The California Department of Insurance has finished reviewing a new wildfire risk model created by Karen Clark & Company (KCC). This is California’s second wildfire catastrophe model approved for insurers to use when setting home insurance rates. The approval comes as the state faces a severe homeowners insurance crisis caused by increasingly destructive wildfires and skyrocketing claims.
The KCC Wildfire Reference Model Version 3.0 was evaluated under California’s new procedure that requires insurers to get approval before using such models for pricing. The department had already completed a similar review of the Verisk Wildfire Model for the U.S. earlier this summer. Both models are now cleared for use, helping insurers better understand wildfire risks and set rates accordingly.
California’s insurance market has been shaken hard by recent fires. In particular, the devastating wildfires in Los Angeles destroyed over 16,000 buildings and claimed 30 lives. Insured losses from these fires alone are estimated between $30 billion and $35 billion. Major insurers like State Farm, Allstate, Farmers, and Mercury have reported paying out billions in claims. State Farm, which covers about 20% of California homeowners, has been hit hardest, filing nearly 13,000 claims and paying close to $4 billion by mid-June.
These losses have forced insurers to push for big rate hikes. State Farm recently got approval for a 17% increase and has requested even higher rates. Some reports say these hikes could add more than $1,000 to the average homeowner’s annual insurance bill by 2026 compared to 2023. Such increases are helping insurers cover their wildfire-related costs but are also raising concerns about affordability for many Californians.
Wildfire seasons in California have become more intense and frequent. In the past decade, seven of the state’s ten most destructive fires occurred. This has led many insurance companies to pull back on issuing new policies or to charge much higher premiums. As a result, homeowners have increasingly turned to the California FAIR Plan, a last-resort insurer, or to surplus lines insurance. Surplus lines transactions doubled in the first half of this year compared to last year, highlighting growing difficulties in finding standard coverage.
The KCC model stands out because it factors in climate change and rewards efforts to reduce wildfire risks at the property and community levels. Insurers using this model will also have to expand coverage in wildfire-prone areas, which aims to increase availability while pricing risk more accurately.
The California Department of Insurance is also reviewing wildfire models from Moody’s and Karen Clark & Company. The adoption of these advanced models marks a key step toward addressing California’s wildfire insurance challenges by creating fairer and more science-based pricing.
In short, California is taking new steps to handle its wildfire insurance challenges. Approving the KCC model gives insurers better tools to assess risk and it also helps protect homeowners. But with large losses and rising rates, many residents will still feel the strain for some time.