Major insurers get their own way with 40% price hike after giving brutal ultimatum to California

California has introduced new regulations aimed at easing the state's home insurance crisis, but it will mean Americans will pay more. 

The new rules, released Monday by the California Department of Insurance, allow providers to pass the cost of reinsurance on to policyholders. 

Reinsurance is effectively the insurance taken out by insurers. It transfers some of the risk so that no company has too much exposure to a potential catastrophe. 

The cost of reinsurance has boomed in recent years, due to the increased risk of natural disasters in the state. 

This, in part, is why insurers have been pulling out of the state, and regulators hope the reform will make the market more attractive to home insurers.

Earlier this year, State Farm gave the state an ultimatum - threatening to ax cover if it did not allow the insurer to raise home insurance rates for millions.

This will be the first time that insurers have been able to pass on the cost to consumers in California, which is a common practice in all other states. 

However consumer advocates warn that this change will likely lead to immediately higher prices for homeowners, many of whom are already struggling to afford soaring premiums. 

Doug Heller, director of insurance for the Consumer Federation of America, speculated that consumers could see price increases of 30 percent to 40 percent, the San Francisco Chronicle reported.

The regulation is the final step in Insurance Commissioner Ricardo Lara's Sustainable Insurance Strategy, which aims to fix the growing crisis in California. 

To make up for the price rises imposed on customers, regulators have attached a condition to the reform. 

This is that insurance companies that pass on their reinsurance costs must also commit to writing more policies in wildfire-prone parts of the state, or pledge to maintain their presence there. 

'Californians deserve a reliable insurance market that doesn't retreat from communities most vulnerable to wildfires and climate change,' Lara said in a statement. 

'This is a historic moment for California.'

Insurers will have to start increasing their coverage by 5 percent every two years until they hit the equivalent of 85 percent of their market share. 

That means if an insurer writes 20 out of every 100 state policies, they would need to write 17 in a high-risk area, Lara's office said. 

The department said it will limit the costs to consumers by tying the reinsurance charges to an industry standard that cannot be exceeded. 

Insurance companies will be able to decide how they split up their reinsurance costs among customers with different types of risk, and regulators will review those decisions, said Department of Insurance Deputy Commissioner Michael Soller.

The regulation was praised by the trade group the American Property Casualty Insurance Association.

Laura Curtis, assistant vice president of state government relations for the group, said in a statement that it was 'one of several critically needed reforms to stabilize California's insurance market.'

However Consumer Watchdog, a Los Angeles based group, blasted the new rules, saying Lara is too close to the industry - a claim he dismissed as 'hogwash.' 

The group said it would lead to rates being 40 percent higher for homeowners, and claimed the regulation contained loopholes that do not guarantee insurers would write up more policies in wildfire-prone areas, the Los Angeles Times reported.

'Tellingly the commissioner did not do a cost impact analysis of his plan on consumers. 

'That's because this plan is of the insurance industry, by the insurance industry, and for the industry,' Jamie Court, president of the group, said in a statement.