California is moving to redefine how catastrophic climate losses are funded, potentially reshaping the role of insurers, utilities, investors, taxpayers, and policyholders in absorbing the cost of extreme weather events.
Late last month, Gov. Gavin Newsom signed an executive order launching what he described as a “whole-of-government” approach to the economic fallout of climate change, with a direct focus on the state’s strained insurance market and wildfire-exposed utility sector. The directive calls on state agencies to collaborate on developing “durable, long-term mechanisms to fairly allocate the costs of recovering from natural catastrophes.”
At the same time, the executive order seems to signal an intent to overhaul how climate-related risk is priced, mitigated, and distributed in California’s economy. It follows SB 254 (Becker), which updates and extends California’s Wildfire Fund framework, setting replenishment rules and directing a comprehensive study of new catastrophe response approaches.
This next phase could accelerate analysis of new catastrophe cost-sharing mechanisms, such as expanded reinsurance use, capital markets (cat bonds), or public-private pools.
“This is aspirational. It’s the first step toward an answer,” said Elizabeth Tosaris (pictured below), a California-based partner at law firm Michaelman & Robinson's regulatory & administrative law practice.
“I believe this demonstrates leadership that the (insurance) industry has been wanting to see – leadership that will allow various stakeholders to collaborate on the huge issues we face around climate change, wildfire, and threats to homeowners and other property owners.”
Under the order, the California Earthquake Authority (CEA) will lead research into innovative insurance and utility market reforms.
Options under evaluation could include models where catastrophic losses are distributed among insurance companies (through mandatory participation or quota-share structures); energy utilities (who are already contributing to the Wildfire Fund); reinsurers and capital markets (via collateralized risk transfer); taxpayers (through potential public backstops or resilience funds); and insurance policyholders (via surcharges, rate adjustments, or risk-based pricing).
The goal is to improve insurer solvency, prevent catastrophic liability for utilities, and protect ratepayers from bearing the full cost of climate disasters while keeping private capital engaged.
According to the governor’s office, insurers have already begun re-entering high-risk wildfire zones under the state’s Sustainable Insurance Strategy, which incentivizes carriers using predictive catastrophe models to expand offerings in distressed regions.
From the insurance industry’s perspective, the executive order represents a potential turning point. “The industry has long believed that expanding insurance availability will depend in part on better building practices and better management of high-risk areas,” said Tosaris. “So, seeing the state put a framework in place, or require the framework, for that kind of effort will be very welcome.”
However, Tosaris doesn’t see immediate short-term relief. “Until the building codes are updated and a significant number of structures comply with the new standards, lowering the overall risk, insurability improvements will take time,” she said.
“That said, some quicker actions could emerge. We’ve already seen legislation limiting how close landscaping can be to a building’s exterior walls in certain areas. Measures like that, which don’t require generational change, could happen faster.”
Newsom has framed California’s move as a national and global model, noting that insurance markets from Florida to Australia are being destabilized by climate-related catastrophes. If California succeeds in building a durable cost-allocation framework, other states may adopt similar structures.
While the order cites “affordability and accessibility” as core goals, there is an open question about how costs will be distributed. If new funds or pooled-risk programs are created, lawmakers could consider funding via utility charges or other assessments, which would keep ratepayers and policyholders in the cost-sharing mix.
According to Tosaris, the industry's priority should be long-term viability rather than short-term premium relief.
“It’s an important piece of the puzzle. You can’t address this issue just through the Department of Insurance. That department alone isn’t set up to manage such a complex, multi-dimensional problem,” she said.
“The recognition that collaboration between multiple agencies is necessary is a huge step. Requiring agencies to communicate is critical to developing a reasonable solution that considers all angles.”
