California Allows Reinsurance Cost in Rates as Fire Worry Grows

(Bloomberg) — California approved new rules that let insurers account for reinsurance costs when they set rates, the last major step in a regulatory overhaul designed to halt an exodus of carriers amid rising concern over wildfires. 

All other states in the US already allow for such costs and reinsurance is the primary strategy insurers use to continue providing coverage in high-risk areas, Insurance Commissioner Ricardo Lara said in a statement Monday. Seven of the 12 largest insurers have limited their coverage in California in recent years, canceling hundreds of thousands of policies. 

“My sustainable insurance strategy is focused on addressing the challenges we face today and building a resilient insurance market for the future,” Lara said in the statement. 

The new rules are meant to work in tandem with additional changes announced earlier this month that will let insurance companies compute policy rates by using catastrophe models that incorporate the growing risk of climate change instead of relying solely on historical disaster data. Homeowner mitigation efforts, such as hardening structures against fire danger, will also be considered in pricing. 

California has seen an uptick in wildfire activity this year, though the total acreage burned remains below the five-year average, according to the state’s Department of Forestry and Fire Protection, or Cal Fire. 

Earlier this month, a wind-driven blaze tore through southern Malibu, prompting thousands of evacuations and shutting down a key stretch of the Pacific Coast Highway. The fire burned more than 4,000 acres over a week and destroyed about 20 structures.

The new reinsurance rules also require carriers to increase coverage in high-risk areas, ensuring more options for Californians while limiting the costs passed on to consumers, Lara said. Reinsurance companies, such as Munich Re and Swiss Re AG, provide relief to insurers when a major disaster strikes.  

But consumer advocates assailed the regulations, warning they will raise costs for ratepayers without guaranteeing a substantive expansion in wildfire coverage. 

“This plan could drive the price of home insurance up by 40%” said Jamie Court, president of Consumer Watchdog, a Los Angeles-based nonprofit. “This plan is of the insurance industry, by the insurance industry, and for the industry.” 

–With assistance from Mark Chediak.

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