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CAMARILLO, CA - MAY 3: A man on a rooftop looks at approaching flames as the Springs fire continues to grow on May 3, 2013 near Camarillo, California. The wildfire has spread to more than 18,000 acres on day two and is 20 percent contained.
California Insurance Commissioner Ricardo Lara has started procedures allowing property insurers to take climate hazards, notably wildfires, into account when establishing rate prices, which is a significant step toward addressing the mounting danger of climate change on property insurance.
This decision comes as a response to the increasing withdrawal of insurers from high-risk areas and the surge in the government's Fair Access to Insurance Requirements (FAIR) Plan, designed as a last-resort insurer, which has now garnered a 3% share of California's insurance market, as per The Washington Post.
California Takes on Climate Risks in Property Insurance Rates
Lara emphasized the urgent need for action: "We are at a major crossroads on insurance after multiple years of wildfires and storms intensified by the threat of climate change."
His actions align with an executive order from Governor Gavin Newsom, urging regulatory measures to expand coverage in underserved areas, factor in catastrophe risks when setting rates, and ensure the financial stability of the FAIR Plan.
The consequences of climate change have been felt acutely in California, with the state experiencing an increase in wildfires and hurricanes, leading to soaring property insurance rates.
Larger insurers have been hesitant to provide coverage in high-risk areas, attributing their decision to rising reinsurance costs, catastrophic loss expenses, and escalating costs of materials and labor for property repair and rebuilding.
The FAIR Plan, designed to fill the gap as an insurer of last resort, has witnessed a significant uptick in customers, with its market share reaching 3% since 2018.
To encourage insurers to return to high-risk zones, Lara has introduced a threshold equivalent to 85% of an insurer's statewide market share, requiring them to cover a proportionate number of homes in fire-prone areas.
The FAIR Plan and other higher-cost insurers would manage the remaining 15%. In exchange for this commitment, Lara has offered certain regulatory concessions, a move endorsed by the Personal Insurance Federation of California.
The existing rate approval process requires insurers to submit applications to the Department of Insurance, complete with supporting documentation, for any rate hikes. Consumer advocates also have the opportunity to intervene, adding transparency to the process.
These rules, established in 1988, have prevented insurance companies from passing on reinsurance costs to policyholders and limited rate hike requests to historical loss data. Under Lara's new regulations, insurers can employ catastrophe modeling that considers climate change projections and other dynamic factors when requesting rate increases.
Additionally, they will be able to incorporate reinsurance costs into rate filings, subject to their commitment to expand coverage and reduce the FAIR Plan's customer base. Lara has streamlined the process by accelerating rate approvals and allocating resources for increased staffing.
To enhance transparency, he will make intervenor filings public, facilitating greater participation from consumer advocates. While some consumer advocates have welcomed these changes, others, like Consumer Watchdog, have expressed reservations.
They voiced concerns about granting extraordinary powers to Commissioner Lara without adequate public input and pointed to his perceived close ties to industry lobbyists, according to Yahoo News.
Debate Arises Over Transparency and Costs in California's Insurance Policies
Harvey Rosenfield, the author of Proposition 103 and founder of Consumer Watchdog, questioned the proposed policies' potential impact on insurance costs, suggesting that insurers could manipulate forward-looking catastrophe models without sufficient transparency.
The debate also extends to reinsurance costs, which operate in an unregulated global market. Allowing companies to pass these costs on to consumers could create a loophole in California's stringent price control system.
Lara's transparency requirements for intervenors were applauded by consumer advocates, who have long called for greater transparency in the process. However, the absence of a written agreement with insurance companies raises questions about their commitment to the contract.
The complex challenge of balancing climate-related risk factors, reinsurance costs, and rate transparency in the insurance industry remains a topic of ongoing debate and scrutiny in California.
As the state grapples with the consequences of climate change, Commissioner Lara's actions represent a significant step towards addressing the evolving landscape of property insurance in a changing climate, Aol reported.
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