California DIO Reforms Change the Game for Carriers Equipped to Analyze Risk

Carriers can now calculate impact of reinsurance costs and use forward projections in the calculation of rates, and those with more sophisticated data and analytics can be more selective of the risks they chose to insure.

(Commissioner Ricardo Lara on Sept. 21.)

As weather risks intensify, so can the natural tension between insurance carriers and insurance regulators. Just as these interests clashed over the rising costs of insuring property in Florida, greater frequency and intensity of wildfire risk has done the same in California. However, last week the state announced a “Sustainable Insurance Strategy” designed to make improvements in protecting consumers while ensuring the viability of the market through the continued participation of insurers. Executives from Guidewire weighed in on the matter, applauding the state’s latest actions and calling attention to key factors for enabling insurers to do business and serve California’s citizens.

Ricardo Lara, California Insurance Commissioner.

According to figures from Guidewire HazardHub —an InsurTech Provider of API-driven property risk insights acquired by Guidewire(San Mateo, Calif.) in 2021— with an average of 8,273 wildfires per year, California is the state most prone to wildfire risk. HazardHub reports that, over the past decade, the state has seen an average of 933,000 acres burned yearly by wildfires. California is the nation’s largest P&C market with more than $11 billion in homeowners and fire insurance premiums written.

In the ongoing negotiation between insurers the California Department of Insurance (DOI), of the 12 insurers representing 85 percent of coverage in the state, seven have either left the state or limited the issue of new policies in California. On Sept. 21, the state made a kind of response through Insurance Commissioner Ricardo Lara’s announcement of a package of executive actions he characterized as promoting the sustainability of the California property insurance market. On the same day, California Governor Gavin Newsom issued an executive order urging prompt regulatory action in support of Commissioner Lara’s actions.

The most significant concessions for insurers in the California DOI’s reforms were granting them the ability to factor the cost of reinsurance into their rate calculations and to assess catastrophic risk through the use of predictive models or “forward looking projections.” In return, California demands that insurers maintain a certain proportion of coverage in the highest risk geographical areas within the state. Currently, many Californians have relied on the state-run FAIR Plan, which has functioned as the insurer of last resort—much like Citizens Property Insurance in Florida. The new reforms require that insurance carriers write no less than 85 percent of their statewide market share in high wildfire risk communities. For example, if a carrier writes 20 out of 100 homes statewide, it must write 17 out of 100 homes in a distressed area.

“We are at a major crossroads on insurance after multiple years of wildfires and storms intensified by the threat of climate change,” commented Commissioner Lara during his announcement of the reforms. “I am taking immediate action to implement lasting changes that will make Californians safer through a stronger, sustainable insurance market. The current system is not working for all Californians, and we must change course. I will continue to partner with all those who want to work toward real solutions.”

Mike Rosenbaum, CEO, Guidewire.

In a company statement, Guidewire CEO Mike Rosenbaum applauded the actions of Governor Newsom and Commissioner Lara while insisting that, “Despite current challenges, the State of California is highly insurable.

The Right Regulatory Structure and the Right Data & Analytics

Rosenbaum noted that Guidewire HazardHub data shows that more than 90 percent of property damage in California is concentrated in just 10 percent of the state, with homes in those areas 50 times more likely to suffer damage. However, added Rosenbaum, “With the right regulatory structure and the right data and risk analytics, insurers can more accurately identify, price and account for risk at the individual property level and the portfolio level.”

The current requirements that rely solely on historical data are outdated in a time when weather and natural catastrophe events are changing rapidly, according to Roger Arnemann, General Manager and SVP, Guidewire Analytics. Thus, he adds, “The California DOI’s proposals to permit insurers to price catastrophe risk with forward-looking projections will be a game-changer in improving the state’s market conditions.”

Arnemann insists that, even within the constraints of the California DOI’s minimum coverage requirements, there are very good risks to insure in the state. The challenge, he says, is that traditional insurance risk assessment tools struggle to accurately identify and differentiate risk in wildfire-prone areas.

The Coming Race to Cover the Least Risky Properties

Roger Arnemann, General Manager, Analytics, Guidewire Software.

Guidewire’s statement on the California reforms says that many insurers rely on these outdated technologies that look at wildfire risks based on just a few data elements and thus consider all the properties in large geographical areas as having the same risk. Some territories or zones can include entire cities, zip codes, or other census-defined areas.

“The technology and data exist to examine over thirty data elements correlated with higher wildfire risk – and to map and define that risk at the exact property address level,” says Arnemann. “HazardHub provides insurers with the comprehensive data that allows them to assess and underwrite property risk profitably.”

“With more sophisticated methods, you an cherry-pick what risks are good at the rate you filed,” he adds. “The thing to do is to go and find those properties and to do it fast. There will be a race to find less risky properties than the less granular analytic methods would lead you to think.”

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Anthony R. O’Donnell // Anthony O'Donnell is Executive Editor of Insurance Innovation Reporter. For nearly two decades, he has been an observer and commentator on the use of information technology in the insurance industry, following industry trends and writing about the use of IT across all sectors of the insurance industry. He can be reached at or (503) 936-2803.

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