One of California’s largest property insurers pledged to sell additional policies in wildfire-threatened areas, becoming the first company to use a new state order aimed at resolving the state’s insurance crisis..
Mercury Insurance said in a recent rate filing with the state that it would cover more homes in parts of California where wildfire risk has made insurance scarce and costly.
In exchange, California’s third-largest home insurer was allowed to propose a rate increase based on computer models that incorporate climate change and other future conditions to predict property damage and claims.
California insurers have been barred for decades from using models that are common elsewhere and were forced to set rates based on historical claims payments — a system they denounced. As insurers stopped covering hundreds of thousands of properties in wildfire-prone areas in recent years, California’s insurance commissioner said they could use models but only if they expanded coverage in risky areas.
“They’re trying out the new process. That is important,” said Michael Wara, director of Stanford University’s Climate and Energy Policy Program, of Mercury. “The prices that Californians are paying are out of whack with the risk.”
Wara said Mercury’s rate filing “is the first example of using a model to estimate what the risk is now … as opposed to a backward-looking view.”
The new process was the last piece of a group of regulations advanced by Insurance Commissioner Ricardo Lara to transform how property insurance is priced in the state.
Los Angeles-based Mercury sells multiple kinds of insurance. California accounts for 70 percent of its home-insurance premiums.
In the filing, Mercury said it’s “targeting” the addition of up to 6,200 customers from wildfire-distressed areas and from the California FAIR plan. The plan is a state-chartered insurer required to sell property coverage to people who cannot buy it on the market. Its policy count has soared this decade after natural disasters and insurer pullbacks.
But Mercury’s filing also highlights the uncertainty over whether insurers will live up to their promises of expanded coverage.
In an Aug. 1 statement, Consumer Watchdog, a California consumer advocacy group, said Lara’s regulations include no guarantee that they will expand coverage in risky areas and give insurers many ways to avoid or delay insuring high-risk customers.
Wara agreed the language is slippery but added, “If there was no flexibility, they wouldn’t have agreed.”
Mercury’s filing said it’s “dedicated to growth in California” and that it is “aiming to grow by 15 percent in distressed areas.”
Michael Soller, a spokesperson for Lara, said, “We have strong existing enforcement tools available to hold insurance companies accountable to their commitments and we will not hesitate to use those tools.”
‘A black-box catastrophe model’
Wildfires and other natural disasters in recent years have left California insurers with multibillion-dollar payouts. Insurers have requested large rate hikes from California regulators and pared back business in areas they consider high risk.
Since 2022, seven of California’s top 12 insurance companies have either paused or stopped writing property insurance, even as they ask to increase rates, the Insurance Department says.
Insurance companies say they’re withdrawing because California’s regulatory process makes it hard to set prices that reflect increased climate exposure and rising reconstruction costs.
Extensive losses from the LA-area wildfires in January further damaged industry confidence. “They’re risk-averse right now,” Wara said.
Kevin Stein, CEO and co-founder of San Francisco-based Delos Insurance Solutions, said many insurers have overcorrected by pulling back more than necessary. Delos is a specialty insurer in California that faces less regulation than the large companies that comprise most of the market. It sells about 30,000 home insurance policies in California and bases its prices on proprietary wildfire models that specialty insurers are allowed to use.
“A lot of companies right now don’t know the risk in certain areas. They’re adding in uncertainty or using models that think certain areas are risky, but they’re actually not,” Stein said, referring to what his own company’s models show.
Hoping to lure companies back to the state, Lara, the insurance commissioner, issued a series of regulations answering industry demands.
Lara’s new rules promise to speed up the approval process for increasing rates. They also allow insurance companies to pass on some costs such as reinsurance to their customers — a practice that was previously barred. Primary insurers buy reinsurance to help cover payments after catastrophic events.
Catastrophe models are advanced computer programs that can simulate natural disasters. California was the last state that barred them in the ratemaking process.
Consumer Watchdog has opposed the regulations allowing models, saying that they lack the transparency that’s supposed to be the hallmark of California’s regulatory process.
“In the past, the public was able to review each insurer’s historical catastrophe loss dollars, and see the step-by-step calculation of the catastrophe portion of their rates,” Ben Armstrong, the group’s staff actuary, said in an email. “Mercury is now using a black-box catastrophe model, which spits out a number that they claim to be a reliable estimate of wildfire losses. Since the model is secret, we can’t check the numbers.”
This month, the Insurance Department approved the last of three wildfire models created by the private sector for insurance companies to use to set rates.
The company has been hammered by extreme weather. It reported catastrophe-related losses of $460 million in the first half of this year, mostly due to the LA-area fires and severe storms in Texas and Oklahoma. That’s more than double what it sustained in the first half of 2024.
Mercury in its rate filing asks to increase rates by an average of 6.9 percent across California — just short of the 7 percent rate hike that triggers a longer public review.
Mercury claims 6.5 percent of the market share for residential property insurance but estimates it has only 2.9 percent of the business in California’s wildfire-distressed areas.
It said it intends to increase the latter figure in the two years after new rates are approved. Eight years from now it aims to take “around 6.5 percent” of FAIR plan customers.
Mercury declined to answer questions about the filing. In June, it hired a senior director of climate and catastrophe science and established a new team focused on climate-driven extreme weather.
The company claims to be one of the first large insurance companies to return to Paradise, California, which was devastated by the 2018 Camp Fire. It said firsthand observation of reconstruction efforts there — which include stricter building codes and fire-break techniques around the city — helped persuade it that even risky areas can be insurable.
