Commissioner unveils plan for home insurers to base rate hikes on catastrophe prediction models

In an effort to staunch the exodus of home insurers fleeing the state, California Insurance Commissioner Ricardo Lara unveiled a proposal for letting those insurers use computer models of possible future catastrophes to justify rate increases.

The proposal unveiled Thursday is part of yearlong effort to overhaul regulations and ease the insurance market crisis in the wildfire stricken state.

Insurers use catastrophe models to calculate rates in every other state, but California has instead required the companies to use only historic experience based on the past 20 years. Insurers say that keeps them from pricing the growing risks from a warming climate into policies. In recent years many insurers have stopped offering new coverage and dropped customers in wildfire risk areas, forcing them to buy bare-bones, last-resort policies at two or three times the cost.

“We can no longer look solely to the past as a guide to the future,” Lara said in a statement Thursday. “My strategy will help modernize our marketplace, restoring options for consumers while safeguarding the independent, transparent review of rate filings by Department of Insurance experts, which is a bedrock principle of California law.”

The second-term elected commissioner has been in a political vice as a growing number of homeowners in and around wildland areas from the Bay Area and beyond face soaring premiums and cancelled coverage since 14 of the state’s20 most destructive wildfires occurred in the last 10 years. It has only aggravated the state’s worsening problems with housing affordability, a top voter concern.

Consumer advocates behind the 1989 Proposition 103 voter initiative that set the state’s current insurance regulatory framework have criticized computer modeling as proprietary “black box” formulas that amount to fancy risk estimates insurers would use to drive unwarranted rate hikes.

Consumer Watchdog founder Harvey Rosenfield, Prop 103’s author, has noted catastrophe modeling hasn’t helped hurricane-wracked Florida, which is facing a home insurance crisis of its own while homeowners there already pay some of the highest premiums in the country.

“Black box catastrophe models are notoriously contradictory and unreliable, which is why public review and transparency are key before insurance companies are allowed to use them to raise rates,” Rosenfield said Thursday. He said Lara’s plan “appears drafted to limit the information available to the public about the impact of models on rates in violation of Proposition 103.”

Insurers however applauded Lara’s proposal and argued it will go a long way toward stabilizing the California home insurance market.

“As Californians grapple with record inflation and become increasingly vulnerable to climate-driven extreme weather, including catastrophic wildfires, this is a critically needed tool to help identify future risks more accurately and set rates that reflect our new reality,” said Mark Sektnan, vice president of state government relations for the American Property Casualty Insurance Association. “More accurate ratemaking will help restore balance to the insurance market and ensure all Californians have access to the coverage they need.”

The Department of Insurance is inviting public comment on the proposed catastrophe modeling regulation ahead of an April 23 meeting.

It is the second initiative in a plan Lara announced last fall, spurred by Gov. Gavin Newsom, for what he called the biggest overhaul of the state’s insurance regulations in three decades. He expects to complete the plan by December.

Last month Lara unveiled a proposal to speed approval of requested rate increases, but both consumer advocates and insurers voiced concerns about that plan. A public hearing is scheduled March 26.

Faster rate approval and predictive catastrophe modeling are two of three key demands insurers have insisted are needed to stabilize the insurance market and provide homeowners with more coverage options. A third, allowing insurers to bill policy holders for reinsurance — coverage insurers buy for themselves to limit their catastrophic loss exposure — is expected to be announced soon.

Lara has promised that in exchange for granting insurers’ ratemaking wishes, they must agree to provide 85% of their statewide home insurance market share in wildfire-risk areas. Rosenfield and independent industry analysts have been skeptical such a commitment is feasible or enforceable.

Lara noted that catastrophe modeling already is being used in the state to set policy rates for earthquakes and fires caused by them. The new proposal would expand catastrophe model use to include wildfire, terrorism and flood protection for homeowners and commercial property.

Rosenfield said the proposed rule could lead to even further expansion of catastrophe modeling to boost rates for car insurance and coverage of other risks unrelated to wildfires, and that it “fails to spell out whether or how the Department of Insurance would assess a model’s bias, accuracy, or the validity of the science.”

The commissioner said that the proposal would allow for sufficient public oversight because the catastrophe models insurers would be allowed to use would be reviewed by a panel of experts overseen by his department. The models, he said, would stabilize rates over time, and also take into account homeowner and community “hardening” efforts to lower fire risk.