California has announced new insurance reforms aimed at improving market conditions for consumers who’ve seen insurance options dwindle in recent months.

In a Sept. 21, press release, Insurance Commissioner Ricardo Lara discussed a series of executive actions dubbed “California’s Sustainable Insurance Strategy.” Gov. Gavin Newsom released his own executive order to bolster Lara’s efforts.

The strategy has been hailed as the state’s largest insurance reform in 35 years. These changes could greatly impact rental owners, especially in areas prone to wildfires.

What’s in the plan?

The following are key goals from the plan, among other elements:

  • Transition consumers from Fair Access to Insurance Requirements (FAIR) plans back to the normal insurance market.
  • Give consumers on a FAIR plan who follow California’s “Safer From Wildfires” legislation priority for switching back to the normal insurance market.
  • Have insurers commit to “writing no less than 85% of their statewide market share in high wildfire-risk communities.” According to the press release, this means “if a company writes 20 out of 100 homes statewide, it must write 17 out of 100 homes in a distressed area.”
  • Expedite the adoption of new rules among the California Department of Insurance that involve climate catastrophe models accounting for wildfire safety and mitigation actions.
  • Implement changes to state FAIR plans to increase data reporting and prevent bankruptcy in the event of an especially catastrophic event.
  • Expand FAIR plan commercial coverage to $20 million per building to aid the state’s housing goals.
  • Improve rate filing timeliness and enact intervenor reform to increase process transparency.

Why now?

The announcement came after this year’s legislative session ended with no solution to the property insurance crisis. This legislative inaction comes despite urgent appeals from industry and housing groups, including the California Apartment Association, which has warned about the potential insolvency of the FAIR Plan and the detrimental impact on the state’s economy. 

In California, which has the country’s largest insurance market, wildfire risks have led some insurers to stop issuing or renewing certain policies.

Insurers will issue policies only when they can ensure payment of all loss claims and related expenses while still maintaining a profit (to fund such responsibilities). If an area becomes too risky (i.e., claim costs become too expensive to reasonably cover), an insurer may stop writing or renewing policies. This has happened in some high wildfire-risk areas of California.

Adding to the situation, California has a rule regarding insurance rate increases. If an insurer wants to increase rates over a certain percentage — such as to maintain solvency for increased claims — the state holds a public hearing with an intervenor to decide if the increase is warranted. This process has been criticized as a hurdle to swiftly adapting to higher claims costs, as it may take years.

If unable to pay for increased claims in a timely manner, an insurer may back out of an area altogether.

When insurers leave an area, consumers must turn to state-backed FAIR plans for coverage, also known as “insurance of last resort.” As the term implies, these plans can be considerably more expensive than typical policies. 

The proposed plan from the California Department of Insurance aims to fix the current market conditions forcing insurers to leave some parts of the state. Stakeholders hope these initiatives will act as a balanced approach that can serve both consumers and insurers even as climate-related risks continue.

Implications for CAA members

Amid this insurance crisis, CAA continues to advocate for a balanced and sustainable insurance market.  While CAA works closely with legislators and industry stakeholders, it’s worth noting that CAA members have exclusive access to specialized insurance programs designed to meet the unique needs of rental property owners and managers.

The CAA Value Insurance Plan, a full-service, multi-carrier insurance program, aims to provide cost-effective solutions to members, irrespective of property size and location. While this doesn’t resolve the broader crisis, it does offer a valuable resource for those managing risks in these uncertain times.

For more information about how this member benefit can serve your needs, call 866-913-6293 or visit our CAA Insurance page.

CA License #0F71902