California Commissioner Issues Regulation to Allow Reinsurance in Ratemaking

California Insurance Commissioner Ricardo Lara on Monday announced what he is calling the final step in his efforts to help the state’s ailing homeowners insurance market with the Net Cost of Reinsurance in Ratemaking Regulation, which enables reinsurance as a ratemaking factor and requires insurers to increase coverage in high-risk areas.

The step, which the California Department of Insurance said will create more insurance coverage options for Californians while limiting the costs passed on to consumers, is designed to work with other reforms underway.

The new regulations come as the state has seen broad insurance carrier pullback from the wildfire prone state. 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.

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.

All other states except California allow for costs of reinsurance as a ratemaking factor. According to the CDI, reinsurance is the primary strategy most carriers use to continue to write and expand coverage in higher risk parts of California.

The American Property Casualty Insurance Association, the primary national trade association for home, auto, and business insurers said the reform is critically needed.

“Incorporating reinsurance into ratemaking is one of several critically needed reforms to stabilize California’s insurance market,” Laura Curtis, APCIA assistant vice president of state government relations, said in a statement. “California is the only state that does not allow reinsurance in ratemaking. We appreciate Commissioner Lara for taking this step as a part of his Sustainable Insurance Strategy. We look forward to carefully reviewing the regulation and working with the Department to ensure it effectively improves access and availability to insurance for all Californians.”

Consumer Watchdog warned that the new regulation would allow carriers to drive up home insurance rates by 40% to 50% without offering a substantive expansion in wildfire coverage.

“This plan could drive the price of home insurance up by 40%” stated Jamie Court, president of Consumer Watchdog. “Tellingly the commissioner did not do a cost impact analysis of his plan on consumers. That’s because this plan is of the insurance industry, by the insurance industry, and for the industry. The Commissioner has left no opportunity for public comment on the regulation before it is final by issuing it on an emergency basis. It’s the worst type of power grab.”

Under the plan, insurance companies must increase coverage in wildfire-prone regions, ensuring they write policies for at least 85% of their statewide market share, with annual increases until the threshold is met.

The regulation treats reinsurance like other expenses allowed under Proposition 103, such as claims handling or agent commissions, by establishing a standard cost of reinsurance and capping the amount of reinsurance costs that can be charged to consumers. Companies spending more than the industry standard cannot pass these costs onto their policyholders, according to the CDI.

The new regulation is the final element of the largest insurance reform to Prop. 103 for California. Lara on Dec. 13 announced he had finalized a wildfire catastrophe modeling regulation with a requirement for insurers to increase their policy offerings in underserved areas of the state as a condition of incorporating catastrophe modeling into ratemaking. These two regulations are designed to work together, with other Sustainable Insurance Strategy reforms, to increase the availability of homeowners and commercial insurance policies in wildfire distressed areas.

Some carriers have already responded favorably to the new regulations being rolled out.

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.