California Home Insurance Costs Shift as Climate Risk Models Gain Use

A recent report by UC Berkeley’s Terner Center for Housing Innovation highlights that California's median home insurance premium is approximately $1,200 annually, placing the state in the middle range nationally. Despite California's increasing wildfire risks, current premiums remain lower than in hurricane- and tornado-prone states like Florida and Louisiana. However, affordability remains a concern, particularly for lower-income homeowners who dedicate a larger share of their income, around 3%, to insurance compared to the state median of 1%. In response to escalating wildfire damages and rising costs, California regulators have recently implemented reforms allowing insurers to use climate risk models to justify premium increases. This shift is expected to raise home insurance rates but aims to encourage insurance providers to re-enter high-risk fire areas where coverage has been previously withdrawn, thereby reducing reliance on the state's costly FAIR Plan high-risk program. The FAIR Plan has grown substantially, now covering roughly 625,000 policies. The reforms mark a significant regulatory change, as California had been the only state to prohibit the use of climate risk modeling for rate setting. The expectation is that this policy adjustment will balance the need for insurer participation in vulnerable areas with the financial realities posed by climate-related risks and construction costs. Nonetheless, consumer advocates express concerns about sharp premium increases and doubt whether insurers will sufficiently expand coverage in fire-prone regions. The report also identifies that about 16% of California homeowners without mortgages are uninsured, with rural and high-fire-risk areas showing uninsured rates as high as 20%, indicating a vulnerability gap that might affect housing stability amid increasing environmental risks. This evolving insurance landscape in California signals a broader trend of integrating climate risk into insurance pricing and regulatory frameworks, challenging insurers, regulators, and homeowners to adapt.