Suggested Insurance Reforms in California to Create Resilient Communities and Inclusive Markets
The Blue Ribbon Commission on Climate Action and Fire Safe Recovery, a body created following the January 2025 wildfires in the Los Angeles, California region, requested a memo on potential insurance reforms for California. Insurance for Good founder, Carolyn Kousky, crafted the following policy recommendations. Download the memo as a PDF here.
Date: May 9, 2025
Thank you for the work you are doing and for the opportunity to share my reflections on how we can reform insurance in California and the Los Angeles region to better support residents. I am the founder of Insurance for Good and the associate vice president for economics and policy at Environmental Defense Fund. I have been working on topics of disaster insurance for close to twenty years and am the author of Understanding Disaster Insurance Markets: New Tools for a More Resilient Future. I serve as vice-chair of the California Department of Insurance’s Climate Insurance Working Group. I bring that background to this memo in which I would like to offer suggestions on policy reforms related to two key areas: insurability and inclusivity. Please note, however, that these are my personal recommendations and I do not speak for any organization with which I am affiliated. The recommendations are listed here and I provide background and expand on them in the following pages.
Policy Recommendations: Creating Insurable Communities
Expand the geographic scope of Chapter 7a
Educate stakeholders about IBHS standards for rebuilding
Support stronger codes (oppose AB 306)
Advocate for resilient and green insurance endorsements
Advocate for the FAIR plan to support resilient rebuilding
Support efforts for greater integration of risk reduction into insurance-sector models for underwriting and pricing
Provide funding for low- and moderate-income households to rebuild to wildfire-resistant standards (support AB 888)
Policy Recommendations: Creating Inclusive Insurance Systems
Provide means-tested premium assistance for low- and moderate-income households
Create a parametric microinsurance market
Adopt consumer-friendly baseline standards for homeowners insurance
Ease recovery, such as by reforming contents payout rules
Beyond these two areas, I also want to suggest that reform of the FAIR Plan is a critical topic for the state. While I note aspects of this related to risk reduction and inclusivity below, there are broader questions about the design and operation of California’s state residual insurance program that should be considered. As wildfire risk has increased dramatically, the FAIR Plan is now serving a very different purpose than the one for which it was created. A working group to undertake a deep dive analysis of reform options by an independent organization would be a useful contribution to state policy; Insurance for Good is exploring such future work.
Creating insurable communities: background
Since the 2017 and 2018 wildfires – the two most damaging in the state’s history until the recent L.A. blazes – the property insurance market in California in areas of high wildfire risk has been destabilized, leading to reductions in insurance availability and higher prices in the riskiest locations. This in turn impacts people’s location choice and housing values. Insurance availability and premiums are influenced by many factors, including regulations and the cost of rebuilding. Some key regulatory barriers have now been reformed by the Department of Insurance [1]. Certain prior drivers of higher rebuilding costs, such as high inflation in 2021 and 2022 and covid-era disruptions to labor markets and supply chains have improved. Unfortunately, the tariffs of the current administration are going to once again raise rebuilding costs and drive up insurance premiums yet again.
Beyond these factors, however, the rising risks of weather-related extremes are an increasing driver of insurance market instability. Insurance is more expensive and harder to provide when risks are higher. And wildfire risk in California is only growing. It is now a year-round threat, as demonstrated by the L.A. fires, with loss potential climbing as the planet warms. Climate change is increasing temperatures, drought conditions, and dry fuel. Couple this with increased development that raises ignition risk and exposure, prior forest management that allowed a build-up of dangerous fuels, and additional stresses, such as tree death across the state—also related to climate changes—and fire risk is on an upward trajectory. The only long-term solution to stabilizing insurance in areas of high and growing risk is dramatic investments in risk reduction.
To substantially lower expected losses from wildfire and preserve insurability, risk reduction measures must be adopted at all scales: homes must be hardened, zone 0 cleared, the spacing between homes designed and managed, buffers created, and surrounding natural and wildlands managed to reduce the risk of catastrophic fires. The necessary risk reduction at a property and neighborhood scale have been solidified in the the Wildfire Prepared Home and Wildfire Prepared Neighborhood standard established by the Institute for Business & Home Safety (IBHS).
An effective way to create insurable homes and communities is through strong building codes that consider our climate future. Building codes for safer homes not only save money in future losses, but often add negligible costs to home construction and can lower delinquency rates. Research in California finds that a home built to modern codes is 40% less likely to be destroyed, as well as reducing risks to neighbors; these benefits in building homes to safer standards outweigh costs in high wildfire risk areas. Add in greater insurance availability for safer homes, lower insurance costs, and higher home values, and the economics of strong building codes are even more compelling.
Even with strong benefits over time, wildfire safe construction will cost somewhat more at the time of construction or, in the case of L.A., rebuilding. While more affluent households can afford these costs, lower- and moderate-income survivors may struggle with the additional expenses. Headwaters Economics has estimated that building a more wildfire safe home in California can cost anywhere from an additional $2,800 to $27,000, depending on the standard and wildfire-resistant features chosen.
Policy recommendations for insurable homes and communities
Expand the geographic scope of Chapter 7a.
In joint work, Headwaters Economics and Insurance for Good have documented that rebuilding L.A. to wildfire standards will save money in future losses for the household and the broader community. Buildings that are more likely to survive disasters also improve insurability. Further, having strong building codes in place at the time of rebuilding can unlock insurance dollars for policyholders in California that have full homeowners coverage. This is because the state of California mandates that all homeowners insurance policies that include full replacement cost coverage include additional coverage (a minimum of 10% of the dwelling coverage) to comply with any updated building codes. As such, in areas where stronger codes have been adopted since the home was first built, insured homeowners will not need to pay out of pocket to comply—their policy will pay for it.
These benefits do not apply where there is no code, however, as insurance policies do not pay to build above code. While California upgraded its wildfire code in 2008 and its Chapter 7a standards are one of the strongest in the country, unfortunately, they do not apply everywhere [2]. Notably, 40% of the burned area of L.A. is not subject to this stronger code (all within the footprint of the Eaton fire). This means insured residents in this area will not be able to unlock insurance claim dollars to rebuild safer. Analyzing the most recent data from the California Depart of Insurance, in the zip codes of the Eaton fire, takeup for homeowners insurance ranges from 85% - 92%. As such, many residents would have financially benefited from the code being in effect across the entire burned area. Additional financial support for uninsured policyholders to meet stronger codes should be simultaneously developed (see below).
Educate stakeholders about IBHS standards for all rebuilding.
The Wildfire Prepared Home and Neighborhood certifications from IBHS are currently the highest standards for wildfire. These standards go beyond the current Chapter 7a building code, such as by requiring an area of 5 feet (so-called Zone 0) of defensible space around homes. Joint work by Headwaters Economics and Insurance for Good estimates that the additional costs above Chapter 7a to meet the IBHS Wildfire Prepared Home standard is roughly $5,000 on average per home. The IBHS standards should be promoted with those stakeholders involved in rebuilding Los Angeles, including builders, real estate agents, insurance agents, local leaders, and community-based organizations. The city, county, and partners should work with IBHS to create trainings, continuing education classes, and information sessions for all these groups. Key components of the standards could be codified, as suggested by IBHS.
Support stronger codes (oppose AB 306).
The state legislature is considering a bill, AB 306, which would prohibit stronger building codes of any type for effectively the next ten years. While there is a process for getting approval for a stronger wildfire code, it could impose unnecessary red tape. In addition, this bill would prohibit stronger building codes for flood risk, which could lower flood insurance premiums; stronger earthquake codes; and improved energy efficiency and decarbonization codes—all of which are essential for preparing our communities to thrive in the face of escalating climate risk. Contrary to many arguments, research has shown that stronger codes are not a driver of housing unaffordability. They can save more money over time than they cost, they are needed to preserve insurability, and due to the requirement in California to have code upgrade coverage, most disaster survivors will have funds from insurance to cover costs. The list of organizations opposing this bill is long and includes The American Property Casualty Insurance Association, The Association of State Floodplain Managers, California Fire Protection Officers, the International Code Council, multiple environmental groups, and many others. The Blue Ribbon Commission should add their voice in opposition to this legislation unless amended.
Advocate for resilient and green insurance endorsements.
Through a climate endorsement – an add-on to a standard insurance contract – an insurer could provide extra funds to support resilient and decarbonized rebuilding. For example, a climate endorsement could provide policyholders with a set amount in the event of a substantial or total loss for the policyholder to incorporate safer or greener retrofits during rebuilding. This could be building to the IBHS Wildfire Prepared Home Plus standard, for example, or paying the difference to upgrade to an induction stove or adding rooftop solar. These endorsements would cost a small amount extra, but if capped at a certain amount, could be inexpensive. An example of this comes from the Gulf Coast region where Alabama and other states now require insurers to offer a “FORTIFIED endorsement” to cover the additional costs of upgrading to the IBHS standard during rebuilding. Some of these are offered for free by state wind pools.
Advocate for the FAIR plan to support resilient rebuilding.
In compliance with the Safer from Wildfire program of the California Department of Insurance, the California FAIR plan recently began to offer premium discounts for policyholders that adopt wildfire risk reduction measures. This includes discounts of 5% for policyholders that maintain defensible space, 10% for policyholders that meet a series of structural hardening measures, as well as an additional 10% discount for policyholders located in a Firewise USA Community. While this is important to reward policyholders and communities that invest in risk reduction, the FAIR Plan could do more to support mitigation. First, discounts could also be applied for IBHS structure and neighborhood standards. Second, as just discussed, the program could offer no-cost endorsements to pay for home hardening at the time of a substantial loss. The program could even offer grants to expand wildfire mitigation. This would follow the approach of several other state-created insurance programs-of-last-resort including the California Earthquake Authority, which offers earthquake retrofit grants, and the North Carolina wind pool, which offers home hardening grants for hurricanes. A forthcoming research report undertaken by the Environmental Defense Fund and Cornell University researchers synthesizes and evaluates the range of risk mitigation approaches used by residual insurance programs and identifies lessons learned in how to ensure they are as effective as possible.
Support efforts for greater integration of risk reduction into insurance-sector models for underwriting and pricing.
The models used for insurance underwriting and pricing often do not account for all risk reduction measures taken by households or communities, either at all or in a timely way to reflect actual changes in risk. This creates perverse market signals, whereby reductions in risk may be made and no changes observed in insurance markets, upsetting communities and residents. Some efforts are underway to correct this, such as the WUI Data Commons. Several Gulf Coast states have forced premiums to take account of certified mitigation measures by requiring premium reductions when homes install IBHS Fortified roofs, with the amount of the discount backed by both engineering and observational studies of loss reduction. The CA Department of Insurance has taken initial steps in this direction by requiring insurers to account for wildfire mitigation in rate-setting. To ensure further progress, the state should support data access and transparency, engage the modeling community on developing best practices for timely integration of risk reduction, and encourage more field studies documenting losses avoided associated with different mitigation measures.
Provide funding for low- and moderate-income households to build stronger (AB 888).
There will always be uninsured and underinsured households of limited means who cannot afford upgrades for wildfire resilience. Providing funding for these households to invest in resiliency measures would provide economic benefits to them, their neighbors (since wildfire risk is collective and requires all structures being hardened), the public sector in lower response and recovery costs, and the broader economy in terms of less disruption. Several states have adopted grant programs to support risk-mitigation: Alabama’s successful home hardening grant program has led to adoption in many other states impacted by hurricanes and high-winds and Colorado has a program to provide grants or low-interest loans for wildfire measures. California could draw on lessons from these programs and develop its own similar grant program. Legislation has been introduced to do this: AB-888, the California Safe Homes grant program.
Creating inclusive insurance markets: background
Insurance improves recovery. In my own research with a colleague, we have found that households with insurance have fewer unmet needs and financial burdens after a disaster. We also find that as more households in a community are insured, following a disaster, local businesses see more visitors, since, presumably, those with insurance are able to more quickly and fully participate in the local economy. Other work has found that those with insurance are more likely to rebuild, have fewer negative financial impacts like bankruptcy, and that lack of insurance can widen income inequality post-disaster.
The reason for all these benefits is straightforward: there is no other source of substantial dollars to meet the financial shock that is a disaster. The overwhelming majority of American households do not have enough savings to cover the spike in expenditures and potential simultaneous decline in income post-disaster. Federal disaster aid is woefully insufficient, not designed to replace insurance, and under threat by the current administration. Lower-income households and other marginalized populations can be locked out of access to credit and for many households, additional debt after losing their largest asset will make their financial situation even more precarious. Since lower-income households have less access to savings or loans, they often need insurance the most and yet are least able to afford it.
In addition, there are rising anecdotal concerns that limitations in insurance contracts—such as sublimits for certain types of losses, outright exclusions for certain damages, or higher deductibles for disasters—are growing and that policyholders are often unaware of these restrictions until they go to rebuild and realize they have insufficient coverage to do so. We also see complaints about fairness in the claims process and a lack of products for certain types of losses, especially non-property losses, such as higher rents post disaster.
All of these challenges point to an insurance system that is not as inclusive as it could be. We define an inclusive disaster insurance system as the suite of policies, programs, and products that make appropriate and affordable insurance available to those unserved or underserved by the market. My second set of recommendations are those that could help close insurance gaps and improve inclusivity across both the private market and state-created programs.
Policy recommendations for more inclusive insurance markets
Provide means-tested premium assistance for low- and moderate-income households.
Concern about the affordability of disaster insurance has been mounting for many years. As the costs of insurance rise, it burdens households and can lead many to forgo coverage altogether, with devastating consequences in the next disaster. This concern has been particularly acute for flood insurance, where policy discussion of this topic has been ongoing for decades. This worry is now spreading to our private insurance markets. Over the past decade, a policy consensus emerged that for the flood insurance program, this could be best addressed through a means-tested assistance program that would provide a sliding scale of assistance with premiums to households based on income. This would allow for the true cost of risk to be priced in order to align incentives in markets, while providing support only for those who otherwise could simply not afford coverage. California could adopt a state level policy for private insurance or for wildfire coverage specifically, such as providing premium assistance for wildfire coverage for lower-income households. Such assistance could also be focused through the FAIR plan.
Create a parametric microinsurance market.
There are many gaps in insurance coverage that can slow recovery – gaps for certain perils, certain populations, and certain economic losses. New tools are emerging to fill some of these gaps. A current proposed bill, AB 1236, would create a grant program for the Department of Insurance to support innovative pilot projects. One in particular that has been used around the world for decades but only recently in the United States is parametric microinsurance. These are smaller coverage policies in which a set amount is paid automatically upon occurrence of a “triggering event,” or observable measure of the disaster. Parametric microinsurance is not a replacement for full homeowners insurance; it is a tool to fill other gaps in recovery. There are three key benefits associated with microinsurance: (1) it can be affordable enough for lower-income populations, (2) payouts are typically very rapid, and (3) the dollars can be used flexibly for any post-disaster need. It can thus be a powerful tool to cover non-property losses, such as higher rents post-disaster, the costs of evacuation or temporary housing, or lost income. It can also be a useful “jumpstart” to recovery for otherwise uninsured residents. Puerto Rico is the only jurisdiction in the U.S. to create enabling regulations for a microinsurance market. California could follow their lead, adding another financial recovery tool to the toolbox.
Adopt consumer-friendly baseline standards for homeowners insurance.
Homeowners insurance policies are surprisingly heterogenous. They will have different exclusions (types of loss that are not covered at all), sublimits (lower payout caps for certain types of losses), and disaster-specific deductibles (such as much higher deductibles for wildfire, potentially, than other losses). In addition, consumers may not realize that if they have not kept their coverage level up-to-date or ensured full replacement cost coverage, they may not be sufficiently covered for a total loss. Much of these details are in the fine print and most consumers do not read it or may not understand the technical jargon or know what to ask about it. Further, many of the details, such as exclusions, may not be shared with consumers at renewals unless they ask for it. State regulators could require more transparency in contracts and minimum coverage levels that all homeowners or disaster policies are required to include. This could ensure that consumers are guaranteed certain minimum amounts of coverage, while maintaining the option for companies to offer products that are more expansive. For example, the mandated code upgrade coverage in California is now ensuring the many wildfire survivors will have needed funds to rebuild stronger homes.
Ease recovery, such as by reforming contents payout rules.
Recovery is a slow and difficult process. Insurance should make it easier, not harder. One way to do this is reducing red tape to collect on insurance proceeds while not requiring insurers to pay for items that they had not included in the contract. One example is to reform contents payouts for a total loss. When a policyholder suffers a complete and total loss, they should be entitled to receive their contents coverage without itemizing everything – an extremely time-consuming and difficult task. After the Marshall fire, for example, Colorado passed legislation that following a total loss of contents, insurers must pay 65% of the contents coverage limit without any written inventory. Oregon has a similar requirement for 70% of the coverage limit. Similar legislation could be adopted in California, as has already been proposed in SB 495.
Thank you again for the opportunity to share my thoughts. I look forward to working with our partners in California on solutions that will lower future losses, keep people safe, protect our economies, and maintain insurability in the face of our growing climate-related risks.
Carolyn Kousky
[1] The Insurance Commissioner addressed several regulatory concerns that had made insurance more difficult to provide for wildfire. First, insurers can now use needed catastrophe models to estimate wildfire loses—a severe and changing risk for which historical data is a poor predictor of the future. Second, in exchange for writing more high-risk policies, insurers can now include some of the costs of reinsurance in premium; reinsurance is necessary to globally diversity a risk, like wildfire, in which entire communities are impacted simultaneously.
[2] Chapter 7a applies to all new developments located in State Responsibility Areas (SRAs) and the highest fire severity zones in Local Responsibility Areas (LRAs).
