California will allow property insurers to factor climate risks into pricing

California will change its rules to let insurance companies consider climate change when setting prices, a move aimed at preventing them from fleeing the state.

California will let insurance companies consider climate change when setting their prices, the state’s chief regulator announced Thursday, a move aimed at preventing insurers from fleeing the state over fears of massive losses from wildfires and other natural disasters.

Unlike other states, California does not let insurance companies consider current or future risks when deciding how much to charge for an insurance policy. Instead, they can only consider what’s happened on a property in the past to set the price.

At a time when climate change is making wildfires, floods and windstorms more common, insurers say that restriction makes it difficult to truly price the risk on properties. It’s one reason why, in the past year, seven of the top 12 insurance companies doing business in California have either paused or restricted new business in the state.

On Thursday, California Insurance Commissioner Ricardo Lara said the state will write new rules to let insurers look to the future when setting their rates. But companies will only get to do this if they agree to write more policies for homeowners who live in areas with the most risk — including communities threatened by wildfires.

“Modernizing our insurance market is not going to be easy or happen overnight. We are in really unchartered territory and we must make difficult choices when the world is changing rapidly,” Lara said at a news conference.