California, a state in the western US, has introduced the Net Cost of Reinsurance in Ratemaking Regulation.
According to the California Department of Insurance, this new rule is the first to require insurers to provide coverage in high-risk areas, expanding options for Californians.
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This regulation is part of a sustainable insurance strategy aimed at enhancing the resilience of the state’s insurance market against wildfires and climate change.
It modernises reinsurance practices, allowing insurers to expand coverage and issue more policies in communities facing increased risk, thereby ensuring market stability.
The regulation requires insurers to cover wildfire-prone regions, ensuring they underwrite policies for at least 85% of the statewide market share, with incremental annual increases until the target is met.
In addition, the regulation caps reinsurance costs that can be passed to consumers, establishing an industry-wide standard and preventing companies from charging more than this standard to policyholders.
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By GlobalDataIt is expected to encourage competition among insurers for the best reinsurance prices, ensuring consumers receive optimal value.
Specifically, the regulation limits costs to California-only incidents, protecting consumers from paying for disasters in other regions, such as the Gulf Coast hurricanes or Midwest windstorms.
It also aligns with forward-looking wildfire catastrophe models for more reliable rate predictions, addressing the issue of ballooning premiums and rate spikes following major wildfires.
To prevent “model shopping,” where insurers might use different models to justify higher consumer rates or lower reinsurance costs, the regulation requires the use of consistent models for both purposes.
This aims to promote a balanced approach to risk assessment and consumer protection.
California Insurance Commissioner Ricardo Lara said: “My Sustainable Insurance Strategy is focused on addressing the challenges we face today and building a resilient insurance market for the future.
“With input from thousands of residents throughout California, this reform balances protecting consumers with the need to strengthen our market against climate risks.”
Recently, Delos Insurance Solutions, a San Francisco-based managing general agent serving homeowners in wildfire-prone areas, secured $9m in Series A funding.
Using satellite imagery and wildfire science, its technology identifies homes with lower wildfire risk, providing an alternative to traditional insurers that have pulled back from high-risk regions.
