A significant change in California’s insurance market could provide relief for homeowners in neighborhoods at high risk of wildfires. Many homeowners have struggled to find insurers willing to cover their homes in recent years.

How the models work

First developed in the 1980s because of hurricane losses, the models have increasingly applied to wildfires. Insurers often run thousands of potential scenarios to assess their financial exposure in the event of a disaster. In their proprietary models, they consider various factors, including weather, the area’s topography, the amount of potential fuel sources, and the density of buildings in the community.

California will now require insurers to factor in building owners’ fire mitigation efforts, such as installing Class A fire-rated roofs, closing eaves, and removing brush, when determining individual home premiums.

Will the models increase insurance availability?

The changing regulations are hoping to help increase insurance availability in areas with high fire risk as defined by Department of Insurance maps released this year. Homeowners in those areas have struggled to obtain insurance and have been flocking to the bare-bones FAIR Plan policies, the state’s insurer of last resort.

In exchange for using the property models, large insurers are supposed to write policies for high-risk neighborhoods equivalent to 85% of their statewide market share. That means an insurer with a 10% statewide share should cover 8.5% of homes. However, critics say there are loopholes for insurers not to meet the benchmarks.

How will the new regulations affect insurance rates?

It’s a matter of debate for now. Catastrophe models are not explicitly intended to lower rates. Consumer advocates say the models will lead to higher premiums for homeowners. But if more insurers return to specific areas, having a choice in carriers could reduce the rates consumers pay.

However, insurers and the insurance department maintain that catastrophe models should allow for more gradual rate increases. That’s compared to significant one-time rate hikes, such as the State Farm’s 30% increase last summer.

When will homeowners see the new policy modeling?

The insurance department will begin accepting applications from modeling companies on Jan. 2, 2025. After a public review process, some applications could be approved in Q1 2025. Insurers can then file for new rates based on these models. Any rate filings will also need to undergo a review by the DOI, which could be completed for some by next summer, with more approvals expected in 2026.