California Sustainable Insurance Strategy

Published Date: 11/28/2023

California’s Sustainable Insurance Strategy: A Blueprint to Rebuild a Broken Market

California’s insurance market is in crisis. From wildfire-exposed homeowners unable to find coverage to major carriers pausing new policies, the Golden State has spent the last several years grappling with an insurance ecosystem on the verge of collapse. Yet amid this turmoil, a new path forward is taking shape — one that promises to bring insurers back, increase competition, and protect consumers.

It’s called the California Insurance Stability Plan (or “Sustainable Insurance Strategy”), and if it works as intended, it could reshape not just California’s insurance system but become a model for the nation.

The Roots of the Problem: Proposition 103 and Market Paralysis

For more than 35 years, California’s insurance system has been governed by Proposition 103, a 1988 ballot initiative designed to protect consumers from excessive rate increases. The law gave the Department of Insurance sweeping power to approve or reject rate changes — a safeguard in its day, but one that now acts like a chokehold on a modern insurance industry.

Because of Prop 103’s rigid structure, insurers can’t quickly adjust prices to reflect real-world risks, such as catastrophic wildfires, flood exposure, or rising reinsurance costs. Even simple underwriting changes — like offering a new discount for a safer roof type — can take months or years to approve. As Susman put it, “In California, you can’t really shop for property insurance — you can only hunt for it.”

The result? Insurers flee the state, refusing to write new business or limiting coverage so severely that homeowners are left with a single option: the state-run California FAIR Plan.

The FAIR Plan: From Last Resort to Only Resort

The FAIR Plan was designed as a safety net — a “market of last resort” for homeowners who truly couldn’t get insurance elsewhere. It provides bare-bones fire coverage, not the comprehensive protection a standard policy offers.

But in today’s market, FAIR Plan enrollment has exploded. Consumers aren’t turning to it because their homes are uninsurable; they’re turning to it because no private insurer will take them. Susman notes that this is backwards: “It’s supposed to be where you go when you absolutely have no other choice — not where half the state ends up by default.”

The Sustainable Insurance Strategy aims to reverse that trend — to “depopulate” the FAIR Plan by re-energizing the private market.

Step 1: Depopulating the FAIR Plan

The first pillar of the new plan is straightforward: transition homeowners and businesses out of the FAIR Plan and back into private insurance.

That means:

• Allowing insurers to once again write policies confidently.
• Making it financially viable for them to take on risk.
• Giving consumers access to fuller coverage (including liability, theft, and water damage) that the FAIR Plan doesn’t offer.

The plan doesn’t eliminate the FAIR Plan — it restores it to its proper role as the “insurer of last resort,” not the only game in town.

Step 2: Embracing Predictive Modeling and Climate Data

For decades, insurers have priced coverage based on historical loss data — essentially looking backward to forecast the future. But climate change has upended that logic. Weather patterns, wildfire frequency, and catastrophic losses look nothing like they did 20 years ago.

The Stability Plan will now allow insurers to use catastrophe modeling — sophisticated computer simulations and climate risk analytics — to predict losses more accurately.

This is controversial. Some consumer groups argue that it’s unfair to charge higher rates for disasters that “haven’t happened yet.” But the alternative, Susman warns, is worse: insurers that can’t account for foreseeable risk simply stop offering coverage altogether.

By allowing the use of predictive models, California aligns insurance pricing with scientific reality. It’s not about overcharging — it’s about keeping the market solvent so insurers can stay and pay claims when disaster strikes.

Step 3: Expanding Commercial Coverage for High-Value Properties

Another major change affects commercial insurance, particularly for large complexes such as condominium associations and multi-building developments in wildfire zones.

Currently, the FAIR Plan caps commercial fire coverage at $20 million per location, which can leave multi-building properties underinsured. The new plan raises that cap to $20 million per building — a major improvement that ensures businesses and HOAs can purchase enough protection to rebuild after a catastrophic loss.

This doesn’t encourage dependence on the FAIR Plan — it ensures that when the Plan is used, it can meet the real needs of California’s high-value commercial properties.

Step 4: Accounting for Reinsurance Costs — Fairly

Behind every insurance company stands another layer of protection: reinsurance — insurance for insurers. Reinsurance allows companies to share catastrophic risks, but its cost has skyrocketed worldwide due to extreme weather and inflation.

Until now, California law didn’t allow insurers to include reinsurance costs in their rate filings. That meant companies were eating those costs or walking away from the market.

The new plan introduces a California-specific reinsurance allowance. Insurers can now include reinsurance costs directly tied to California risks in their rate calculations — not global reinsurance expenses, just those tied to the state.

This is a pragmatic compromise. It prevents consumers from paying for hurricanes in Florida, while letting insurers remain financially solvent in the face of higher California-specific wildfire exposure.

Step 5: Fixing the Broken Rate-Filing Process

One of the biggest bottlenecks in California insurance regulation has been the rate-filing process. Under Prop 103, rate filings can be appealed by third-party “consumer advocates.” While oversight is valuable, one organization has used this system to delay nearly every filing — collecting millions in legal fees and stalling innovation for months, even years.

Susman described it bluntly: “An insurance company waited over 300 days just to get one classification plan through.”

The new Stability Plan aims to streamline these approvals:

• Hearings will remain public, but groups must now justify their objections and disclose how much money they earn from each appeal.
• The Department of Insurance will add more staff to clear the backlog.
• Approval timelines could shrink from nearly a year to one or two months.

This modernization doesn’t just help insurers — it benefits consumers by speeding up new discounts, products, and coverage options that are currently stuck in regulatory limbo.

Step 6: Requiring Insurers to Write in High-Risk Areas

Perhaps the most groundbreaking piece of the strategy is a mandatory writing requirement: insurers must now write 85% of their property business in wildfire-prone areas proportional to their statewide market share.

For example, if a carrier insures 20 of every 100 homes statewide, it must also write 17 policies in designated high-risk zones. This ensures that every insurer shares the burden of California’s risk landscape, rather than cherry-picking only the safest neighborhoods.

Initially, rates in those regions may rise. But as competition returns, premiums are expected to stabilize — and consumers will once again have choice.

Step 7: Allowing Fair-Plan Recoupment — Without a Bailout

Finally, the plan permits insurers to recoup a portion of funds they contribute if the FAIR Plan ever exhausts its reserves. Critics have called this a “bailout,” but that’s a mischaracterization.

The FAIR Plan has never gone bankrupt, but if it did, participating insurers are legally required to cover losses proportional to their market share. The new rule simply allows them to gradually recover those costs rather than absorb them entirely — keeping the system solvent for everyone.

Why Solvency Matters

Throughout his discussion, Susman stressed a key point: financial solvency isn’t greed — it’s survival. An insurer that underprices risk today may not have the funds to pay claims tomorrow. The recent collapse of multiple insurers in Florida proves the danger of a system that demands low rates but ignores sustainability.

The Sustainable Insurance Strategy is about balance: ensuring rates reflect real risk while preserving affordability and access. It’s not about higher premiums — it’s about building a system that can actually pay its promises.

Looking Ahead: California as a National Model

California’s approach — modernizing catastrophe modeling, accelerating rate approvals, and enforcing market participation — could become a template for other states facing climate-driven insurance instability. States like Colorado, Louisiana, and Florida are already watching closely.

As Susman concluded, “Change isn’t bad. It’s necessary. These laws were written 35 years ago — in a world that no longer exists. If we don’t change the system, we’ll keep getting the same broken results.”

Final Thoughts

The California Sustainable Insurance Strategy represents a long-overdue recalibration of a system that hasn’t kept pace with economic or environmental reality. It won’t fix everything overnight, and initial premiums may fluctuate as new models take effect. But over time, increased competition, innovation, and transparency will drive a healthier, more resilient marketplace.

For consumers, this means more options. For insurers, it means a fair playing field. And for California, it means a pathway out of crisis — and toward a sustainable insurance future.