California Insurance situation - can we fix it?

Published Date: 11/17/2023

Can California Fix Its Insurance Crisis? Charting a Path Through Climate, Risk, and Regulation

California is known for its breathtaking landscapes, cultural diversity, and global economic influence — but also, increasingly, for its growing insurance crisis. As climate-driven disasters intensify and insurers flee the state, homeowners and businesses find themselves trapped in an unstable marketplace.

In a recent Insurance Hour episode, host Karl Susman offered a grounded, yet forward-looking take on the situation — exploring what went wrong, why insurers are struggling, and how California can rebuild a sustainable path forward.

His analysis goes beyond the headlines, tracing the deeper systemic problems in the Golden State’s insurance ecosystem and suggesting how collaboration, innovation, and realistic policy reform might steer it toward stability once again.

California: Beauty, Risk, and the Cost of Climate Change

California’s extremes are what make it extraordinary — and difficult to insure. From coastal cliffs to desert valleys, from mountain forests to urban sprawl, the state’s diversity also means diverse vulnerabilities.

As Susman describes it, California is a “land of extremes — extreme beauty, extreme innovation, and unfortunately these days, extreme weather.”

In the past decade alone, the state has seen:

• Record-breaking wildfires that destroy thousands of homes each season.
• Historic droughts followed by catastrophic flooding.
• Expanding “red zones” where the risk of natural disaster makes insurance nearly impossible to secure.

These aren’t rare anomalies anymore. They’re recurring, predictable crises. “The abnormal has become the norm,” Susman says, warning that California’s environment — and the insurance market that underpins it — is entering a new era of volatility.

Insurance: The Backbone of Recovery

Insurance is often the unsung hero of economic recovery. It’s what allows individuals, businesses, and communities to rebuild after catastrophe.

“Insurance is the bedrock of economic stability,” Susman emphasizes. “It’s what allows us to pick up the pieces after a disaster, to rebuild, to recover, to move forward.”

But what happens when that bedrock starts to crack? That’s exactly what California is now facing.

Insurers are struggling to balance two competing pressures:

1. A surge in claims caused by escalating climate-related losses.
2. Regulatory limits that restrict their ability to adjust rates or underwriting models to match real-world risk.

The result is an increasingly fragile system, where insurers can no longer afford to operate sustainably, and consumers are left with shrinking options.

The Elephant in the Room: Rate Hikes and Policy Cancellations

Homeowners across California have been receiving unpleasant surprises in their mailboxes — non-renewal notices or steep premium increases. It’s not a coincidence.

Susman explains:

“When the risk of wildfires or floods skyrockets, so does the cost of insuring against them. That’s not greed — it’s math.”

Insurance is built on the principle of risk assessment. When risk rises dramatically, pricing must follow. However, California’s regulatory structure often blocks insurers from using forward-looking data (like climate projections or reinsurance costs) when calculating rates.

That means insurers are effectively charging yesterday’s prices for tomorrow’s risks — a formula that’s impossible to sustain.

The state’s strict regulatory environment, designed decades ago to protect consumers, is now unintentionally driving insurers out. When companies can’t raise rates to reflect risk, they stop writing new policies or pull out entirely.

Regulation in a Changing Climate

At the heart of the issue lies Proposition 103, a voter-approved measure from 1988 that made California’s insurance market one of the most tightly regulated in the country.

It required prior state approval for rate changes and gave consumer advocates the ability to challenge insurer filings — ensuring transparency and fairness.

But as Susman notes, the world of 1988 is gone. The climate, economy, and technology have evolved, but California’s regulatory tools have not.

“These regulations were conceived in a different era, under a different climate reality. They need to evolve, just as our climate is evolving.”

Without reform, insurers remain locked into outdated models that prevent them from adapting to modern risks — a mismatch that threatens both the market’s stability and consumers’ long-term protection.

The Fair Access Dilemma

One of California’s guiding principles in insurance has been “fair access” — the idea that everyone deserves affordable coverage, regardless of where they live.

On paper, it’s a noble ideal. In practice, it’s becoming increasingly complex.

How do you guarantee affordable coverage in areas that now burn almost every fire season? How do you price insurance fairly when some homes sit on fire-prone ridgelines and others are miles from any hazard zone?

Susman acknowledges the moral and political tension:

“How do you balance the scales between risk and affordability? That’s the real challenge.”

He argues that the answer lies not in denying risk, but in innovating how we measure and manage it.

Innovation: A New Model for Risk

To build a sustainable future, Susman calls for innovation and flexibility in how insurers assess, price, and share risk.

That means embracing tools and technologies that didn’t exist when Proposition 103 was written:

• Big data analytics to identify micro-level risk patterns.
• Satellite imagery and AI-driven mapping to understand wildfire behavior and property exposure in real time.
• Parametric insurance models, which trigger payouts automatically when measurable events (like wind speed or rainfall) occur — speeding up recovery and reducing administrative costs.

By using these tools, insurers could move from a one-size-fits-all model to personalized risk pricing — ensuring homeowners pay for their actual exposure rather than broad geographic averages.

However, innovation can’t happen in isolation. It requires cooperation between insurers, policymakers, builders, and consumers.

Building Smarter and Safer

Insurance reform alone won’t solve California’s crisis. The state must also tackle the physical and structural risks that make disasters so costly in the first place.

That means:

• Fire-resistant building materials and smarter construction standards.
• Land-use planning that limits development in extreme-risk areas.
• Community-wide fire prevention efforts, including vegetation management and defensible space zones.

As Susman puts it, “We need to build smarter, build safer, and build with an eye toward sustainability.”

Insurance, in this vision, becomes just one part of a larger resilience strategy — not a band-aid for poor planning.

The Consumer’s Role: A Partnership in Resilience

While it’s easy to blame insurers or regulators, Susman reminds listeners that homeowners also have a part to play.

“Being a partner in resilience means taking personal responsibility,” he says. “It’s about creating defensible space around your home, adhering to evacuation orders, and understanding your own risk.”

Consumers who take proactive steps — from home hardening to emergency preparedness — not only improve their safety but also contribute to reducing collective risk, which benefits the entire insurance pool.

It’s a mindset shift: insurance isn’t a transaction, it’s a partnership.

A Global Challenge with Local Solutions

California’s insurance troubles aren’t unique. Across the world, insurers are grappling with the same questions — how to stay solvent in a warming world where disasters are more frequent and severe.

From Florida’s hurricanes to Australia’s floods, the pattern is the same: climate risk is outpacing traditional insurance models.

But as Susman optimistically notes, California often leads where others follow:

“California is always first — first to face the challenge, and first to find the solution.”

If the state can modernize its system — blending data-driven risk management, consumer protection, and environmental responsibility — it could become a model for other regions facing similar pressures.

The Path Forward

Fixing California’s insurance crisis won’t be quick or simple. It will require:

• Regulatory reform that modernizes Proposition 103 without dismantling consumer protections.
• Investment in resilience — from infrastructure to community fire defense.
• Public-private collaboration to align insurers, government agencies, and citizens toward shared goals.
• Education and transparency, so policyholders understand what their coverage does — and doesn’t — do.

As Susman concludes, the issue isn’t just about insurance. It’s about adaptation — how society evolves to meet the realities of a changing planet.

“Climate change doesn’t recognize borders or politics. It’s a universal threat that demands a unified response.”

Final Thoughts: Hope Through Action

California’s insurance market may be in crisis, but crisis often precedes transformation. The state’s legacy of innovation — from technology to environmental leadership — proves it’s capable of reinventing systems when old models fail.

The path forward will be defined not by blame, but by balance — between risk and affordability, innovation and regulation, individual and collective responsibility.

If Californians can unite behind that vision, the state may once again lead the nation — not just in facing catastrophe, but in building resilience for generations to come.