CALIFORNIA – California Department of Insurance commissioner Ricardo Lara enforced, December 13, his catastrophe modeling and ratemaking regulation to expand insurance coverage in wildfire-prone and high-risk areas.

The department says homeowners and businesses will see greater availability, market stability, and recognition for wildfire safety through use of catastrophe modeling.

“With our changing climate we can no longer look to the past. We are being innovative and forward-looking to protect Californians’ access to insurance,” said Lara.

AI catastrophe models will set rates

Lara says the new regulation requires insurance companies to increase the writing of policies in wildfire distressed areas equivalent to no less than 85% of their statewide market share.

In exchange, insurers will be able to use AI catastrophe models based on historic disaster data and estimates of future losses to set rates. 

CDI says the regulation supports the development of a public catastrophe model. This is a disaster risk assessment tool developed openly by public institutions rather than private companies.

The new rule also makes insurance companies consider safety improvements made by homeowners, businesses, and communities — like adding fire-resistant materials or creating firebreaks — when setting insurance rates.

Consumers should expect large rate hikes

According to Consumer Watchdog, consumers should expect large rate hikes but not more insurance policies sold under the new rules.

“The Insurance Commissioner claims that insurance companies will have to cover more homeowners in wildfire areas in exchange for the right to raise rates with secret algorithms. However, this requirement is not in the text of the regulation,” said Consumer Watchdog executive director Carmen Balber.

She goes on to say that instead, insurance companies won the right to keep how they project wildfire losses secret, meaning the public and regulators will have no way to determine if wildfire insurance rates are fair. 

Balber points out that one of the loopholes regarding catastrophe modeling is the lack of guidelines for minimum public disclosures. The required information will vary for each model.

“The rules violate insurance consumer protections under Proposition 103 that allow regulators and the public to confirm rates are justified,” said Balber.

To read the full regulation on catastrophe modeling and ratemaking click here. 

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