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 proposal, which is the second element of the regulator's Sustainable Insurance Strategy introduced by Insurance Commissioner Ricardo Lara, aims to revise what can be included in catastrophe modeling. This move is seen as a departure from the standards set in the Insurance Rate Reduction and Reform Act of 1988, commonly known as Proposition 103. The current limitations on catastrophe models only allow for earthquake losses and fires following earthquakes.
Lara emphasized the need for this change by stating, "We can no longer look solely to the past as a guide to the future." He believes that expanding the use of catastrophe models, including wildfire risks, will help modernize the insurance marketplace and provide more options for consumers.
The restrictive rules for modeling in California, which Lara described as "outdated," have led to major insurers like The Allstate Corp., The Progressive Corp., and State Farm Mutual Automobile Insurance Co. either leaving the state or refusing to underwrite new business. These insurers argue that the current backward-looking modeling approach does not enable them to accurately price the risks they cover, especially in wildfire-prone regions.
State Farm, the largest homeowners insurer in California, made the decision to stop underwriting new property and casualty policies due to the inadequacy of rates. The escalating costs of climate-driven mega fires have significantly impacted insurance expenses for many Californians, with availability of insurance becoming increasingly challenging.
To address these challenges, the California Department of Insurance is set to hold a workshop on April 23 to gather public input on the proposal before it receives final approval by the Office of Administrative Law.