California’s insurance laws are set to evolve, reflecting a situation in which seven of the nation’s leading insurance companies have restricted or paused the issuance of coverage. The California market is highly regulated, with 1988’s Proposition 103 requiring the state’s Department of Insurance approval prior to any rate increase.
When setting rates, insurance companies are not allowed to consider a property’s current or future risk. Only historic data may be applied. In addition, they cannot consider reinsurance costs, or the price that they themselves pay to insurance companies that service the industry. With global warming and increased fires a factor (14 of the state’s most destructive fires have taken place within the last decade), many insurance firms are not able to price product in ways that reflect true future risks.
The state is currently working to draft measures that allow insurance companies to take climate change into consideration when setting rates. Such rules will apply only for those who live in areas where wildfire risks are high. While consumer groups fear that this might lead to exorbitant rates for a substantial minority of homeowners, insurance could be designed to take into account upgrades homeowners have made to create buffers and home fire resistance when setting rates. Proponents argue that the end result should be beneficial for the overall residential markets in California, as more competition will help contain costs.
