape how insurance companies do business in California, and possibly help bring coverage back to wildfire-prone regions.

1. “Why Are Insurance Companies Allowed to Cherry-Pick Zip Codes?”

One of the first questions Lara faced came from a homeowner angry about insurers refusing to cover entire neighborhoods based on risk.

“Why are insurance companies allowed to cherry-pick the zip codes they want to insure?” the homeowner asked.

It’s a question on the minds of thousands of Californians who have been dropped by their insurers or seen their rates triple, even when they’ve never filed a claim.

Lara’s response revealed a key difference between the insurance industry and other types of regulated utilities:

“Unlike public utilities,” he explained, “insurance companies can limit where they write policies.”

In other words, while the state can regulate how insurers do business, it can’t force them to offer coverage everywhere.

That’s a bitter pill for homeowners in high-risk areas — especially those living near wildfire zones — who feel abandoned by companies they’ve trusted for decades.

2. The Sustainable Insurance Strategy: A Deal to Bring Coverage Back

To address that inequity, Lara said his department has reached what he called a “historic agreement” with insurers as part of his Sustainable Insurance Strategy, a reform package first announced in September 2023.

“We have reached this historic agreement with insurance companies to write coverage for properties in wildfire risk areas,” he said.

Under the plan, insurers would be allowed to use forward-looking catastrophe models — sophisticated risk-assessment tools that can project future wildfire losses — but only if they commit to writing more policies in high-risk regions.

That’s a key trade-off: insurers get the flexibility they’ve been demanding, and consumers in wildfire zones get access to coverage.

“They’re going to commit to come back and write in these communities,” Lara said. “It’s really a win-win for everybody because at the end of the day, we also have to secure our insurance market in California.”

3. The Problem with “Past Is Prologue”

Currently, California’s insurance regulations require companies to base their rate filings on historical loss data — specifically, the last 20 years.

That rule, a holdover from the late 1980s, prevents insurers from accounting for how much wildfire risk has increased in recent years.

“Under current law,” Habegger explained, “insurance companies must get any rate increase approved by the Department of Insurance. Right now, they’re only allowed to use the past 20 years of historical data to justify any rate increase.”

Insurers argue that this system makes it impossible to set rates that reflect actual risk in today’s climate environment — forcing them to either raise prices across the board or pull out of high-risk areas altogether.

That’s why the new proposal — allowing the use of forward-looking catastrophe modeling — is considered a game changer.

“We should be using forward-thinking technology to help us assess the risk,” Lara said.

Still, the policy comes with strict conditions. Only insurers who actively increase their coverage footprint in high-risk areas will be allowed to use these models.

4. How Catastrophe Modeling Works

Catastrophe modeling uses advanced data analysis to estimate potential future losses from natural disasters like wildfires, earthquakes, or floods.

These models combine:

• Historical data (past fires, claims, and weather events),
• Current environmental conditions (drought, vegetation, wind), and
• Future projections (climate change, urban growth patterns).

For insurers, it’s a way to understand and price risk more accurately. For regulators, it’s a way to ensure those projections don’t lead to excessive or unjustified rate hikes.

The challenge is balance: allowing insurers to use modern tools without giving them free rein to overcharge consumers.

“It’s really about creating a system that’s fair and sustainable,” Lara said. “We have to make sure we’re protecting homeowners while also keeping companies in the market.”

5. What It Means for Wildfire-Prone Communities

One of the most significant parts of Lara’s reform package is a requirement for insurers to write policies in specific wildfire-prone zip codes and counties — areas where coverage has become almost impossible to find.

In a press release last month, the Department of Insurance listed those regions, which include large portions of Northern California, the Sierra foothills, and Southern California’s inland valleys.

By tying access to catastrophe modeling with the obligation to write in these areas, Lara hopes to bring insurers back into communities that have been stuck on the FAIR Plan.

“We also have to secure our insurance market in California,” Lara said.

For homeowners, this could mean a gradual return of private coverage options — and eventually, more competitive pricing.

6. “It’s a Horrible Situation Right Now”

Even with reforms in motion, experts caution that improvements won’t happen overnight.

“It’s a horrible situation right now,” said insurance analyst Karl Susman. “There’s no way to put it any other way.”

Susman told ABC 10 that while Lara’s proposed regulations are a move in the right direction, consumers won’t feel the impact until sometime next year.

“We’re going to have to be a little more patient,” he said. “I think realistically, we should expect to see companies begin to reenter the market — getting their toes a little bit wet.”

That timeline depends on how quickly the Department of Insurance finalizes and implements the new rules, as well as how individual insurers respond.

Some may reenter the market cautiously, starting with limited coverage areas, while others may wait until the reforms prove financially viable.

7. The Bigger Picture: Balancing Consumer Protection and Market Stability

California’s insurance crisis has exposed the tension between consumer protection and market sustainability.

For decades, Proposition 103 — the 1988 voter initiative that regulates rates — has prevented insurers from using catastrophe modeling, charging excessive premiums, or raising rates without public review.

While that system has saved consumers billions, it’s also left insurers constrained in an era of escalating climate risk.

Lara’s Sustainable Insurance Strategy is an attempt to modernize that framework — not by dismantling Prop 103, but by adding flexibility within its limits.

“We have to use forward-thinking technology,” Lara said, “but in a way that expands access, not restricts it.”

It’s a delicate balancing act that will test whether California can maintain affordability and availability at the same time.

8. What Homeowners Should Expect Next

Here’s what California homeowners can expect as these changes take shape:

✅ 1. A Gradual Return of Private Insurers

Expect to see a few companies begin re-entering the market in late 2024 or early 2025 — likely starting with new underwriting guidelines focused on wildfire-resistant homes.

✅ 2. Continued FAIR Plan Growth (Short-Term)

Until reforms take full effect, the FAIR Plan will remain the fallback option for high-risk homeowners.

✅ 3. New Emphasis on Risk Mitigation

Insurers are likely to offer discounts for defensible space, fire-resistant roofing, and community-wide mitigation efforts.

✅ 4. A More Data-Driven System

With catastrophe modeling, rates will reflect not just geography but also individual property conditions and local mitigation measures.

9. What Homeowners Can Do Right Now

While policy reforms work their way through Sacramento, homeowners should take proactive steps:

• Maintain defensible space — clear vegetation and debris from around your home.
• Upgrade roofing and vents — insurers are prioritizing fire-resistant materials.
• Stay in touch with your agent — your current insurer may reenter your market sooner than you expect.
• Document improvements — photos and receipts can help prove mitigation work for discounts later.

10. The Bottom Line

California’s insurance crisis has tested homeowners, regulators, and insurers alike.

But the state’s new Sustainable Insurance Strategy — combining catastrophe modeling with commitments to serve wildfire-prone communities — may finally offer a path forward.

“It’s a horrible situation,” Susman said, “but we’re moving in the right direction.”

For now, patience will be essential. Real relief will take time, but progress is underway — and for the first time in years, California’s insurance market may be on the road to recovery.