California Insurance Rates and Catastrophe Modeling Shift

Published Date: 04/25/2024

California’s insurance market is undergoing a seismic transformation. As wildfires, floods, and other climate-related disasters grow more destructive, the state’s long-standing approach to regulating insurance — rooted in 1980s-era policies — is being pushed to its limits.

In April 2024, the California Department of Insurance held a public workshop on catastrophe modeling, a process that uses artificial intelligence, climate science, and advanced data analytics to project future disaster risk. For the first time, state regulators and insurers formally discussed incorporating these tools into how homeowners insurance rates are calculated.

Insurance industry expert Karl Susman, who testified at the workshop and later spoke with Spectrum News 1, helped clarify what catastrophe modeling really is — and what it means for consumers, regulators, and insurers. His insights reveal both the promise and the controversy behind this major policy shift.

Why California’s Insurance System Has Reached a Breaking Point

In the week leading up to the Department of Insurance workshop, two more insurance carriers exited the California market — the latest in a series of withdrawals by major insurers such as State Farm, Allstate, and Farmers. The causes have become familiar: escalating wildfire losses, regulatory restrictions, and the inability to charge premiums that reflect modern risk.

As Susman explained, many insurers that remain in California have been forced to raise prices simply to survive. Yet even those increases are constrained by existing law.

Unlike nearly every other state in the country, California still prohibits insurers from using forward-looking catastrophe models to determine rates. Instead, pricing must be based on historical loss data — an approach that increasingly fails to capture today’s climate-driven disaster risk.

Catastrophe modeling is designed to address this gap by allowing insurers to account for worsening droughts, extreme heat, wind patterns, and wildfire behavior as they exist now and into the future.

What Catastrophe Modeling Really Is

Despite the technical name, catastrophe modeling is not a new concept.

“It’s something that’s been utilized across the world for years,” Susman said. “It’s used in insurance underwriting and rating in literally every state except for California.”

Catastrophe modeling combines science, engineering, statistics, and advanced computing to estimate both the likelihood and financial impact of large-scale disasters. Rather than relying on broad regional averages, the models analyze highly specific factors, including:

• Local vegetation, terrain, and access to fire protection
• Building materials, roof type, and maintenance history
• Historical fire activity and weather patterns
• Climate projections for temperature, wind, and humidity
• Mitigation efforts such as defensible space and fire-resistant upgrades

“It’s not just looking at what happened in the past,” Susman emphasized. “It’s looking at what consumers are doing to their homes today to make them safer.”

The result is a far more precise estimate of risk at the individual property level.

The Transparency Debate and the “Black Box” Concern

One of the biggest criticisms of catastrophe modeling is the fear that it creates a “black box” system controlled by insurers through proprietary algorithms that homeowners cannot see or challenge.

Susman pushed back on that notion directly.

“That’s one of the biggest misconceptions,” he said. “Every insurance carrier has its own models — its own secret sauce — but the information that comes out of it is completely disclosed to the California Department of Insurance.”

He illustrated the point with a simple analogy: insurers must disclose the ingredients of the rate calculation, but not necessarily every internal formula used to develop them. Regulators still have full access to all relevant data inputs, outputs, and justifications before any rates are approved

.

Under the proposed framework, the Insurance Commissioner and the Department of Insurance would retain full authority to review, challenge, modify, or reject model-based rate filings. The goal is to balance transparency and consumer protection with legitimate business confidentiality.

Florida Comparisons and What They Get Wrong

Opponents of catastrophe modeling often cite Florida as a cautionary tale, where insurance premiums have surged and multiple carriers have failed despite the use of advanced modeling.

Consumer advocates warn that California could face the same outcome.

Susman argued that this comparison oversimplifies Florida’s situation. Florida’s insurance crisis is driven by unique factors such as heavy hurricane exposure, extreme litigation costs, high reinsurance dependence, and a market dominated by small regional insurers — conditions that differ significantly from California’s.

A better comparison, he suggested, is flood insurance.

“With flood insurance, there’s just one program — the National Flood Insurance Program,” Susman explained. “Rates have gone up in high-risk areas and gone down in lower-risk ones. When you get more exact and precise, you inevitably see people paying more and others paying less.”

That precision is the core purpose of catastrophe modeling.

Ending the Cross-Subsidy Problem in Insurance Pricing

Under California’s current system, pricing is often based on broad geographic averages. This creates what Susman calls a “homogenous pricing” problem.

Homeowners living in dense urban areas with relatively low wildfire risk often pay similar premiums to those living deep in canyons, hillsides, or remote fire-prone terrain. In effect, lower-risk homeowners subsidize higher-risk ones.

Catastrophe modeling allows pricing to reflect real, location-specific risk.

Homes far from fire stations, surrounded by vegetation, or accessible only by narrow roads are likely to see higher premiums. At the same time, safer homes — especially those with strong mitigation — could see lower rates.

This shift restores actuarial fairness but also signals a reality many homeowners must confront: living in higher-risk locations will likely cost more to insure.

How Catastrophe Modeling Would Be Implemented

As of the April 2024 workshop, catastrophe modeling had not yet been formally adopted. The Department of Insurance is working to establish a regulatory framework that:

• Allows modern modeling methods
• Preserves strict regulatory oversight
• Protects consumers from unjustified or discriminatory pricing

At the time of Susman’s testimony, phased implementation was expected to begin in late 2024 or early 2025.

Insurers will be required to submit new rate filings incorporating catastrophe models for Department approval. These filings will undergo regulatory review before being used to set premiums.

Once approved, the models will not only affect base rates but also shape how mitigation discounts are applied — strengthening financial incentives for homeowners to reduce wildfire risk.

What Homeowners Can Expect from Model-Based Pricing

If catastrophe modeling is fully implemented, homeowners across California are likely to see several changes:

• More accurate pricing based on property-specific risk rather than regional averages
• Higher premiums in high-risk areas, particularly in vegetation-dense or remote locations
• Lower premiums for safer or well-mitigated homes in lower-risk zones
• Stronger incentives for wildfire mitigation, including defensible space and fire-resistant construction
• Continued regulatory oversight, with all model-driven rates still subject to Department approval

While not every homeowner will benefit immediately, the system is designed to align prices more closely with real-world exposure.

Insurance in the Age of Climate Uncertainty

California’s move toward catastrophe modeling reflects a broader shift in how financial systems adapt to climate change. Insurance exists to manage uncertainty — but traditional backward-looking methods can no longer keep pace with the speed and scale of environmental change.

By using data science and predictive analytics, regulators and insurers are attempting to build a more resilient and sustainable marketplace that acknowledges risk rather than masking it through outdated methods.

Still, how these tools are governed will determine whether catastrophe modeling strengthens or destabilizes public trust.

The Bottom Line

California’s adoption of catastrophe modeling marks a fundamental turning point in insurance regulation. It represents a shift away from a backward-looking system toward one guided by science, data, and climate reality.

For homeowners, the transition may bring short-term disruption — especially in high-risk areas — but it also offers a future in which mitigation efforts are rewarded, insurers regain the confidence to write policies, and pricing reflects actual risk.

Catastrophe modeling is not just about algorithms or premiums. It is about redefining how California confronts the financial consequences of living in a changing climate — with fairness, accountability, and foresight guiding the way.