What to Know About California’s New Plan to Bolster Home Insurance Market

Californians’ home insurance options shrunk significantly in 2023, with seven of the state’s 12 largest home insurance companies either limiting new business or leaving the state marketplace altogether. But the state’s governor and insurance commissioner recently took action aimed at curtailing the state’s growing insurance crisis.

Advocates say it will lead to more readily available home insurance for California homeowners, even those in high-risk regions. Opponents view the plan as a sellout by state Insurance Commissioner Ricardo Lara and say it will benefit insurers far more than homeowners.

California’s growing home insurance crisis

Buying home insurance has always been challenging in coastal states. Add inflation, climate change, wildfires, legislative conflict, and a dwindling number of available insurers into the mix, and a challenge becomes a crisis.

That’s the current situation in California, where State Farm, which represents more than 21% of the state’s home insurance market, has paused writing new home policies. The state’s second-largest insurer, Farmers, restricted the number of new policies it will write each month to just 7,000.

The narrowing marketplace has helped squeeze home insurance rates even higher. In 2021, the average cost of home insurance for a $200,000 property in California was $972 annually, according to Insurify data. Today, the average is $1,056.

Despite these increases, insurers point to California’s wildfire risks, its high construction and repair costs, and the rising cost of reinsurance as reasons for limiting or abandoning business in the state.

Governor, insurance commissioner take action

In September, Gov. Gavin Newsom issued an executive order calling on Lara to take action on the state’s insurance crisis. The same day, Lara announced California’s Sustainable Insurance Strategy, calling it the largest insurance reform since the passage of Proposition 103.

Lara’s announcement followed the state legislature’s unsuccessful attempts to pass legislation addressing the crisis.

Specifics of the plan

Lara’s office says the plan will benefit California homeowners by:

• Requiring insurers who operate in California to write at least 85% of their total policies in the state in “distressed areas identified by the insurance commissioner.”

• Moving homeowners off the state’s FAIR Plan, which provides basic fire insurance coverage for high-risk properties that private insurers have declined to cover.

• Revising risk categorization models to give homeowners better rates and discounts for taking steps to mitigate hazards.

• Expanding the state’s FAIR Plan coverage limits to $20 million per structure to help provide coverage to HOAs, affordable housing projects, and infill development (construction of buildings or other facilities on previously vacant or under-used land in a city or developed area).

The plan would benefit the state’s insurance marketplace by:

• Updating timelines for the review of rate requests.

• Improving filing procedures for rate change requests.

• Potentially allowing insurers to factor their California reinsurance costs into their rate filings in the state.

• Requiring the state’s FAIR Plan to take steps, such as building reserves and financial safeguards, to ensure a catastrophic event wouldn’t bankrupt California’s insurer of last resort.

Lara’s plan is likely to benefit both consumers and insurers, says Betsy Stella, Insurify’s vice president of carrier management and operations.

“Carriers will be able to file for rates that more accurately reflect the costs they incur to provide insurance since they’ll be able to include reinsurance expenses in their models,” Stella says. “Consumers will likely benefit in that more carriers will be willing to write in the state. And the agreement requires carriers to hold market share in the most risk-prone areas, which will make coverage more accessible for homeowners in those areas. It may even create a fair amount of competition for that business.”

“We are at a major crossroads on insurance after multiple years of wildfires and storms intensified by the threat of climate change,” Lara said in announcing his executive actions. “I am taking immediate action to implement lasting changes that will make Californians safer through a stronger, sustainable insurance market. The current system is not working for all Californians, and we must change course. I will continue to partner with all those who want to work toward real solutions.”

Opposing viewpoints

Consumer Watchdog, whose founder wrote Proposition 103 and campaigned for its passage, denounced Lara’s plan as a “behind-closed-doors deal.”

The plan will allow home insurers to increase rates on millions of Californians but “ does not guarantee that people who need coverage will be able to get it,” the organization said in a press release. “[N]or does it do anything to reduce the risk of homes burning in California.”

Consumer Watchdog pointed to issues not addressed in the plan, among them:

• Discounts for homeowners who take steps to mitigate their homes’ risk of fire damage are currently awaiting approval by the Department of Insurance.

• Continued building in areas at high risk of wildfires.

No public or written commitment by insurers to uphold the proposed 85% benchmark for policies in high-risk areas.

What’s next

Proposition 103 allows Californians or their representatives — known as intervenors — to take part in rate hearings, challenge rate changes, sue insurance companies in court, and recoup their costs from the insurance companies. It’s possible Lara’s executive actions could face court challenges — from Consumer Watchdog, other organizations, or individual Californians.

Further, California law requires its agencies to hold public hearings on regulatory changes. So the Sustainable Insurance Strategy will have to undergo public scrutiny and comment — a process Lara anticipates wrapping up by the end of 2024.