California Insurance Commissioner Takes Steps to Address Climate Risks in Property Insurance Rates
California’s Insurance Commissioner, Ricardo Lara, has announced significant steps to allow property insurers to consider climate risks, including wildfires, when determining insurance rates. This move comes as insurers are encouraged to expand their underwriting in high-risk areas, with the aim of reducing consumers’ reliance on state-funded coverage.
Challenges in California’s Insurance Market
Since 2022, seven of the state’s top 12 insurers, including giants like State Farm and Liberty Mutual, have either halted or restricted new business operations in California. Additionally, the government’s Fair Access to Insurance Requirements (FAIR) Plan, which serves as a last-resort insurer, has seen its market share rise to 3% in California.
“We are at a major crossroads in the insurance industry, following several years of intensified wildfires and storms, driven by the looming threat of climate change,” stated Commissioner Lara.
Governor Newsom’s Executive Order and Regulatory Action
The state’s insurance regulator’s measures align with an executive order issued by Governor Gavin Newsom, which calls for regulatory actions to:
- Expand insurance coverage in underserved areas.
- Incorporate catastrophe risks into insurance rates.
- Ensure the financial stability of the FAIR Plan.
Impact of Climate Change on Insurance Rates
A report by broker Gallagher Re, published in July, revealed that property catastrophe reinsurance rates in the United States increased by as much as 50% during a critical July 1 renewal period. This surge in rates is linked to the growing frequency of wildfires and hurricanes, particularly affecting states like California and Florida, partially attributable to climate change.
Consequences for Larger Insurance Carriers
The trend of larger insurance carriers scaling back their involvement in California’s residential property insurance market reflects ongoing regulatory constraints, escalating cost inflation, and higher catastrophe-related losses. Credit rating agency Fitch had previously highlighted these challenges earlier this year.
As California grapples with the increasing impact of climate change on its insurance landscape, Commissioner Lara’s actions aim to strike a balance between protecting consumers and ensuring the stability of the insurance market.