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Elizabeth Tosaris, Esq.
MICHELMAN & ROBINSON, LLP
(415) 882-7770

CALIFORNIA'S PUSH TO ADDRESS THE PROPERTY INSURANCE CRISIS

California’s Department of Insurance (CDI) is in the process of bringing about an ambitious set of reforms aimed at countering the severe shortage and soaring prices of property insurance in the state. In late 2023, spurred by escalating wildfire and climate risks—most recently underscored by the devastating Los Angeles fires in January 2025—Insurance Commissioner Ricardo Lara unveiled a comprehensive “Sustainable Insurance Strategy” designed to stabilize the market, enhance consumer protections, and foster long-term resilience. This multipronged initiative reflects the state’s urgent need to address both immediate challenges and the broader systemic risks posed by climate change.

The Sustainable Insurance Strategy: Building Resilience

Announced in September 2023, the Sustainable Insurance Strategy emerged after months of public town hall meetings and stakeholder consultations. Commissioner Lara underscored the gravity of the situation, stating that California is at an “insurance crossroads” driven by climate-induced volatility. To avert a broader crisis, the CDI proposed a series of regulatory, operational, and market-driven interventions aimed at expanding coverage options, improving market efficiency, and mitigating climate-related risks.

The strategy includes the introduction of a series of regulations or modifications to regulations governing rate filings for property risks, the development of a wildfire model, and efforts to shore up the California FAIR plan, which serves as the property insurer of last resort for many Californians. In general, the regulations are intended to modernize rate filing rules with reforms that insurers have sought for years, but only in exchange for the filing insurer’s commitment to write more policies in the higher wildfire risk areas.  The wildfire model is in such early stages of development that very little is known thus far about when it will be available for use and the industry reception that can be anticipated. For its part, the California FAIR plan is likely to need additional monitoring to determine the efficacy of the revised plan of operation in the wake of the recent fires in Los Angeles and any future large fire events.

Of note, the Sustainable Insurance Strategy is not the only tool the CDI has to try to maintain insurance availability in the state.  For example, following specific wildfire events, the Commissioner has—and likely will going forward—exercised his statutory authority to impose moratoriums on cancellations and non-renewals of policies insuring property in zip codes affected by the catastrophe. These moratoriums are typically put in place for a year and apply to all residential policyholders within the affected area who suffer less than a total loss or no loss. In addition, the Commissioner has also previously revised regulations to require insurers to offer certain discounts to consumers who have taken action to address their wildfire risk.  Those regulations required insurers to submit new rate filings that incorporated wildfire safety standards developed by the CDI and required insurers to establish a process for providing residents with their wildfire risk determination.

Proposed and Recent Rate Filing Regulation Reforms

Since the announcement of the Sustainable Insurance Strategy, the CDI has taken the following steps:

1. Streamlined Rate Filings: Recognizing industry concerns about the lengthy and complex rate approval process, the CDI issued proposed regulations to expedite property and casualty (P&C) rate filings. These changes aim to balance the need for regulatory scrutiny with insurers’ desire for “speed to market,” thereby encouraging more participation in California.  Industry has been uncertain regarding the likely effectiveness of the regulations; once the regulations are in place, time will tell whether they have the desired effect on the speed of rate filing reviews.
2. Wildfire Catastrophe Modeling: To address the growing risks of wildfires, the CDI launched a dual initiative: the recently announced creation of a public wildfire catastrophe model and the revision of existing regulations governing the use of models in ratemaking. While existing regulations allowed the use of rate models based on historical data to calculate the risk of wildfires, stakeholders in the industry argued that these models failed to reflect the recent trend toward more and larger catastrophic wildfires, and therefore did not allow sufficient rate to guard against the likelihood of significant wildfire loss in the future.

Unlike models that rely on historical loss data, the use of forward-looking modeling tools allow insurers to incorporate predictive analytics to capture future risk trajectories. The revised regulations, which have just taken effect in 2025, also created a method for insurers to submit information prior to the submission of a complete rate application. This pre-application required information determination process or “PRID” allows a rate filer to obtain a non-binding determination on the information and data used to develop its catastrophe model. Verisk announced it was the first to file for the PRID pursuant to the new regulations, which suggests that the industry in general may have a quick and enthusiastic take up rate on the new PRID process.

The public wildfire model is likely to work in a similar fashion to the public model that Florida introduced several years ago to allow insurers to model for hurricane risk. Florida’s Public Hurricane Loss Model, developed through a collaboration between the state and academic institutions, was designed to provide an independent, transparent, and scientifically robust alternative to private proprietary models. It has since been used to assess risk, support regulatory rate filings, and offer a consistent framework for insurers navigating the state’s exposure to catastrophic weather events. Similarly, for the California wildfire model to be effective, it must not only be credible and accurate but also achieve broad industry acceptance—something that will require a high degree of transparency, rigorous peer review, and demonstrated predictive reliability over time. Without these elements, insurers may be hesitant to rely on the model for ratemaking, which could undermine the CDI’s goal of stabilizing the state’s insurance market.

3. Addressing Reinsurance Costs: Existing regulations did not permit insurers to incorporate the cost of reinsurance in their rate filings except for the hazards of earthquake and medical malpractice. Insurers pointed out that reinsurance, a key component of the insurance ecosystem, has become increasingly expensive and scarce in California’s high-risk areas, and urged the CDI to allow recovery of some of these costs in their rate formulas. In response, the CDI introduced a proposal to standardize the net cost of reinsurance as an element in the rate making process. Under this framework, insurers must commit to writing more policies in underserved regions as a condition for using standardized reinsurance benchmarks in their rate filings. This approach seeks to ensure that the cost of reinsurance—a major factor in premium calculations—does not disproportionately burden consumers while incentivizing broader market participation. The CDI held a workshop on this issue in December 2024 and is likely to propose a related regulation sometime in 2025.

California FAIR Plan Modernization

The California FAIR Plan has been a critical safety net for homeowners and businesses unable to secure coverage in the private market. Significantly, reliance on the California FAIR Plan has grown as private insurers reduce their presence in wildfire-prone areas, underscoring the challenges faced by homeowners seeking affordable coverage. This increased reliance has put strain on the organization, both financially and operationally, as it was originally designed as a market of last resort, not a primary insurance solution for a growing number of Californians. The surge in policyholders has led to concerns about the California FAIR Plan’s ability to maintain adequate reserves, absorb large-scale losses, and ensure long-term sustainability. Additionally, because these policies generally offer more limited coverage than those available in the private market, homeowners and businesses relying on the California FAIR Plan often face gaps in protection, leaving them more vulnerable to financial hardship in the event of a loss.

In response, last year, the CDI and California FAIR Plan agreed on a new operational framework to expand coverage options and strengthen financial safeguards. Key updates include (1) a new high-value commercial coverage option with limits up to $20 million per building; (2) enhanced public reporting requirements to ensure transparency and accountability; and (3) financial resilience measures to protect policyholders against extreme loss scenarios.

Conclusion

While the Sustainable Insurance Strategy represents a bold step forward, its success hinges on effective implementation and industry collaboration. Insurers have expressed cautious optimism about the regulatory reforms but remain concerned about California’s broader business climate, including litigation risks and economic volatility. Moreover, the transition to a more sustainable insurance market will require significant investments in infrastructure, data analytics, and consumer education. For example, the public wildfire model being developed in partnership with Cal Poly Humboldt must deliver accurate, actionable insights to gain industry buy-in and drive meaningful changes in underwriting practices.

What differentiates the more recent Sustainable Insurance Strategy from other actions the CDI has taken in the past is the scope of the Strategy. By balancing regulatory oversight with market incentives, the Strategy seeks to create a more resilient, equitable, and innovative insurance ecosystem.

While challenges certainly remain, the reforms spearheaded by the Commissioner and the CDI offer a roadmap for other states grappling with similar issues. Insurers’ experience in California can also be used to inform their interactions with other state regulators working on their own initiatives. To be sure, as implementation progresses, stakeholders across the insurance value chain must work together to ensure that California’s ambitious vision becomes a reality, securing a sustainable future for consumers and insurers alike.

References

Elizabeth Tosaris is a partner in the San Francisco office of Michelman & Robinson, LLP, a national law firm headquartered in Los Angeles. She advises insurers and other Department of Insurance-regulated entities on a range of issues, including rate-related issues and regulatory compliance.  Elizabeth can be contacted at (415) 882-7770 or etosaris@mrllp.com