California Commissioner updates on use of cat models for rate applications
California plans to allow insurers to submit rate applications using estimates from risk models rather than relying on historic loss data, the California Insurance Commissioner said this week.
Ricardo Lara, speaking at the Bermuda Risk Summit, said historic loss models were less useful in an area of rapid climate change.
Saying California was experiencing all of the effects of climate change, he also said the state was moving to expedite the rate approval process which can take one to two years now.
At the same time, he said insurers had to be convinced to continue to offer insurance in the state.
California has seen a large number of national insurance companies pause writing new homeowner policies, citing regulatory challenges and the high cost of reinsurance.
Lara said it was critical to understand the human impact of increases in global temperatures. He said heavy rain in February in Southern California had caused $11 billion worth of damage in just three to four days due to flooding.
“We also understand as regulators that we have to move more quickly to work with industry to meet these unprecedented challenges,” he said.
“The message is we are ready to work with re/insurers to act now to mitigate the effects of climate change.”
He added: “Not having insurance is not an option. Insurance when first created was a novel idea and we need to come together again to solve these problems.”
Lara said his department was streamlining the rate filing process, which was taking one to two years and would allow the use of catastrophe modelling in rate applications.
He said the goal was to enable consumers to get insurance in 85% of wildlife areas and to ensure they had coverage in areas historically hit by disasters. At the same time, models and parametric insurance could be used to reward building owners who hardened their homes and made them more wildfire resistant.
Earlier in the same panel, Dr Mark Guishard, the chief operating officer of ASU Bermuda Institute of Ocean Science, said the Paris Accord’s goal of restricting global warming to 1.5 degrees Celsius above pre-industrial levels was likely to be exceeded in the next 15 to 20 years and temperatures could be 2.5 to three degrees higher by the end of the century.
The 1.5 degree increase had been exceeded in 2023, but Dr Guishard said this was due to the El Nino phenomenon and temperatures were likely to be lower this year. However, he said this also meant there was an increased chance of hurricanes.
He said even now, record sea surface temperatures in recent years were probably causing rapid intensification of hurricanes because more energy was being added to the ocean system. In part this was leading to increasing calls for a category six to be added to the Saffir Simpson Scale.
At the same time, warming temperatures in the Arctic were pushing the polar jet stream further south which was causing worse winter and also blocking weather systems from moving west to east. This could cause dryer periods on the West Coast of the US leading to wildfires.
Conversely, frontal systems could also sit longer, Dr Guishard, a meteorologist, said. Bermuda had its wettest year on record in 2023 and Los Angeles had its fourth wettest February and experienced what is known as an atmospheric river, causing the damage referred to by Commissioner Lara.
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