A report issued last week by a group formed by California Insurance Commissioner Ricard Lara is calling for the creation of public/private “extreme heat” risk pool backed by private reinsurance capital.
Separately, the report also calls for catastrophe models to become the basis of wildfire rate making in place of historical losses.
“In short, California has a widening protection gap—the gap in insurance coverage between insured and uninsured losses,” the report states. “A widening gap leaves communities more exposed to financial costs and less able to recover. “
According to the report by the Climate Insurance Working Group, California should establish a extreme heat risk pool that would aggregate wildfire risks from cities and counties to the state that would, in turn, transfer the risks to the private insurance and reinsurance markets.
The working group was formed in 2018 to make recommendations to reduce the threat from wildfires, floods, mudflows, urban high heat, sea-level rise.
“This type of solution costs money, which would come from taxpayers,” the report says. “The public sector would need to pay more money upfront, but gain the capacity to better react to future heat waves, potentially preserving health and saving money in the long term. “
The report recommended a “parametric insurance model” to speed claims payoutsbased on the Urban Heat Island Index for California developed by the Office of Environmental Health Hazard Assessment at the California Environmental Protection Agency.
“Based on this tool, a trigger would be set for when payment from the risk pool’s parametric policy would be made to the local government jurisdiction a few days prior to, during, or immediately after the heat wave,” the report states. “The local jurisdiction would decide how to use the funds.”
Beyond the wildfire reinsurance pool, the report calls for the Insurance Commissioner to allow use of catastrophe modeling to price insurance wildfire policies. Currently, insurers are only required to use using historical loss analysis to estimate future insurance losses .
“The Commissioner should convene one or more public meetings or discussions, examining existing departmental approaches, and comparing those that rely on past loss experience to the potential application of catastrophic models, giving the Commissioner and the public an opportunity to discuss and assess this policy tool,” the report states. “In doing so, the Insurance Commissioner should evaluate how wildfire mitigation measures, including prescribed burns and forest management, community buffers, and home hardening, are integrated into catastrophe models.”
The report, and especially the use of catastrophe modes, has already received pushback from consumer groups that fear their use will articdualy raise wildfire insurance rates based on private market models.
“The secrecy of such private models would prevent the Insurance Commissioner or the public from verifying the assumptions made in determining the appropriate rate,” said Consumer Watchdog, a California-based non-profit.
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