In the days leading up to the destructive wildfires that ravaged Los Angeles, California’s insurance commissioner announced a new regulation aimed at improving homeowners’ access to insurance in wildfire-prone areas. The rule, which will go into effect later this month, requires insurance carriers to gradually expand coverage in high-risk regions by 5% every two years, ultimately ensuring that insurers hold at least 85% of the market share in the state. In exchange, insurers will be permitted to pass reinsurance costs onto consumers in their pricing calculations.
Insurance Commissioner Ricardo Lara expressed that the new rule was designed to ensure a reliable insurance market for Californians, particularly in areas vulnerable to wildfires and climate change. “Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change,” Lara stated, emphasizing that other states already allow insurers to pass on reinsurance costs.
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The regulation came at a time when many insurers had pulled back from California in response to increasing weather-related risks, including wildfires that had decimated company profits in the past. For example, State Farm reduced its policies by nearly 70% in Pacific Palisades last year.
However, just a week after the rule was announced, wildfires erupted across the Los Angeles area, fueled by strong winds. The blazes swept through Pacific Palisades, Altadena, and the San Fernando Valley, damaging or destroying approximately 12,000 structures. The total damage from these wildfires is expected to reach between $135 billion and $150 billion, marking one of the worst fire seasons in modern U.S. history.
Despite the state’s attempts to address the issue, consumer advocacy group Consumer Watchdog raised concerns, warning that the new rule could lead to significant premium hikes for homeowners, potentially increasing rates by 40% to 50%. The group argued that the rule might not provide enough coverage in wildfire-prone areas to justify such increases. California’s insurance department did not respond to requests for comment, but Lara disputed these predictions, telling CNN that the estimates were exaggerated.
In the wake of these insurance changes, homeowners who lost their policies due to insurers pulling out of California have faced limited options. Many have had to turn to the state’s FAIR plan, a last-resort insurer, to obtain coverage. As of September, FAIR’s exposure to residential properties had ballooned to $458 billion, a 61% increase from the previous year, with nearly $6 billion of that total tied to properties in Pacific Palisades.
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FAIR has assured policyholders that it can pay out claims, relying on the ability to recoup costs from primary insurers. However, this cost recovery is likely to be passed on to customers in the form of higher premiums, adding to the financial strain on California homeowners. Whether through private insurers or the state’s FAIR plan, residents can expect to see rising rates in the face of ongoing wildfire risks.
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