The California insurance commissioner has announced a plan that would allow insurance companies to use computer modeling to justify rate increases.
The plan is part of Insurance Commissioner Ricardo Lara’s attempt to keep home insurers from fleeing the state, where claims from frequent wildfires have been eating into carriers’ profit margins. Fourteen of the 20 most destructive wildfires in the state’s history have occurred in the last decade.
The computer modeling plan would allow insurers to predict possible wildfires and adjust rates based on those predictions, according to a CBS News report. However, the plan has already drawn the ire of consumer groups that fear computer modeling would be unreliable and could be used to raise rates unjustifiably.
“The problem with these models is they’re owned by Wall Street companies who refuse to explain to us how they’re getting the rates they’re proposing,” Carmen Balber, executive director of Consumer Watchdog, told CBS News.
“Insurance companies want catastrophe models because they are guaranteed to raise rates,” Balber said. “We need to make sure that if we are pricing climate risks into insurance rates, we do it fairly and accurately.”
Consumer Watchdog has also expressed concern that the models could be used to raise rates for reasons beyond wildfire risk.
“The rule also proposes expanding the use of catastrophe models far beyond wildfire loss, explicitly expanding them to flood and also allowing the commissioner, at his discretion, to approve their use in any line of insurance,” the group said in a statement earlier this month. “That could mean auto, non-wildfire residential or commercial, cyber insurance and more. It would allow insurers to use models to predict all losses, not just catastrophe losses, a dramatic departure from current practice and one that would guarantee an explosion of rates.”
Every other state allows insurers to use catastrophe models to calculate rates. California, however, requires insurance companies to use historic loss data based upon the previous 20 years, according to a report by Redland Daily Facts.
Insurers insist that this policy prevents them from accounting for increasing weather risk due to climate change – and in recent years, many insurance companies in the state have stopped offering new coverage and dropped existing customers in areas with high wildfire risk. Earlier this week, State Farm announced its intention to drop 72,000 policies in the state.
Lara said that the state’s current rules are outdated and have pushed rates up.
“We can no longer look solely to the past as a guide to the future,” he said in a statement. “My strategy will help modernize our marketplace, restoring options for consumers while safeguarding the independent, transparent review of rate filings by Department of Insurance experts, which is a bedrock principle of California law.”
With climate change it's clear we can no longer look solely to the past as a guide to the future. I am addressing decades-long neglected issues. And I will keep looking to you - the people of California - as we stay on track for restoring access to property insurance for ALL https://t.co/wnJyXcpyF3
— Ricardo Lara (@ICRicardoLara) March 14, 2024
Roger Arnemann, general manager and senior vice president at Guidewire Analytics, told Insurance Business in October that the change was overdue.
“I think allowing the market to price the risk is the only way to have a market in the first place,” Arnemann said. “We’re excited that this increased ability to use modern methods is going to open the market and solve a lot of the problems that we’re facing.”
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