California Insurance Market Faces Regulatory Hurdles Despite New Cat Modeling Rules

California has implemented new regulations allowing homeowners insurers to use catastrophe models and include reinsurance costs in their rate filings as part of a Sustainable Insurance Strategy aimed at stabilizing the market. However, insurers remain hesitant due to conditions requiring them to write 85% of their business in high hazard areas. This reluctance highlights ongoing regulatory challenges in the state, including the impact of Proposition 103, which enforces a prior approval rating system with consumer group interventions that many industry experts find outdated for modern risks and market realities.

Industry analysts at the S&P Global Ratings 41st Annual Insurance Conference discussed broader state tort reform impacts. Florida’s 2023 tort reforms on assignment of benefits and attorney fees have notably reduced auto liability loss ratios and improved homeowners market combined ratios, partly driven by enhanced defense cost containment measures and a reduction in litigated claims. Market depopulation efforts have also intensified, with the Florida Citizens Property Insurance Corporation losing substantial policy counts recently.

Comparatively, California struggles with wildfire-related losses, smoke damage claims, and unsustainable coverage mandates, which exacerbate insurer withdrawals from the admitted market. The FAIR Plan insurer of last resort is expanding rapidly, adding to market strain and raising concerns over potential carrier assessments. Industry leaders indicate that improving FAIR Plan reforms and adopting risk-based pricing are critical for market recovery.

Data from S&P Global Market Intelligence shows significant rate increases in many states, particularly in homeowners lines in the Midwest and auto insurance in prior-approval states like New Jersey and California. These states face delays in rate approvals tied to regulatory procedures, affecting insurer capacity and pricing adequacy.

Industry executives from USAA, Travelers, and Chubb emphasized the necessity of regulatory frameworks supporting risk-based pricing and the use of catastrophe models to ensure insurer solvency and adequate market capacity. They identified certain states, especially California, as facing disproportionate regulatory barriers that limit risk differentiation and drive insurers towards surplus lines markets.

Reinsurance experts and insurers noted growing opportunities in excess and surplus lines in California as admitted market capacity shrinks due to rate and form restrictions. The contrast with Florida’s market turnaround following sustained tort reforms underscores the potential benefits of legislative and regulatory adjustments.

Ongoing advocacy efforts continue in markets like Florida to maintain reforms that have introduced new competitors and controlled rate increases. However, political and legislative dynamics remain a challenge for stable insurance market environments.

The collective analysis stresses the importance of updating regulatory approaches to better reflect modern risk environments, promote timely rate adjustments, and balance insurer capacity to support consumer protection without inducing market instability. California’s recent regulatory changes mark progress but require further refinement to fully restore market health and insurer participation.