(Airdate: 2023-09-27) FOX - KTVU - California Catastrophe Insurance

Published Date: 09/27/2023

California’s Catastrophe Insurance Overhaul: Can New Regulations Save the State’s Failing Homeowners Market?

California’s insurance market has reached a critical turning point. In a state defined by its beauty and its volatility—where wildfires, earthquakes, and floods have become part of the yearly rhythm—the home insurance system is showing signs of collapse. As major insurers like State Farm and Allstate pull back from writing new homeowner policies, state officials are stepping in with sweeping reforms that could reshape how risk is measured, priced, and shared.

Last week, Insurance Commissioner Ricardo Lara announced a comprehensive plan to rescue California’s “collapsing” insurance market. The proposal—currently under public review—marks the most significant regulatory shift in decades. It would allow insurers, for the first time, to factor the increasing wildfire risk from climate change into their rate filings.

To many, this is a long-overdue modernization. To others, it raises concerns about affordability, access, and fairness. The state’s insurance crisis is not just about numbers—it’s about balancing science, public policy, and the urgent realities of a warming planet.

The Immediate Crisis: Why Insurers Are Leaving

For years, California has been caught in a vicious cycle: as climate-driven disasters increase, so do insurance losses. Insurers are paying out more in claims than they can recover through premiums, yet state law limits how much—and how quickly—they can raise rates.

Two key factors have worsened the problem:

1. Proposition 103, a 1988 voter initiative, requires insurers to obtain state approval before raising rates. It also prohibits the use of predictive “catastrophe models” that estimate future risks based on weather patterns, vegetation, and climate projections.
2. Rising reinsurance costs—that is, the cost of insurance that insurance companies themselves buy—are not allowed to be fully reflected in consumer premiums under current regulations.

As a result, insurers are operating in a system where they cannot charge enough to cover mounting risks. Faced with this imbalance, major carriers began to pause new policy sales, especially in high-risk wildfire zones.

This left many Californians scrambling for coverage, with some forced onto the state’s FAIR Plan, a last-resort insurance pool that provides limited, high-cost protection.

Commissioner Lara’s new proposal aims to reverse that exodus—by making the system more responsive to real-world risks while requiring insurers to recommit to the California market.

Catastrophe Modeling: The Science Behind the Change

At the heart of the proposed overhaul lies a technical but transformative concept: catastrophe modeling.

During an interview with FOX KTVU, Karl Susman, insurance expert and owner of Susman Insurance Agency, described it as “the perfect marriage of science, math, engineering, history, statistical analysis, and really sophisticated computer technology.”

Catastrophe models combine decades of data—on weather, fire history, topography, building materials, and vegetation—with modern simulations to estimate how likely future disasters are to occur and what they might cost.

“These models,” Susman explained, “mash all that data together and give us an idea of what to expect tomorrow.”

For insurers, this means being able to price premiums based on future risk, not just past events. For regulators, it offers a more data-driven basis for approving rates. And for consumers, it could lead to a market that is both more stable and more transparent—though not necessarily cheaper.

Reinsurance Reform: The Hidden Cost Behind Your Premium

Another critical element of the proposal involves reinsurance—essentially, insurance for insurance companies.

When catastrophe losses spike (as they have with California’s record-setting wildfires), insurers rely on reinsurance to spread the financial burden. But reinsurance rates have soared globally in recent years, reflecting the mounting cost of climate disasters worldwide.

Until now, California law has prevented insurers from passing most of these costs on to consumers. The proposed regulations would change that—but with limits.

As Susman explained, “They’re actually allowing reinsurance costs, but only as they affect California, not the rest of the world.”

This distinction matters. Global reinsurance rates can be influenced by hurricanes in Florida or floods in Asia. The state’s proposal ensures that only reinsurance expenses directly tied to California’s risks are factored into local premiums.

While this will likely lead to modest price increases, the goal is to stabilize the market—making it viable for insurers to continue operating rather than retreating altogether.

More Competition, Not Less: A Mandate for Coverage in High-Risk Areas

One of the most innovative—and controversial—aspects of the reform package is its coverage requirement.

Under the new rules, insurance companies would be required to write policies for at least 85% of properties in distressed or high-risk areas. This effectively mandates that insurers share the burden of insuring California’s most vulnerable communities.

Right now, with so few insurers writing policies, competition has nearly vanished. “When there’s little competition,” Susman pointed out, “prices go way up—and that’s where we are right now.”

The goal is to bring insurers back into the marketplace by balancing risk and reward: if they want to do business in California’s lucrative low-risk markets, they must also serve high-risk ones.

This mandate, combined with the introduction of catastrophe modeling, could broaden coverage availability—but likely at the cost of higher premiums in the short term.

The Short-Term Pain, Long-Term Promise Dynamic

When asked about how these changes will affect homeowners, Susman offered a nuanced view: “In the short term, rates are going up, up, up because competition has been going down, down, down. Once all the companies come running back and start competing, we’ll start to see them lower down again.”

In other words, the state’s reforms may not bring immediate relief. In fact, consumers could see premiums rise further before they stabilize.

But over time, the expectation is that more insurers re-entering the market will introduce competition—forcing rates back down through market dynamics rather than regulation alone.

This reflects a significant philosophical shift: rather than relying purely on price controls, California is trying to fix the structural incentives that drive insurer participation.

The Public Workshop: Opening the Conversation

The state’s Department of Insurance has been hosting public workshops to gather input from both insurers and homeowners. These forums are designed to increase transparency around the proposed changes and allow stakeholders to weigh in on technical and consumer impacts.

The first major session, held virtually in late September 2023, centered on catastrophe modeling and reinsurance. Susman, one of the invited speakers, emphasized the importance of educating the public about how these systems work.

“This isn’t just about insurance companies,” he said. “It’s about giving homeowners a market that functions—so that everyone can find coverage and the state isn’t left holding the bag when disaster strikes.”

A Cooperative Approach Between Industry and State

One of the most promising signs in this debate is that industry, regulators, and lawmakers appear to be working together.

Susman shared that, according to conversations with sources in Sacramento, there’s a broad understanding between the insurance industry, the governor’s office, and the Department of Insurance that this overhaul is meant to bring everyone back into the fold.

“The goal,” he said, “is to be sure that everybody’s back and everybody is aggressively writing insurance in California.”

This collaboration reflects a growing realization: California can’t afford to have insurers walk away. Without a functioning private insurance market, the entire state could face economic ripple effects, from housing insecurity to reduced property values to an overwhelmed FAIR Plan.

The Bigger Picture: Climate Adaptation and Financial Resilience

Ultimately, California’s insurance reforms are part of a broader reckoning with climate change. Every sector—from agriculture to real estate—is being forced to confront how environmental volatility reshapes economic systems.

Insurance, by its very nature, is about managing uncertainty. But as disasters become more frequent and intense, the traditional models of spreading and pricing risk are breaking down.

By integrating climate science, technology, and financial realism, the state is taking an important step toward modernization. However, policymakers must remain vigilant to ensure that affordability and accessibility remain central to the mission.

Conclusion: A Delicate Balancing Act

California’s catastrophe insurance overhaul represents one of the most ambitious attempts in the nation to realign insurance regulation with the realities of climate change.

The state’s new direction—embracing catastrophe modeling, reinsurance reform, and mandatory high-risk coverage—seeks to create a fairer, more sustainable system. Yet it also underscores a hard truth: resilience has a cost.

For homeowners, that may mean paying more in the near term. For insurers, it means greater accountability and transparency. For regulators, it’s the challenge of keeping the market open without pricing out the people who need it most.

In the end, the question isn’t whether California can afford to reform its insurance system—it’s whether it can afford not to.