P&C insurers in California will soon be able to recalibrate their rates

The news: California released new rules meant to stabilize its home insurance market, allowing insurers to use complex computer models—also known as catastrophic models—to set rates. 

• Effective January 2, 2025, insurers will be allowed to consider meteorological and geographic data when determining pricing, alongside historical loss data, per the LA Times. 
• In exchange, insurers must write policies in wildfire-prone neighborhoods equal to 85% of their statewide market share and let the state review their models.

How we got here: P&C insurers have been exiting the state due to major strains on their profitability, driven by climate risks like bigger and more widespread wildfires.

• While the direct underwriting profit across the US averages 3.6%, California’s is -13.1%. 
• Earlier this year, seven of the 12 largest US insurers limited the policies they’re willing to write in California—ceased writing new policies altogether.

Insurer reactions: California Insurance Commissioner Ricardo Lara claimed there are already positive changes in the state’s P&C insurance landscape. For example, he said Farmer’s Insurance plans to expand in the state citing market improvements, per NBC News.

Our take: While these regulations encourage insurers to remain in California by providing more flexibility in pricing, insurers must balance profitability with keeping premiums affordable, especially in high-risk areas. 

Insurers will need to carefully monitor customer drop-offs resulting from price adjustments to avoid further destabilizing the market.

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