Fulfilling his pledge to complete new regulations before the end of 2024 to implement his Sustainable Insurance Strategy, Insurance Commissioner Ricardo Lara submitted final regulations to the California Office of Administrative Law on Dec. 27 that would—for the first time in California—recognize insurers’ net reinsurance costs in rate making.
California is the only state that had refused to recognize such expenses—which has had the effect of significantly reducing rates that insurers could lawfully charge, and perpetuating rate inadequacy causing insurers to stop writing and renewing property insurance risks.
Here is the “Final Statement of Reasons” and actual text of the regulations that CDI filed with OAL, which is now reviewing the submission:
Under the new CDI rules, regulators will cap the amount of reinsurance that can be passed on to customers by calculating an industry standard; insurers that pay higher reinsurance costs than peers will be limited in how much of that cost they can pass on.
And insurers are required to make commitments to write and renew policies in areas of the state determined by the Commissioner to be underserved by property insurers—which include the areas of the state most prone to wildfire losses.
Insurers can meet those requirements in a variety of ways, including taking polices out of the FAIR Plan, or maintaining a heavy presence in wildfire areas if they are already insuring properties there.
Identical requirements apply to new regulations allow insurers to use catastrophic loss modeling in ratemaking.
Allowing insurers to pass along the cost of reinsurance will make it easier for them to write more policies in risk-prone areas, and if insurance companies can recoup some or all of the cost of purchasing reinsurance, then they can afford to purchase more reinsurance—which permits them to assume greater wildfire exposures.