California Department of Insurance Workshop, testimony provided by Karl Susman regarding CAT models
Published Date: 06/27/2024
Decoding Catastrophe Models: Karl Susman’s Testimony and What It Means for California’s Insurance Future
California’s property insurance market stands at a crossroads. Wildfires, inflation, and regulatory gridlock have pushed many insurers to the brink, leading to policy non-renewals, coverage restrictions, and widespread consumer frustration.
At the heart of the debate over how to fix this broken system lies a single, powerful concept: catastrophe modeling, often shortened to CAT modeling.
In a recent California Department of Insurance (CDI) workshop, industry expert and Insurance Hour host Karl Susman delivered testimony supporting the state’s proposed reforms to allow insurers to use catastrophe models in their rate filings — and in doing so, sought to dispel some of the misinformation surrounding them.
His remarks captured not only the urgency of California’s insurance crisis but also the role that science, data, and transparency must play in rebuilding a sustainable marketplace.
Why the Workshop Mattered
The CDI’s workshop on catastrophe modeling was part of the Sustainable Insurance Strategy, a comprehensive plan launched by Insurance Commissioner Ricardo Lara to stabilize California’s insurance system.
The proposed changes would, for the first time, allow insurers to use forward-looking catastrophe models — sophisticated tools that combine climate science, historical data, and advanced analytics — to predict potential future losses.
The move has sparked both optimism and controversy. Proponents argue it’s essential for solvency and long-term affordability. Critics claim it opens the door to “black box underwriting” — secret, unaccountable algorithms that could raise rates unfairly.
Susman’s testimony tackled these issues head-on.
“We Know Why We’re Here”: A Market in Shambles
Susman began by acknowledging the elephant in the room — California’s insurance crisis.
“We know why we’re here,” he said. “The California insurance marketplace is currently in shambles. Insurers are non-renewing policies, not offering policies, and leaving the state altogether.”
The causes, he explained, aren’t mysterious: insurers have repeatedly pointed to the regulatory environment as a major reason for their withdrawal.
Under Proposition 103, insurers must receive state approval for any rate changes — a process that can take years. During that time, inflation, wildfire exposure, and reinsurance costs can shift dramatically, leaving companies operating at a loss.
“Most of them claim the reasons for taking these actions are due to the regulatory environment that currently exists,” Susman said.
The Sustainable Insurance Strategy — and particularly its inclusion of CAT modeling — aims to correct that imbalance.
What Are Catastrophe Models?
Catastrophe models are analytical systems used to estimate potential losses from disasters like wildfires, earthquakes, floods, and hurricanes.
They combine historical loss data, scientific research, and statistical simulations to create a detailed picture of what could happen under different scenarios — for example, how a wildfire might spread under certain weather conditions, or how many homes might be affected.
“Catastrophe modeling provides detailed risk assessments based on historical data, scientific principles, and advanced analytics,” Susman explained. “All the data, all the science, just the facts — fair, non-discriminatory.”
Unlike traditional models that rely purely on past losses, CAT models are forward-looking — a crucial difference in an era where climate change is reshaping risk at an unprecedented pace.
This allows insurers to:
- Better estimate future claims.
- Maintain appropriate financial reserves.
- Price coverage more accurately and sustainably.
“By better understanding potential losses,” Susman said, “insurers can maintain appropriate reserves necessary to pay for expected claims, ensuring stability and solvency.”
The Consumer Benefit: Knowledge Is Power
While CAT modeling may sound like an industry tool, Susman emphasized its value to consumers and communities.
By pinpointing high-risk areas, these models can empower homeowners, local governments, and even businesses to take proactive steps to reduce losses — such as retrofitting structures, creating defensible space, or updating building codes.
“As consumers or as an entire community, we get the advantage of all of this big data and can be told if an area that we are in is a higher risk than we thought,” he said. “We can then take that information, take the necessary steps to try and reduce our exposure.”
That feedback loop — using science to drive behavior that lowers risk — benefits everyone.
“This could lead to less losses, which is good for consumers, less claims, which is good for the insurance companies, which equates to lower premiums — which is good for everybody.”
How Insurers Actually Want Fewer Claims
Susman pushed back against the idea that insurers profit from disasters or high rates.
“Insurers would love nothing more than for you to never have a claim, really,” he said.
The less damage that occurs, the fewer payouts insurers must make — and the more stable premiums become for everyone.
If companies can use data to help customers avoid losses, they will.
“If they have information that they can provide to consumers to assist them in creating an environment where fewer claims happen, you can be sure they’re going to provide that information — and provide it loud and clear.”
This reframing highlights the shared goal of risk reduction between consumers and insurers — a point often lost in the political noise surrounding rate approvals.
Busting the “Black Box” Myth
Perhaps the most passionate part of Susman’s testimony was his takedown of the so-called “black box underwriting” myth — the claim that catastrophe models are secret algorithms used to arbitrarily raise rates without oversight.
“Anytime you hear someone use the phrase ‘black box underwriting,’ take a shot,” he joked. “It’s a farce. It’s a lie. It literally, literally does not exist in the proposed legislation from the Insurance Commissioner.”
He clarified that the CDI will have full access to all catastrophe model data and assumptions — just as it does for any other rate filing. The only information not made public is proprietary intellectual property, similar to trade secrets in any industry.
“If you actually take the time to read the legislation,” Susman said, “you’ll see there is nothing that hides data or shields insurers from oversight.”
In other words, regulators — not the public or the insurers — hold the keys. There’s no secrecy, just protection for competitive trade data.
The irony, Susman noted, is that critics of catastrophe models are often the same groups that once championed consumer transparency under Proposition 103, yet now spread misinformation about tools that could make pricing more accurate and fair.
Science Over Politics
Throughout his testimony, Susman’s central message was clear: the debate over catastrophe models should be guided by science, not ideology.
“All the data, all the science, just the facts — fair, non-discriminatory,” he repeated.
By resisting modern modeling, California has effectively been asking insurers to drive looking only in the rear-view mirror. But past wildfires don’t predict future ones, and yesterday’s loss patterns don’t reflect today’s realities.
“No point in letting an insurer sell insurance if they can’t plan and pay for the claims that are coming,” Susman said.
In other words, refusing to use modern data tools doesn’t protect consumers — it endangers them by making the market unsustainable.
The Broader Impact: Stability Through Modernization
Allowing CAT models isn’t about higher rates; it’s about market stability.
By using these tools, insurers can confidently stay in California, knowing they can price risk fairly and maintain solvency even amid extreme weather patterns.
Consumers, in turn, gain from:
- A wider choice of insurers.
- More accurate pricing (those far from risk centers may even pay less).
- Incentives for mitigation, since models can reflect home-hardening efforts.
“The goal is not to punish consumers,” Susman said. “It’s to ensure a functioning insurance system that can actually pay claims and encourage smarter risk management.”
The Road Ahead
The Department of Insurance’s workshop marked a pivotal moment in California’s insurance reform process.
As Commissioner Lara moves to finalize catastrophe modeling regulations under the Sustainable Insurance Strategy, the state faces a defining question: will it embrace data-driven modernization, or cling to outdated frameworks that have already failed?
Susman’s testimony underscores that this isn’t just an industry debate — it’s about consumer protection through solvency and science.
“By better understanding potential losses,” he concluded, “we can create a system that’s fair to everyone — insurers, homeowners, and communities alike.”
Key Takeaways
- Catastrophe modeling isn’t new or secret. It’s a proven, data-driven tool used nationwide to predict potential losses from natural disasters.
- “Black box underwriting” is a myth. The Department of Insurance will have full oversight of all models and assumptions.
- Modernization protects consumers. CAT models ensure insurers remain solvent and able to pay claims during disasters.
- Data drives prevention. By identifying high-risk zones, modeling can guide homeowners and communities toward effective mitigation.
- Science, not politics, should shape policy. The more California resists data tools, the more unstable its insurance market becomes.
Final Thoughts
Karl Susman’s testimony at the Department of Insurance workshop was more than expert commentary — it was a call to action.
California can no longer afford to regulate its insurance market using backward-looking methods. If it wants a sustainable, competitive, and fair system, it must embrace modern catastrophe modeling as both a scientific and consumer-protection necessity.
By grounding policy in facts, transparency, and shared responsibility, the state can finally begin rebuilding trust — and stability — in a market that millions of homeowners depend on.
“It’s not about politics,” Susman reminded the panel. “It’s about reality — and reality demands data.”
Author