California’s Sustainable Insurance Strategy: What the Biggest Overhaul in 30 Years Means for Your Premiums

In late 2023, California Insurance Commissioner Ricardo Lara announced the Sustainable Insurance Strategy — the most fundamental overhaul of California’s insurance regulatory framework since the passage of Proposition 103 in 1988. The strategy is designed to address a crisis that has been building for years: major insurers leaving California, the FAIR Plan growing to unsustainable levels, and hundreds of thousands of homeowners unable to find coverage at any price.

The central bargain of the Sustainable Insurance Strategy is straightforward in concept, even if the details are complex: insurers get the ability to charge higher, more actuarially accurate rates, and in exchange, they commit to writing policies in the wildfire-distressed areas they have been fleeing. Whether this bargain delivers for California consumers depends on how the details play out — and the early results are mixed.

How California Got Here

Since 2020, major carriers including State Farm, Allstate, Farmers, USAA, Chubb, and others either stopped writing new homeowner policies in California or significantly restricted their footprint. The California FAIR Plan — meant to be a temporary backstop — swelled to over 400,000 policies with total insured exposure exceeding $300 billion. In some wildfire-prone communities, more than half of all homeowners were on the FAIR Plan or surplus lines coverage.

The root cause, from the industry’s perspective, was that California’s regulatory framework prevented them from pricing policies to reflect actual wildfire risk. Under Proposition 103, insurance rates in California must be approved by the Department of Insurance before they take effect. Historically, the CDI required insurers to base rates on historicalloss data — looking backward at what losses had occurred — rather than forward-looking catastrophe models that project what losses are likely to occur in the future based on climate trends, vegetation conditions, and urban-wildland interface expansion.

Additionally, California did not allow insurers to include the cost of reinsurance (the insurance that insurers buy to protect themselves against catastrophic losses) in their rate calculations. Since reinsurance costs have skyrocketed due to global catastrophe losses, this meant California rates did not reflect one of the largest cost drivers in the industry.

For a broader look at how the crisis developed, see the overview of the California insurance crisis.

The Core Elements of the Sustainable Insurance Strategy

1. Forward-Looking Catastrophe Models

The most significant change is that the CDI now allows insurers to use forward-looking catastrophe models to justify rate filings. These models use scientific data — climate projections, vegetation analysis, fire behavior simulation, topography, and building construction characteristics — to estimate expected future losses rather than relying solely on what happened in the past.

The first catastrophe model was approved by the CDI in mid-2025. Models must meet specific criteria set by the Department, including transparency requirements, open methodology standards, and validation against historical data. The CDI retains authority to reject or require modifications to any model, and the models used by insurers are subject to regulatory review.

2. Reinsurance Cost Pass-Through

For the first time, California insurers can include the cost of reinsurance in their rate calculations. Reinsurance is the mechanism by which insurers spread catastrophic risk globally — a California insurer might buy reinsurance from carriers in London, Bermuda, or Zurich to protect itself against a $1 billion wildfire event. These costs have increased dramatically since 2020 as global catastrophe losses (hurricanes, wildfires, floods, and severe convective storms) have driven reinsurance prices upward worldwide.

Allowing reinsurance cost pass-through means that California policyholders now absorb a share of global catastrophe cost trends — even events in other states or countries affect the cost of reinsurance that California insurers purchase, which is now reflected in California premiums. This is a significant shift. It connects California homeowner rates to global reinsurance market dynamics in a way that was not previously permitted.

3. The 85% Commitment: Writing in Wildfire-Distressed Areas

The other side of the bargain is the commitment requirement. Insurers that use forward-looking catastrophe models and reinsurance cost pass-through to justify higher rates must, in exchange, commit to writing at least 85% of their statewide market share in new policies in wildfire-distressed areas. In practical terms, if an insurer holds 10% of the California homeowner market statewide, it must write new policies in wildfire-distressed ZIP codes at a rate of at least 8.5% of total new policies in those areas.

This is the mechanism designed to ensure that higher rates translate into actual availability. Without this requirement, insurers could simply charge more in lower-risk areas while continuing to avoid high-risk communities altogether.

4. Modifications to the Proposition 103 Framework

Proposition 103, passed by California voters in 1988, established the prior-approval system for insurance rates. The Sustainable Insurance Strategy does not repeal or fundamentally alter Proposition 103 — doing so would require another ballot initiative — but the regulatory changes effectively expand what insurers can include in their rate filings within the existing framework. The CDI has used its regulatory authority to implement the catastrophe model and reinsurance provisions through rulemaking rather than legislation.

Consumer advocacy groups have challenged some of these changes, arguing that the regulatory modifications circumvent the intent of Proposition 103 without voter approval. This legal and political tension is ongoing and may ultimately be resolved by the courts or a future ballot measure.

What Is Happening to Premiums

The premium impact has been substantial. The California Department of Insurance has approved rate increases averaging approximately 16% for 2026, following cumulative increases of roughly 18% in 2024 and 2025 combined. This means that a California homeowner who was paying $2,000 per year in 2023 could be paying approximately $2,680 by the end of 2026 — a cumulative increase of roughly 34%.

These are statewide averages. The impact varies dramatically by location:

• High wildfire risk areas.Homeowners in State Responsibility Areas (SRA) and Very High Fire Hazard Severity Zones (VHFHSZ) are seeing the largest increases — in some cases 40% to 60% or more — as forward-looking models assign significantly higher risk scores to these areas.
• Urban and lower-risk areas. Homeowners in urban, lower-risk areas are seeing more moderate increases, but they are still absorbing the impact of reinsurance cost pass-through and general market hardening.
• FAIR Plan policyholders.The FAIR Plan has filed its own rate increases as well. Homeowners on the FAIR Plan often face the highest absolute premiums because the Plan’s loss experience is concentrated in the highest-risk areas.

Carriers Returning to the California Market

The stated goal of the Sustainable Insurance Strategy is to bring carriers back to California. As of early 2026, several carriers have either resumed writing new policies or expanded their California operations under the new framework:

• Mercury Insurance has resumed writing new homeowner policies in California after a period of restricted new business.
• CSAA Insurance Group (the AAA-affiliated insurer) has expanded its California homeowner writings under the new rate framework.
• Travelers has re-entered the California homeowner market with new products filed under the catastrophe model provisions.

However, several major carriers — including State Farm and Allstate — have not yet resumed writing new homeowner policies in meaningful volume. The extent to which the Strategy succeeds will ultimately be measured not by a handful of early movers but by whether it produces broad, sustained market participation across the state.

Availability vs. Affordability: The Consumer Dilemma

The fundamental tension in the Sustainable Insurance Strategy is the trade-off between availability and affordability. For a homeowner who has been non-renewed and cannot find coverage at any price, any available policy — even an expensive one — represents an improvement. For a homeowner who currently has coverage but sees a 30% to 50% premium increase, the “improvement” feels more like a crisis.

There is also a deeper concern about equity. The areas most affected by wildfire risk are not exclusively wealthy hillside communities. Many of the highest-risk areas include working-class and rural communities where homeowners have limited ability to absorb dramatic premium increases. The question of whether insurance remains affordable for these communities — or whether it effectively becomes an unfunded mandate — is one that the Sustainable Insurance Strategy does not fully answer.

For homeowners who have been non-renewed and are navigating limited options, understanding the full range of alternatives is essential. See the guide to non-renewal and cancellation for steps to take when a carrier drops coverage.

What to Watch Going Forward

The Sustainable Insurance Strategy is still in its early implementation phase. Several key developments will determine whether it achieves its goals:

• 85% commitment enforcement. Whether the CDI actively monitors and enforces the requirement that carriers write proportional market share in distressed areas, or whether carriers find ways to satisfy the letter of the requirement without meaningfully serving those communities.
• Additional catastrophe model approvals. As more models are approved and put into use, the rate impact will become clearer. If competing models produce significantly different risk scores, the CDI will face pressure to establish which models are permissible.
• Legal challenges. Consumer advocacy groups and intervenors continue to challenge the regulatory changes. A court ruling invalidating key provisions could disrupt the entire framework.
• FAIR Plan depopulation. The ultimate metric is whether the voluntary market absorbs policies from the FAIR Plan. If FAIR Plan policy counts continue to grow despite the Strategy, it will be difficult to call the program a success.
• Next major wildfire. The true test of any insurance reform comes when the next catastrophic wildfire occurs. Whether the new framework produces adequate reserves, fair claim handling, and financial stability through a major event remains to be seen.

Key Takeaways

• The Sustainable Insurance Strategy is the most significant change to California insurance regulation since Proposition 103 in 1988.
• Insurers can now use forward-looking catastrophe models and include reinsurance costs in rate calculations, which means higher premiums but potentially greater availability.
• In exchange, carriers must commit to writing at least 85% of their market share in new policies in wildfire-distressed areas.
• Statewide rate increases are projected at approximately 16% for 2026, with cumulative increases of roughly 34% since 2023. High-risk areas are seeing significantly larger increases.
• Several carriers (Mercury, CSAA, Travelers) have returned or expanded under the new framework, but major carriers have not yet returned in significant volume.
• The trade-off between availability and affordability remains the central tension, and the program’s success will be measured over years, not months.
• Policyholders should expect continued premium increases, shop the market aggressively, invest in wildfire mitigation, and review their coverage regularly.