The news: California released new rules meant to stabilize its home insurance market, allowing insurers to use complex computer models—also known as catastrophic models—to set rates.
- Effective January 2, 2025, insurers will be allowed to consider meteorological and geographic data when determining pricing, alongside historical loss data, per the LA Times.
- In exchange, insurers must write policies in wildfire-prone neighborhoods equal to 85% of their statewide market share and let the state review their models.
How we got here: P&C insurers have been exiting the state due to major strains on their profitability, driven by climate risks like bigger and more widespread wildfires.
- While the direct underwriting profit across the US averages 3.6%, California’s is -13.1%.
- Earlier this year, seven of the 12 largest US insurers limited the policies they’re willing to write in California—ceased writing new policies altogether.
Insurer reactions: California Insurance Commissioner Ricardo Lara claimed there are already positive changes in the state’s P&C insurance landscape. For example, he said Farmer’s Insurance plans to expand in the state citing market improvements, per NBC News.
Our take: While these regulations encourage insurers to remain in California by providing more flexibility in pricing, insurers must balance profitability with keeping premiums affordable, especially in high-risk areas.
Insurers will need to carefully monitor customer drop-offs resulting from price adjustments to avoid further destabilizing the market.
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