Insurer Group Reacts to California Department of Insurance Musing on Cat Modeling

Insurer groups may be seeing the light at the end of the tunnel with a hint of a possible change in a regulator’s attitude toward the use of catastrophe modeling in the California market for wildfire insurers.

The California Department of Insurance on Wednesday issued an invitation to a public workshop focused on exploring insurers’ use of risk assessment tools in the face of growing wildfire threats.

The stated goal of the workshop is to “protect consumers and address climate-intensified wildfire risks in California.”

The workshop announcement follows increased calls for the state to change its stance on the use of modeling in rate making after State Farm General Insurance Co. announced at the end of May that it had stopped accepting new policy applications for property/casualty insurance in California for reasons including increased risks from wildfires and inflation. The decision followed a similar move by Allstate Corp. last year.

Insurer groups have argued that restrictions on the use of catastrophe modeling are preventing carriers from adequately pricing wildfire risks and have hurt their efforts to insure homeowners. State regulations direct wildfire insurers to set rates using historical losses as a guide, prohibiting models that can account for land use changes, the state of vegetation or weather trends.

“Unlike every other state, California regulations prohibit the use of forward-looking climate models to project future losses, and instead require wildfire risk to be priced using an insurer’s average wildfire losses over the last 20 years,” Michael D’Arelli, executive director of the American Agents Alliance, a national association headquartered in Sacramento, wrote in a recent editorial that largely blames Insurance Commissioner Ricardo Lara and the CDI for the market turbulence.

D’Arelli called the regulation of property/casualty insurance in California “an epic failure,” noting that under current rules, an insurer gets no credit for writing in higher-risk areas because they must first “experience big losses in order to get approval to charge higher rates to support the greater losses anticipated in higher risk areas.”

The American Property Casualty Insurance Association greeted the workshop announcement with open arms.

“We are pleased to see the CDI continue their work to explore the benefits of catastrophe models, including how forward-looking models can be used to better assess increasing risks caused by climate change and drier conditions,” Mark Sektnan, APCIA vice president for state government relations, said in a press release response. “California is a top insurance market and insurers are committed to the Golden State. Incorporating the use of catastrophe modeling would give insurers the modern tools needed to better assess and reflect growing catastrophic wildfire risk and the rising costs of claims and inflation in rate-making.”

The stated workshop aims are to gather input to inform future regulations to benefit consumers by increasing insurance coverage options, fair pricing of insurance, and greater recognition by insurance companies of federal, state, and local wildfire safety and mitigation investments.

The July 13 workshop is a continuation of a multi-year effort that Lara initiated in 2020. Those efforts led to “Safer from Wildfires” regulations to mandate insurance discounts to homeowners and business owners who engage in wildfire safety and mitigation efforts.

“Protecting California consumers and addressing climate-intensified wildfire risks requires ongoing innovation and being proactive,” Lara said in a statement. “This workshop is a significant step toward engaging stakeholders and experts in developing long-term solutions. Consumers will continue to benefit from this effort through more coverage choices and greater safety for their communities, and longer-term resiliency of our state’s insurance marketplace.”

Reaction to State Farm’s announcement has been pronounced. The decision to no longer write new personal or business property/casualty policies in California not only made headlines, but it got the attention of Fitch Ratings, which said last week that the move “reflects the poor underwriting experience for California homeowners’ writers.”

Fitch said the decision will further restrict coverage availability in California and prompt premium rate increases going forward.

State Farm currently has 21% of the homeowners market, according to the CDI. The number of companies writing new homeowners insurance has stayed consistent roughly 115 since Lara took office, according to the CDI.

Fitch said that the “continued retreat of larger insurance carriers from the California residential property insurance market, including State Farm’s announced move to cease adding new homeowners’ policies in the state, signals ongoing regulatory constraints, rising cost inflation and higher catastrophe losses.”

Wildfires have been a significant source of insured losses in California in recent years.

Eight of the state’s top 20 wildfires have occurred in the last half-dozen years, burning 8,512 structures, according to the Western Fire Chiefs Association. The top three largest fires – the August Complex fire in 2020, the Dixie fire in 2021, and the Mendocino Complex fire in 2018 – burned a collective 2.45 million acres and destroyed 2,526 structures.

Those losses do not reflect the destruction from the Camp Fire in 2018, because the 153,336-acre blaze doesn’t rank among the state’s largest. However, it was the state’s most destructive and its deadliest. The Butte County fire destroyed 18,804 structures, caused 85 deaths and is considered the year’s the costliest natural disaster at over $16.5 billion.

This has prompted leading insurers to reduce exposure in areas most prone to catastrophes.

Other large carriers that have announced a reduced appetite for writing California homeowners insurance include American International Group (AIG), Chubb and Allstate, according to Fitch.

AIG announced its planned exit from the admitted homeowners’ market in California in 2022, and also that year AIG notified California that it would stop offering admitted high net worth homeowners insurance due to an unsustainable level of aggregation. Peter Zaffino, CEO of AIG, said an analysis of the increased frequency and severity of natural catastrophes led to a decision to move the high-net worth homeowners business to excess and surplus lines in multiple states.

According to Fitch, the residential property market in California is expected to see more growth in the excess and surplus lines market, which provides carriers greater flexibility in setting premium rates and policy terms relative to the more strictly regulated admitted market.