California regulators’ solution to the home insurance crisis hinges on a grand compromise: give insurance companies the opportunity to raise rates even more — and in exchange the companies will write more policies in wildfire-prone areas of the state.
But a critical question for homeowners is: how many more policies will insurers actually write?
So far, there’s no official number. Some companies — potentially including California’s largest insurer, according to a Chronicle analysis — may not need to write more policies at all, while other companies would in fact begin writing significantly more policies in risky areas.
The California Department of Insurance’s preliminary analysis, published in August using 2021 data, found that “about half” of companies already wrote enough policies in those high-risk areas to meet the regulatory requirements of its Sustainable Insurance Strategy. In other words, these companies would not need to write more policies in “distressed” areas that have already been hard-hit by non-renewals and price hikes.
That figure could have changed since 2021. More than 70,000 California homeowners have lost their insurance in the past three years. The department is currently working to make updates based on 2023 data, and it won’t have official confirmation of which insurers will write more policies until the companies submit rate applications with their own analysis, according to Deputy Insurance Commissioner Michael Soller.
More than 1.2 million homeowners live in areas that the Department of Insurance has designated as “distressed” — communities from the Sierra foothills to the Marin County coastline where insurance is expensive and hard to find.
To understand how different insurers could be affected by the regulation, the Chronicle analyzed recently filed data from two: State Farm, which covers more than a fifth of the California homeowners market, and Mercury Insurance, which at a 6.35% market share was the fifth largest home insurer as of 2023.
The Department of Insurance does not have the authority to force insurers to write policies in specific places. But it has told companies that if they want to incorporate two tools — reinsurance (insurance for insurers) and forward-looking catastrophe modeling — into their rates, they must match 85% of their statewide market share in designated “distressed” areas.
So, if an insurer writes 100 out of every 1,000 policies in California overall, it would need to write 85 out of every 1,000 policies within the distressed areas.
Policy counts that State Farm submitted in late August indicated that the insurer -- California's largest -- is well above its 85% commitment.
This analysis is not an exact reproduction of what the department will do when it makes its own calculation. The Chronicle used publicly available point-in-time policy counts rather than earned exposure — a measure that multiplies each policy by the amount of the year it’s been on the insurer’s book to prevent double-counting between policyholders who switch insurers. The Chronicle also compared companies’ 2024 policy counts to total policy counts data from 2022, the latest publicly available numbers, to calculate each company’s market share percentage.
But based on the Chronicle’s calculation, more than 550,000 residential policies would have needed to be added in distressed areas by insurers other than State Farm between 2022 and 2024 in order for State Farm to drop below the 85% threshold. That would be a 43% increase from the total number of policies in distressed areas in 2022. The number of residential policies in the state, including the FAIR Plan but excluding condos and renters, decreased by 47,600 from 2019 to 2022.
State Farm declined to respond to Chronicle’s request for comment, but in its August filing acknowledged that it had “significant policyholder concentration in areas of higher risk, even after excluding recently identified nonrenewals.”
If the department’s official analysis confirms State Farm meets the requirements, it would not be asked to write new policies — but will be required to maintain its existing presence in distressed areas for at least three years.
Mercury Insurance meanwhile was well below 85% of its market share in distressed areas as of a June 12 rate filing, according to the Chronicle’s analysis and Mercury’s Chief Operating Officer Victor Joseph.
That doesn’t necessarily mean Mercury will have to rapidly write a substantial amount of policies in order to use the department’s new reforms. It could also commit to increasing its writing by 5% in distressed areas — an alternative for insurers for whom meeting 85% may be “burdensome or create financial considerations,” according to the department’s analysis.
Mercury, which despite growing substantially over the past year, is still a “significant jump” from reaching the 85% threshold, Joseph said.
There are no strict guidelines on which insurers will be forced to comply with the 85% requirement versus the 5% requirement. The regulations also leave room for insurers to propose their own alternative commitment.
The Sustainable Insurance Strategy brings California in line with the majority of other states, where catastrophe models and reinsurance costs have long been allowed to be incorporated into prices. But California is the only state where in exchange, insurers would need to make a “historic commitment” to expand insurance availability in disaster-prone areas, Insurance Commissioner Ricardo Lara told the Chronicle in an interview last month.
To Joseph, both parts of the strategy work in tandem — using catastrophe models and reinsurance costs will make it easier for companies like Mercury to grow, he said.
The use of forward-looking catastrophe models will allow companies to more accurately price policies in wildfire-prone areas, and being able to pass on the cost of reinsurance will give them a greater ability to buy reinsurance to cover their increased risk, Joseph said. Both are key elements for companies to be financially responsible when expanding into areas of greater risk, he said.
“We are definitely supportive” of the upcoming regulatory changes, Joseph said, adding, “We see it as an opportunity to enter more of those (distressed) areas… It makes it easier, in my opinion, for companies like us to go into those areas, to write more policies.”
At 10 a.m. on Tuesday, the Department of Insurance will hold a hearing to take public comment on its proposed reforms.10 minute mail