The California Department of Insurance unveiled a new regulation this week that aims to increase homeowners insurance coverage in areas prone to wildfires, a response to the recent pullback in policies by several major insurers.
Announced by California insurance commissioner Ricardo Lara on Monday, the regulation is under administrative review and is set to take effect by the end of January, according to reporting by The Associated Press (AP). The rule will require all insurers that do business in the state to begin increasing their policies in high-risk wildfire areas by 5% every two years until at least 85% of their policies cover these homes. Currently, the state has no requirements for insurers to offer coverage in these areas.
“Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change,” Lara said in a statement. “This is a historic moment for California. 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.”
To incentivize insurance companies, the state will now allow them to pass on the costs of reinsurance to consumers. Every other state already has this provision, according to Lara. But these costs will be capped through an industrywide standard, which will seek to determine the typical cost of reinsurance and push insurers to compete for the lowest price.
“Today, as climate risks escalate across the nation, reinsurance has become an even more imperative component of insurance companies operating in high-risk and distressed areas, including California,“ Lara’s office stated. “Modernizing regulations around reinsurance will enable insurance companies to expand coverage and write more policies in communities across the state facing greater risk, ensuring stability and resilience in our insurance market.“
In the past two years, insurers like State Farm, Allstate and The Hartford have taken drastic measures to avoid financial losses, including no longer issuing new policies for homes in California and not renewing some existing policies. Allstate previously said it would reverse its decision if it was allowed to account for the costs of reinsurance when setting rates.
Fewer options have led more homeowners to the California FAIR Plan, which is designed to be a stopgap measure rather than a permanent solution. The number of policies under the FAIR Plan more than doubled from 2020 to 2024, according to the AP.
The lack of insurance options has also led to many home sales falling through. The California Association of Realtors reported that 13% of its members had at least one deal cancelled in 2024 due to insurance issues.
In explaining the rationale behind the new regulation, the Department of Insurance noted that climate change “has made California hotter and drier over the last several decades.“ The eight largest wildfires in state history have occurred since 2017, and the worst when measuring the loss of life was the Camp Fire in 2018, which killed 85 people.
In August, CoreLogic reported that 2.6 million homes across 14 western states were at risk from wildfires. About half of these were in California alone.
Last month, the beachside community of Malibu was heavily impacted by the Franklin Fire, which burned about 4,000 acres and temporarily displaced about 20,000 residents. According to data from Realtor.com, the median home price in Malibu is $5.6 million, well above the $3 million coverage limit through the state’s FAIR Plan.
