California insurance regulator to greenlight wildfire cat models

Property and casualty insurers doing business in California will be able to expand their use of catastrophe modeling under a new proposal from the state regulator.

The California Department of Insurance is proposing that insurers be permitted to use catastrophe models that include wildfire, terrorism, and flood lines for both homeowners and commercial insurance lines. The department currently limits the use of catastrophe models to earthquake losses and fires following earthquakes.

The proposal is the second element of the regulator's Sustainable Insurance Strategy, which Insurance Commissioner Ricardo Lara introduced in September 2023. The first element, improving the rate-approval process for insurers, was introduced in February.

Revising what can be included in catastrophe modeling is another step away from standards established in the Insurance Rate Reduction and Reform Act of 1988, also known as Proposition 103, which requires insurers to take the average of actual losses for the previous 20 years when setting rates.

Those rules for modeling, which Lara called "outdated," in a statement were behind underwriters including The Allstate Corp., The Progressive Corp. and State Farm Mutual Automobile Insurance Co. leaving or declining to write new business in the Golden State. Insurers have said backward-looking modeling does not allow them to adequately price the risks they cover, particularly those in wildfire-prone areas.

State Farm, the largest homeowners insurer in California, announced in May that it would stop writing new property and casualty policies because of rate inadequacy.

Supercharged costs

The growth of climate-driven mega fires has supercharged insurance costs for many Californians while making insurance harder to find, according to Lara.

"We can no longer look solely to the past as a guide to the future," Lara said, adding that the expansion of cat model use will "help modernize our marketplace and restore options for consumers."

The department is holding a workshop on April 23 to allow public input on the proposal before it is approved by the Office of Administrative Law.