(Airdate: 2024-03-15) ABC - KXTV - New homeowners insurance regulations in California

Published Date: 03/15/2024

California’s New Insurance Rules: How Catastrophe Modeling Could Finally Bring Stability to Homeowners

California’s insurance market has been under stress for years. Wildfires, floods, inflation, and an outdated regulatory system have driven insurers out of the state, leaving homeowners with skyrocketing premiums and limited options. But new action from the California Department of Insurance (CDI) may mark the beginning of long-awaited change.

In mid-March 2024, Insurance Commissioner Ricardo Lara announced a new proposed rule that could reshape how insurers set rates — and how fairly those rates reflect risk. The change, which allows companies to use forward-looking catastrophe modeling, is a cornerstone of Lara’s Sustainable Insurance Strategy — a reform initiative designed to modernize California’s decades-old insurance framework.

The announcement comes at a pivotal moment: after years of insurer withdrawals, skyrocketing FAIR Plan enrollments, and record losses, California is trying to find a balance between consumer protection and insurer participation.

Here’s what this rule means, why it matters, and how it could affect homeowners in the months ahead.

The Problem: A Market Built on Outdated Rules

For more than three decades, California has regulated property insurance rates under Proposition 103, a 1988 voter initiative designed to protect consumers from excessive premium hikes.

While well-intentioned, Prop 103 requires insurers to justify rate changes using only historical loss data — meaning they can’t factor in future risks or predictive modeling tools widely used in other states.

That approach worked in a stable climate. But California’s environment is anything but stable now.

As wildfire seasons grow longer and storms more severe, insurers argue that relying solely on the past no longer reflects reality.

“Currently, companies are only allowed to use historical data,” the ABC10 report explained, “which they say doesn’t allow them to set prices on a more accurate, granular level.”

The result: carriers underprice risk in some areas, overprice it in others, and ultimately choose to leave the state altogether when losses become unpredictable.

The Proposed Fix: Forward-Looking Catastrophe Modeling

Under the new proposed rule, insurers would be permitted to use forward-looking catastrophe models when submitting rate filings to the California Department of Insurance.

These models use AI, meteorological data, satellite imagery, and climate projections to simulate how disasters might affect specific locations — allowing insurers to price policies with far more precision.

In practical terms, this means rates could finally reflect individual property-level risk instead of broad regional averages.

For example:

• Two homes in the same ZIP code could have very different wildfire risks depending on vegetation, slope, and defensible space.
• One home might qualify for a lower rate because it’s hardened against fire, while another — closer to heavy brush — might face higher premiums.

This kind of nuanced pricing is already common in states like Florida and Colorado, where insurers use catastrophe models to manage hurricane and hail exposure.

Why It Matters: A Path to Market Recovery

While the proposal may sound technical, its implications are major.

By allowing insurers to use forward-looking models, California would give them the ability to price risk accurately — and, crucially, to reenter the market.

As ABC10 noted:

“Rates are high. Competition is non-existent for the most part. So as these regulations start going into place and as carriers start entering the market and start competing with one another, we know what happens when all the carriers come back — then premiums will start coming down.”

The logic is simple: when insurers can predict risk better, they can participate more confidently. That competition naturally drives prices down.

This reform also aligns with the Sustainable Insurance Strategy that Commissioner Lara announced in late 2023 — a broad effort to rebuild stability and restore availability in California’s insurance ecosystem.

A Shift Decades in the Making

For years, insurance carriers have argued that Prop 103’s restrictions made it impossible to operate profitably in California’s climate-risk environment.

Under existing rules, insurers had to base their rates only on past wildfire losses, even as climate models showed those losses worsening year after year.

That disconnect led to some of the most dramatic market disruptions in state history:

• State Farm, which covers more than a quarter of all California homes, stopped writing new homeowners policies in 2023.
• Allstate, Farmers, and Nationwide soon followed, scaling back new business or halting it entirely.
• The FAIR Plan, meant to be a “last resort,” ballooned to cover more than 350,000 homes — triple its volume from 2018.

Allowing catastrophe modeling could be the key to reversing that trend.

By pricing risk realistically, insurers would have more confidence to offer coverage again, especially in wildfire-prone regions that have been left virtually uninsurable.

What Is Catastrophe Modeling — and Why Wasn’t It Allowed Before?

Catastrophe (or “cat”) modeling combines historical data, climate forecasts, and real-time environmental analytics to predict how future disasters might unfold.

These models consider:

• Fire ignition probabilities and spread patterns
• Vegetation and topography
• Wind direction and humidity
• Building materials and home-hardening features

In most states, insurers use third-party modeling firms like AIR Worldwide, CoreLogic, and RMS to estimate potential losses from events that haven’t yet occurred.

But under Prop 103, California regulators prohibited this forward-looking approach, requiring insurers to rely only on historical averages — even as those averages became increasingly unreliable.

The new rule represents a regulatory breakthrough — one that acknowledges that climate-driven risk is dynamic and evolving.

Consumer Concerns: Transparency and Oversight

Not everyone is cheering the change.

Consumer groups have expressed concerns that allowing predictive modeling could make rate-setting less transparent.

As one advocacy organization told ABC10, “We worry the newly proposed regulation is not transparent enough.”

Their concern is that proprietary catastrophe models are often trade secrets, meaning the public — and even regulators — may not fully understand how certain risk factors are weighted.

That lack of transparency, they argue, could lead to unfair or uneven pricing if not properly monitored.

To address these concerns, the CDI’s proposal includes strict disclosure requirements, mandating that insurers explain how modeling inputs are used and how they affect rate outcomes. Regulators will still have final approval authority over all rate filings.

What Homeowners Can Expect

If approved, the new rule could start reshaping the market by late 2024 or early 2025.

Homeowners should expect a gradual, not immediate, impact:

• Short term (2024): Premiums may continue to rise as insurers adjust to inflation and existing losses.
• Medium term (2025–2026): More carriers are likely to return to the market, increasing competition.
• Long term: Rates could stabilize and potentially decrease as competition resumes and risk is distributed more evenly.

In addition, the increased use of property-specific risk modeling could reward homeowners who invest in mitigation measures — such as fire-resistant roofing, cleared defensible space, and home-hardening upgrades.

Insurers will have more data to differentiate between well-protected and high-risk properties, creating incentives for proactive resilience.

The Bigger Picture: Balancing Risk and Fairness

The introduction of catastrophe modeling is not just a technical policy tweak — it’s a fundamental shift in how California approaches insurance in the age of climate change.

For regulators, the challenge is to ensure that accuracy doesn’t come at the expense of affordability. For insurers, it’s about restoring confidence in a market where losses have outpaced pricing power.

As one analyst put it, this is California’s “reset moment” — a rare chance to rebuild a broken system on smarter, more data-driven foundations.

The Bottom Line

California’s new catastrophe modeling proposal represents a pivotal turning point for the state’s struggling insurance market.

If implemented effectively, it could:
✅ Encourage insurers to return to the market.
✅ Create fairer, property-specific pricing.
✅ Incentivize homeowners to mitigate risk.
✅ Restore competition — the key to lower premiums.

As ABC10’s report concluded:

“Competition is non-existent for the most part. So as these regulations start going into place and as the carriers start entering the market and start competing with one another, we know what happens — when all the carriers come back, premiums will start coming down.”

After years of instability, that kind of optimism is more than welcome. And if this proposal delivers what it promises, California homeowners might finally see light at the end of the insurance tunnel.