Calif. will force insurers to cover fire-prone areas. But rates will rise.

Insurance companies that pulled back from fire-prone areas of California in recent years will have to start covering those regions again if they want to stay in the state – but they can pass more costs onto customers.

A new regulation announced this week by the California Department of Insurance requires insurers to increase the writing of comprehensive policies in disaster-prone areas by 5 percent every two years up to a certain threshold. Currently, there is no requirement that insurers operate in high-risk areas at all, and some of the largest home insurers have cut their natural disaster coverage or hiked rates as climate risk grows.

But in an effort to keep those firms from leaving California altogether, regulators included a concession that the industry has sought for years: the ability to include reinsurance costs in the rates that homeowners pay.

“Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change,” state Insurance Commissioner Ricardo Lara said in a statement.

Lara described the rule, which was announced Monday, as part of an ambitious plan for insurance reform. Lara’s broader plan allows carriers to charge residents for the rising costs of climate change, incorporating forward-looking projections rather than just historical data, in exchange for an expansion of coverage. The rule takes effect in 30 days pending an administrative review.

Under the new rules, insurers would eventually write comprehensive home insurance policies in high-risk areas up to a level that is at least 85 percent of their statewide market share. For example, if a company holds 10 percent of policies statewide, its market share in a high-risk area must reach at least 8.5 percent, said Michael Soller, a California deputy insurance commissioner.

“We’re not rewriting their business plan; we are saying these are the areas where people are hurting and where you need to be writing policies,” Soller said.

The changes come after several leading insurers stopped writing new policies in the state, citing financial risk due to wildfires. Allstate, for example, pulled back coverage and was later approved for a 34 percent rate hike.

The regulation effectively means homeowners will bear the cost of the reinsurance policies that insurers use to cover their own losses. Under the new rule, insurance companies can treat reinsurance like any other company expense as long as they abide by an industry standard for how much it should cost.

California has been the only state that doesn’t allow those costs to be considered when insurance companies set rates.

While insurance industry representatives praised the reinsurance changes, a consumer organization criticized the new regulation as a giveaway to insurers. Consumer Watchdog, a California advocacy group, said it is worried that the changes would drive up home insurance rates by as much as 40 or 50 percent without offering a “substantive” expansion in wildfire coverage.

The coverage increases required under the rule are too piecemeal compared to the increased costs for consumers, said Jamie Court, president of Consumer Watchdog.

“This plan is of the insurance industry, by the insurance industry and for the insurance industry,” Court said.

But California has been an outlier when it comes to reinsurance costs, said Janet Ruiz, spokesperson for the Insurance Information Institute. “The cost of reinsurance has increased, and every other state allows that you use that as one of your costs when the department is reviewing your rate increase,” Ruiz said.

Allowing reinsurance to factor into rates “is one of several critically needed reforms to stabilize California’s insurance market,” said Laura Curtis, assistant vice president of state government relations for the American Property Casualty Insurance Association, a trade group.

“We look forward to carefully reviewing the regulation and working with the Department to ensure it effectively improves access and availability to insurance for all Californians,” Curtis added.