Navigating California's Insurance Reforms: Strategies for P&C Insurers

Navigating California's Insurance Reforms: Strategies for P&C Insurers

Roger Arnemann

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The world of property and casualty insurance is never static, and sometimes, it experiences seismic shifts that call for swift adaptation. The proposed new insurance reforms in California are one of those seismic shifts.

To maximize the advantage in the wake of the proposed regulatory changes, P&C insurers will need to adjust their approach in the market. Those that do so with forward-looking insights and speed will stay ahead of the competition.

This post explores three actions insurers can take to succeed on this new playing field.

#1: Write the Lowest Risk Properties in "At-Risk" Areas

Many carriers have likely put forward new or revised rate filings compliant with the April 2023 deadline of Regulation 2644.9 – and are awaiting the California DOI’s approval of their filing. Until these approvals are received, some carriers may be hesitant to write in at-risk areas at all.

That may be an overly cautious approach.

The reforms proposed would require admitted carriers to write policies in the wildfire-prone parts of the state – and do so at least 85% of their statewide market share. For example, if a company provides 10% of policies across California, they would be required to provide 8.5% of the coverage in "At-Risk" areas.

Smart insurers will race to write policies for the lowest-risk properties in those state-defined "At-Risk" areas. Why is this critical?

According to HazardHub data, approximately 25% of properties in the California DOI-defined "At-Risk" areas are likely profitable with current rates. Insurers don't have to wait for their last filings to be approved before taking action. Identifying these lower-risk properties in "At-Risk" areas can give insurers a competitive edge. This business is already priced appropriately with current filings, enabling them to drive towards their required “At-Risk” market share.

A proactive approach supports a sustainable portfolio and demonstrates goodwill through early compliance.

#2: Acquire Advanced Analytics and Reassess

The second action is the importance of high-resolution analytics– vs. the existing low-resolution analytics often used by insurers.

Such traditional approaches may no longer suffice as they are often insufficiently granular, rely on backward-looking data, and consider too few variables to assess and differentiate wildfire risk. They also tend to lump all properties into the same risk level across large census blocks or ZIP Code regions.

Insurers that quickly embrace more sophisticated approaches will be able to differentiate risk using up to 30 variables and at the specific property parcel level instead of census or ZIP Codes.

Insurers that leap forward with advanced analytics will be able to accurately identify, price, and manage risk at a granular level, giving them a significant competitive advantage. Acknowledging my perspective is biased here, one such sophisticated solution is Guidewire HazardHub, which provides property-level insights and considers more than 30 factors to assess and differentiate risk comprehensively. HazardHub offers an Enhanced Wildfire Model, Fire Suppression Scores (FSS), and Property Fire Scores, which are highly predictive and enable carriers to price commensurate with risk.

#3: Reset Strategy and Refile Rate Plans

The third action revolves around resetting strategy and reevaluating rate plans. This will be necessary to align with the proposed reforms and the changing market dynamics.

Assess Current Market Share in the At-Risk Area: Evaluate existing market presence in California's "At-Risk" areas, understanding the proportion of policies held in high-risk regions.

Define Risk Appetite: Reexamine and define their risk appetite, recognizing that insurers will be able to charge premiums commensurate with risk.

Realign Marketing Strategies: Adjust marketing strategies to effectively reach and serve homeowners in the state-defined at-risk wildfire regions.

Differentiate Offerings for Competitive Edge: In a market where not every insurer can compete solely on price, explore ways to provide added value, such as speed, ease of service, and/or innovative coverage options. This differentiation will attract customers and help insurers meet their "At-Risk" market share target.

As California moves forward with these proposed insurance reforms, it is clear that the market is entering a transformative chapter. To excel in this evolving landscape, insurers must proactively and strategically adapt to the changes. It is imperative for them to evaluate their market presence, redefine their risk appetite, revamp marketing strategies, and explore avenues for differentiation. Embracing state-of-the-art risk analytics is essential to their success, equipping them with the capabilities needed to precisely identify, evaluate, and price risk.