California adopts major reforms to address home insurance crisis

Cal Cities will continue to advocate on this issue in the coming year

By Jolena Voorhis, legislative affairs lobbyist, and Zack Cefalu, legislative affairs analyst

The past two months have seen the largest reforms to California’s home insurance marketplace in almost 40 years. These developments cement the final pieces of Insurance Commissioner Ricardo Lara’s efforts to improve the function and coverage of the insurance marketplace.

Cal Cities actively engaged the Department of Insurance on the proposals and provided testimony during the rulemaking process. Cal Cities has also partnered with other local government organizations to respond to any future regulatory and legislative developments.

Improving fire prevention, preparation, and access to insurance policies are all major legislative priorities for Cal Cities in 2025.

What changed?

As of Jan. 2, insurers can use catastrophe modeling when writing policies. Catastrophe models use past data from catastrophic events to predict losses from future disasters on a multiyear basis. Insurance companies can use these computer models to analyze risks from potential future disasters when deciding how much capital is needed to cover claims.

California historically has prohibited the use of catastrophe modeling. Instead, insurers had to use disaster data from the previous 20 years to write insurance policies and justify rate increases. Proponents argue this change will allow for more accurate pricing of rate increases.

The regulations require catastrophe models to use the best scientific information on risk mitigation at the property, community, and landscape levels. While this provision is a good start, Cal Cities will continue to advocate for stronger language that ensures rates recognize local wildfire mitigation efforts and that property owners can get coverage if they have completed specific mitigation measures.

In exchange for these models, insurance companies must cover at least 85% of “wildfire distressed” areas. The state defines wildfire distressed zones as ZIP codes that overlap with high and very high wildfire severity zones in which 15% or more of the dwellings are on the state’s FAIR Plan. 

The rules also require insurance companies to maintain a Wildfire Risk Portfolio Register of every insured property, the date the property was added to the portfolio, and the total number of exposures insured under each property, as well as the start and termination date of the policy if applicable. This should provide more transparency to consumers if insurance companies cancel their policies.  

What’s next?

On Dec. 30, the Department of Insurance submitted the final piece of its Sustainable Insurance Strategy, the Net Cost of Reinsurance in Ratemaking Regulations, for review.

Insurance companies can buy reinsurance from other companies to help cover themselves from being entirely responsible for massive losses during disasters. California is one of a few states that does not allow insurance companies to include the cost of reinsurance in their rates.

Under the proposed regulations, insurers could include reinsurance in their rate packages. However, they would need to increase coverage in wildfire-prone regions by writing policies for at least 85% of their share of the statewide market. This final piece comes as the Legislature reconvenes with the insurance crisis as one of its top priorities.

Lawmakers have already introduced a few related bills. AB 1 by Asm. Damon Connolly would require the Department of Insurance to regularly consider whether to update its ratemaking regulations to include additional building hardening measures for certain wildfire mitigation efforts. Cal Cities supports the measure and will work with the author’s office to pass it.

A measure by Asm. Lisa Calderon, AB 75, would require insurers to provide advance notice to residents about the use of unmanned aircraft to take images of their insured property and make such images available to the policyholder upon request. Cal Cities has not taken a position on AB 75, but in general supports legislation that bolsters fire prevention efforts and encourages insurance companies to consider those efforts when writing or renewing policies.