California Insurance Market Transition and What It Means for Consumers

Published Date: 11/26/2023

California’s insurance market is undergoing one of the most profound transformations in its history. Homeowners and consumers are facing record premiums, fewer carrier options, and an avalanche of regulatory changes — all unfolding against the backdrop of climate change, inflation, and mounting catastrophe losses.

For those trying to make sense of it all, insurance expert Karl Sussman, host of The Insurance Hour, offers a clear-eyed perspective: change is coming, but the real challenge lies in the transition. “Change is easy,” he says, “but transition is hard.”

So what exactly is driving this transition? Why are insurers pulling back? And what can Californians expect once the dust settles?

Let’s break down the current state of California’s insurance crisis and the path forward.

The Perfect Storm: How California’s Insurance Crisis Began

Over the last two decades, California has faced a dramatic shift in its risk landscape. Catastrophic wildfires, once considered rare, are now almost annual events. Historically, the insurance industry expected a “catastrophic event” — defined as a loss exceeding $1 billion — about once every six or seven years.

Today, that cycle has collapsed. As of late 2023, the U.S. insurance industry had already experienced 28 catastrophic events nationwide — and the year wasn’t even over.

For insurers, this surge in frequency and severity has completely upended traditional pricing models. The business depends on predicting losses based on historical data, but climate change has disrupted those patterns. Events that used to be “once in a decade” now occur multiple times a year, leaving carriers unprepared and unprofitable.

The ripple effects extend throughout the industry — from primary insurers to the reinsurance companies that back them. As reinsurance costs rise, many insurers have found it impossible to operate profitably in California’s high-risk environment. Some have paused writing new business, while others have exited the state altogether.

The Consumer Squeeze: Fewer Choices and Rising Premiums

When insurers leave the market, competition disappears — and prices rise.

As Sussman explains, “When you have lots of insurance companies offering coverage, competition drives prices down. When you have only a few, prices go up.”

That is exactly what is happening today. In many wildfire-prone regions, homeowners who once had seven or eight carrier options now have only one or two. Those remaining companies can afford to be highly selective.

Underwriting requirements have tightened, premiums have soared, and even qualified homeowners are being non-renewed. The state’s FAIR Plan, designed as a last-resort option, has expanded into a primary market for thousands of residents.

While frustration is widespread, Sussman emphasizes that insurers are not withdrawing out of greed. “Insurance companies make money by selling insurance policies. If they’re not selling, it’s because they can’t make money doing so.” If there were a profitable way to continue writing business, they would.

The Department of Insurance Steps In With Reform

California leadership recognizes that the system must change. Governor Gavin Newsom has urged the California Department of Insurance (CDI) to restore a functioning marketplace.

In response, CDI has begun implementing new regulatory guidelines aimed at attracting insurers back into the state while maintaining consumer protection. These reforms seek to restore market stability and increase competition.

Three key changes define this regulatory shift.

Property-Specific Risk-Based Pricing

Historically, California insurers priced policies using broad geographic zones, such as ZIP codes. This meant homeowners who invested in fire-

resistant roofs, defensible space, and home hardening often paid the same rates as those who did not.

Under the new rules, insurers will be allowed to use granular, property-level data when setting premiums. This means your rate can reflect your individual risk profile instead of your neighborhood average.

Homeowners who actively reduce risk may benefit from more accurate — and often lower — pricing. It also increases transparency by allowing consumers to directly influence their premiums through mitigation.

Forward-Looking Models and Artificial Intelligence

One of the most significant reforms is the shift from backward-looking data to forward-looking predictive modeling.

Previously, insurers in California were restricted to historical loss data when setting rates. In a rapidly changing climate, those models quickly became outdated.

Under the new framework, insurers may use predictive analytics and artificial intelligence to assess evolving wildfire risk, inflation, reinsurance costs, and climate trends — provided they can justify assumptions with verifiable data.

While some consumer advocates worry about potential abuse, the CDI has committed to strict oversight and transparency requirements for all modeling methods.

Restoring Competition to the Market

Once insurers can price risk accurately and operate profitably, they are expected to return to California’s market. With increased competition, premiums should naturally stabilize and decline over time.

As Sussman puts it, “If more companies are competing for your business, prices fall.”

However, this will not be immediate. Californians are currently in the difficult transition phase — between an unsustainable past system and a more stable future market. Prices remain high, and options are limited, but these short-term hardships are part of a longer-term correction.

What Consumers Should Do During the Transition

While the market remains strained, Sussman offers practical guidance for homeowners navigating this uncertain period:

• Do not cancel your existing policy. If you still have coverage, keep it. Dropping coverage now may leave you unable to find alternatives.
• Use automatic payments. Avoid lapses at all costs. A missed payment could jeopardize your ability to be renewed.
• Verify your insurer’s financial strength. If you are with a lesser-known carrier, check its financial rating through AM Best.
• Invest in mitigation. Fire-hardening upgrades, vegetation management, and defensible space will soon play a larger role in premium pricing.
• Stay informed and patient. The market is rebuilding. Stability will return, but it will take time.

Why the Long-Term Outlook Is Improving

Despite current challenges, there is reason for cautious optimism. The California Department of Insurance is modernizing risk assessment, encouraging competition, and aligning the market with real-world data.

By allowing forward-looking models and property-specific pricing, California is laying the groundwork for a more equitable system — one in which consumers pay rates that reflect actual risk, not just location.

This also aligns incentives. Homeowners want to prevent losses, and insurers want safer properties. As Sussman explains, “Consumers don’t want their houses to burn down — and neither do insurance companies.”

Final Thoughts: Transition Now for Stability Later

Right now, California’s insurance market feels unstable. Premiums are high, availability is restricted, and uncertainty persists. But behind the disruption, meaningful reform is taking shape.

If California successfully completes this transition to a modern, data-driven insurance system, it will emerge with a more competitive and resilient market — capable of adapting to climate change and economic pressure.

As Sussman reminds consumers, “Change is easy. Transition is hard.” California is living through the hard part now. What comes next has the potential to restore confidence, competition, and long-term stability to one of the nation’s most critical insurance markets.