California Code of Regulations Section 2644.9 – Consideration of Mitigation Factors; Wildfire Risk Models
Wildfires have become a concern in California over the past several years, with catastrophic events leading to billions of dollars in damage. With changing climate patterns and extended periods of drought, the frequency and intensity of these wildfires have heightened. In response, the California Code of Regulations Section 2644.9 (CCR 2644.9) was established in October 2022, focusing on the role of mitigation in rating plans and wildfire risk models. The code outlines compliance requirements for insurers to take into consideration wildfire mitigation efforts by personal and commercial property owners, where insurers need to review wildfire risk models and submit new rate filings that adhere to the wildfire standards created by the California Department of Insurance (CDI). Insurers were required to comply within 180 days of the date the codes were passed.
Understanding CCR 2644.9
At its core, CCR 2644.9 aims to ensure that insurers recognize and reward property owners for implementing wildfire risk mitigation measures. The regulation requires that insurers, when developing or updating their homeowner’s insurance rating plans, consider and apply mitigation credits, discounts, or other rate differentials for properties that employ recognized wildfire mitigation measures.
This means that if a property owner in California has taken steps to reduce the potential of wildfire damage (for instance, by creating defensible space, installing ember-resistant vents, or using fire-resistant building materials), they would receive a reduction in their insurance premiums.
Key Requirements of CCR 2644.9
- Incorporation of Mitigation Measures in Rating Plans: Insurers are required to consider recognized wildfire risk mitigation measures when developing or updating rating plans for homeowner’s insurance. This means that if a homeowner has made efforts to mitigate wildfire risks, these efforts should be reflected in their insurance premiums.
- Application of Credits and Discounts: The regulation mandates that insurance providers apply mitigation credits, discounts, or other rate differentials for properties with recognized wildfire mitigation measures. This is a crucial aspect as it provides homeowners with tangible financial benefits for their proactive mitigation measures.
- Recognition of a Broad Spectrum of Mitigation Measures: The regulation does not limit the recognition to specific mitigation measures. This is significant as it provides flexibility and ensures that as new mitigation strategies emerge, they can be incorporated into rating plans.
- Transparency and Documentation: While the regulation advocates for the recognition of mitigation measures, it also implicitly underscores the importance of transparency. Insurers must be able to document and validate their considerations of mitigation in their rating plans.
What the Code Means for Commercial Real Estate Owners
- Potential for Premium Savings: One of the most direct benefits for property owners is the potential to save on insurance premiums by implementing recognized mitigation measures. With the rising costs of insurance premiums due to climate risks, this could potentially lower the insurance premiums for properties that are in areas with high risk for wildfires.
- Increase in Property Value: Commercial properties that have adopted wildfire mitigation strategies could be perceived as ‘safer’ investments, possibly leading to an increase in their market value. Property resilience measures lower not only physical but also financial risks to a property.
- Reduced Risk of Property Loss: Beyond financial incentives, the primary benefit of mitigation measures is the reduced risk of property loss. By following best practices and guidelines, real estate owners can safeguard their investments against the devastating impacts of wildfires. An instance where resilience measures saved a property while surrounding properties were devastated by wildfire was this lone house left standing after the Maui fire this past summer.
- Initial Costs: While there is potential for long-term savings and benefits, real estate owners will need to incur initial costs to implement mitigation measures. This could include landscaping modifications, structural changes, or the use of specialized materials. Partner Energy’s Property Resilience Assessment provides the cost and savings calculations of installing mitigation measures. We also consider the client’s risk tolerance and investment objective to make targeted recommendations. This allows the client to make informed financial decisions and prioritize measures to implement.
- Challenge of Verification: Just as insurers need to verify mitigation measures, commercial real estate owners must be prepared to provide evidence of their efforts, which could mean added paperwork or inspections. Partner Energy can provide property resilience assessment as a standalone service or as an add-on to a Property Condition Assessment (PCA) where data can be collected during one site visit, saving clients time and cost.
The introduction of CCR 2644.9 is a testament to the state’s proactive approach in addressing the increasing threat of wildfires. For insurers, while there are challenges in updating risk models and potential financial implications, the promotion of mitigation can lead to more sustainable business practices in the long run.
For commercial real estate owners, the regulation brings both challenges and opportunities. While initial costs can be a concern, the long-term benefits in terms of premium savings, enhanced property value, and most importantly, the safeguarding of their properties against wildfires, cannot be understated.
To learn more about how Partner Energy can help mitigate the impact of climate risks to your properties, contact us today.