California’s new plans to solve the home insurance crisis
California’s new plans to solve the home insurance crisis

Californians have seen several insurers cut homeowners insurance policies as the state grapples with wildfires and natural disasters, but a new proposal seeks to solve the insurance crisis once and for all.

In March, Ricardo Lara, California’s insurance commissioner, unveiled his new plan to allow insurance companies to use specific models of future crashes to apply higher rates to homeowners. The new plan would allow the use of crash modeling to calculate rate increases for wildfires, terrorism and flood protection for homes and commercial properties.

The change would ideally keep more insurers in the state despite the massive wildfires plaguing the area.

“We can no longer look only to the past as a guide to the future,” Lara said in a statement. “My strategy will help modernize our marketplace by restoring consumer options while protecting the Department of Insurance’s independent, transparent review of rate statements by experts, a core tenet of California law.”

Wildfire in California
A volunteer with the Central Coast Prescribed Burn Association oversees a prescribed burn at Wilder Ranch State Park near Santa Cruz, Calif., on Oct. 13, 2023. The increase in wildfires in the state has caused…

NIC COURY/AFP via Getty Images

Other states already allow insurers to use crash models to calculate insurance rates, but California previously banned the practice and allowed insurers to look only at historical losses as a measure.

“Accurate data is the foundation of any financial decision, regardless of the beneficiary,” said Alan Chang, founder and president of Vested Title & Escrow. Newsweek. “Crash modeling appears to be one of the gaps between California and most other states when it comes to rate filing decisions.”

Still, Chang cautioned that California differs from other states because of its unique housing risks.

“There aren’t too many parts of the country where population and housing density are susceptible to both wildfire and flood risk, among the typical causes of loss,” he said.

Across the state, homeowners have complained about skyrocketing premiums and loss of coverage as major insurance companies, including American National and State Farm, abandon policyholders. The price hikes also add to the state’s already troubling lack of affordable housing, which has prompted many residents to migrate to cheaper parts of the country.

American National, a Texas-based private insurer, previously announced it would stop offering homeowners insurance policies in the fall and send non-renewal notices by August.

Meanwhile, State Farm, Allstate and Farmers have paused new policies or placed new limits on them, affecting more than 40 percent of the state’s home insurance market.

On March 20, State Farm said it would end coverage for about 30,000 homes and 42,000 commercial apartments this summer amid rising costs and reduced profits in the wildfire-prone state.

“With one provider just announcing the non-renewal of over 70,000 policies, I’m sure a large portion of the population is nervous about having to find alternative coverage,” Chang said.

The Department of Insurance is seeking public comment on the new measure, with a workshop scheduled for April 23. The department aims to adopt its new regulations before 2025.

Lara also proposed faster rate hikes from insurers, but was rebuffed ahead of a hearing scheduled for March 26.

Insurers previously listed three requests to help them offer coverage in California, including faster rate increases and crash modeling.

They also asked for provisions that would allow them to charge policyholders for reinsurance, which would reduce exposure to catastrophic losses.

In September, Lara said in a statement that if the new regulations were passed, insurers would have to offer an 85 percent market share of residential insurance in the areas most prone to wildfires.

“It’s not clear at this point whether it’s going to be a win for the insurance companies or the homeowners in the long run,” Cody Horvath, a real estate broker with Scott Group, told Newsweek. “If rates follow a similar path seen in hurricane-hit areas of Florida, insurance companies will likely come out on top.”