California Commissioner Announces Regulation to Enable the Use of Modeling in Rates

California Insurance Commissioner Ricardo Lara on Friday announced what he’s calling “first of its kind” catastrophe modeling and ratemaking regulation that will allow carriers to use the models as a factor in setting and getting rates.

The regulation is a part of his so-called Sustainable Insurance Strategy to increase coverage in wildfire-distressed areas of the state. The California Department of Insurance posted the final regulation after the Office of Administrative Law filed it with the Secretary of State, which concludes a rulemaking process.

“Giving people more choices to protect themselves is how we will solve California’s insurance crisis,” stated Lara. “For the first time in history we are requiring insurance companies to expand where people need help the most. 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.”

Only two days before Friday’s announcement, Farmers Insurance said it will resume offering coverage for multiple lines of insurance in California to new customers. The company cited among its reasons for the decision regulatory steps taken by the state’s insurance commissioner and other stakeholders.

Carriers began pulling back from the state’s homeowners market, blaming blamed wildfire losses as well as regulations. They also began requesting steep rate increases.

State Farm applied for large rate increases in California, a year after the carrier got rate approvals of 7% and 20%. The insurer, the largest in California, insures nearly one-in-five homes in the state. It recently requested a 30% rate increase for its homeowners line, a 52% rate increase for renters and 36% rate increase for condo coverage.

Related: California Insurance Commissioner: Allow Cat Modeling in Rates for Wildfires

Allstate, which stopped issuing new California homeowners insurance policies in 2022, is seeking an increase in its California homeowners insurance premiums by an average of 34%. It would be the largest rate increase this year and would impact more than 350,000 policyholders.

Under Lara’s new regulation, major insurance companies must increase the writing of comprehensive policies in wildfire distressed areas equivalent to no less than 85% of their statewide market share. Smaller and regional insurance companies must also increase their writing.

The CDI hired Kara Voss as model advisor, a newly created position at the department, to oversee the process of examining model integrity and ensuring public review in accordance with the new regulation. Voss has expertise in catastrophe modeling for wildfire and flooding events as a member of the Climate and Sustainability Branch.

Under the regulation, once a model has undergone a pre-application required information determination (PRID), insurance companies can use that model in a rate filing listing their commitments to write more policies. The department will accept PRID petitions starting Jan. 2, 2025 and expects the process to be complete within months.