California’s Insurance Crisis Explained: Sustainable Solutions Ahead!

Published Date: 11/21/2024

California’s Insurance Crisis Explained: Why Reform Is Coming — and How It Could Finally Fix the Market

For years, California has faced an insurance crisis that no one could ignore — not homeowners, not insurers, and not state regulators. Skyrocketing premiums, disappearing coverage, and catastrophic wildfires have turned what was once the nation’s most robust insurance market into one teetering on the edge of collapse.

But that may finally be changing.

In a recent interview on KTVU’s On Your Side, insurance expert Karl Susman broke down the details of Insurance Commissioner Ricardo Lara’s Sustainable Insurance Strategy — a sweeping modernization plan designed to stabilize California’s insurance landscape and bring major carriers back into the market.

“We’ve already fallen over the edge,” Susman said. “Right now, less than 10% of the insurance market is open for business. This plan is about bringing competition back — because without competition, rates will never come down.”

1. How We Got Here: A Perfect Storm of Risk and Regulation

Over the past decade, California’s insurance market has been battered by forces on all sides.

Wildfire losses

The state has endured some of the most expensive wildfire seasons in U.S. history. Between 2017 and 2021, insurers paid out more than $25 billion in claims. Fires like the Camp, Woolsey, and Tubbs wiped out entire neighborhoods, forcing companies to reassess their risk appetite.

Outdated regulations

California’s insurance laws, particularly Proposition 103 (1988), restrict how insurers calculate and file rates. Carriers must base their prices on historical loss data, not forward-looking risk models. In a world where climate change has rendered the past unreliable, this rule makes it nearly impossible for insurers to price accurately.

Exodus of major insurers

State Farm, Allstate, and others have paused or reduced new policies, citing the inability to keep up with reinsurance costs and wildfire risks. As they pulled out, the California FAIR Plan — a last-resort fire insurance pool — ballooned to record levels, now covering hundreds of thousands of homes.

“We have no competition,” Susman explained. “When you can’t shop around for a better rate, the few companies left can charge whatever they need to stay solvent.”

2. Enter the Sustainable Insurance Strategy

Commissioner Ricardo Lara’s Sustainable Insurance Strategy aims to correct this imbalance by making California’s market viable again for insurers — while still protecting consumers.

At its core, the plan offers a give-and-take:

• Insurers get modern tools to assess and price wildfire risk more accurately.
• In return, they must write more policies — including in high-risk or underserved areas.

“It’s a tradeoff,” Susman noted. “They get the ability to properly underwrite, and in exchange, they’re being told they have to write more insurance in distressed areas.”

3. Predictive Catastrophe Modeling: A Game-Changer

One of the biggest reforms in the plan is allowing insurers to use forward-looking catastrophe models — the same predictive tools used in states like Florida and Louisiana to price hurricane risk.

How the system works today

Under current rules, California insurers can only look backward — analyzing the last 10 years of fire losses to set rates. That approach fails when climate patterns, drought intensity, and population density have changed dramatically in that time.

How the new models work

The Sustainable Insurance Strategy lets companies use predictive wildfire modeling, which combines:

• Weather and drought data
• Vegetation density
• Topography and wind patterns
• Historical and simulated fire behavior

“They’ll be able to look ahead,” Susman said. “Even if an area hasn’t burned recently, they can use data to predict the likelihood of future fires.”

These models, once vetted and approved by the Department of Insurance, would allow rates that reflect real-world risk — not outdated averages.

4. Expect Higher Rates — at First

Reform always comes with growing pains. Lara’s plan acknowledges that allowing forward-looking models will initially raise rates for many Californians.

“We’ll see a spike in rates right away,” Susman told On Your Side. “But that’s not because insurers are being greedy. It’s because risks are higher — and prices need to reflect that reality.”

Still, he believes the pain will be temporary.

Once insurers regain confidence and re-enter the market, competition will increase. When that happens, pricing pressure should bring rates down to sustainable levels.

“It’s simple economics,” he added. “Right now, rates are artificially high because we have no competition. Bring the carriers back, and they’ll start competing again.”

5. The Fairness Factor: Insurers Must Return to High-Risk Zones

The Sustainable Insurance Strategy doesn’t just give carriers more flexibility — it also demands accountability.

To qualify for new modeling privileges, insurers must expand their coverage footprint and write policies in distressed or high-risk areas, such as wildfire-prone regions of Northern and Southern California.

This requirement prevents cherry-picking and ensures that returning insurers don’t only target low-risk, high-profit customers.

“They can’t just write in Beverly Hills and avoid Lake Tahoe,” Susman said. “They’re being required to insure all parts of the state if they want access to these new tools.”

6. The Role of Reinsurance: The Hidden Cost Driver

Another crucial piece of the Sustainable Insurance Strategy is its recognition of reinsurance costs — what insurance companies pay to insure themselves against catastrophic losses.

Under Proposition 103, carriers haven’t been allowed to include these expenses in rate filings, even as global reinsurance prices have surged due to climate-related disasters worldwide.

The new plan changes that, letting insurers factor reinsurance into their rate requests.

“If you can’t include your biggest expense in your rates,” Susman explained, “you can’t stay in business. This update makes it viable again.”

7. A Faster, Smarter Regulatory Process

The plan also includes reforms to streamline how insurers file rate changes and update underwriting criteria.

Currently, California’s approval process can take 12 to 18 months, leaving insurers stuck with outdated rates even as their losses escalate. The new system aims to speed up approvals, allowing for a more dynamic, responsive market.

This responsiveness is vital not only for insurers but for consumers — preventing sudden market collapses and coverage gaps.

8. What It Means for Homeowners

For homeowners, especially those in wildfire-prone areas, the immediate future may bring higher premiums — but also hope for long-term stability.

If successful, the Sustainable Insurance Strategy could mean:

• More carriers returning to the market.
• More options for coverage beyond the California FAIR Plan.
• Rates tied to real mitigation efforts — rewarding homeowners who harden their properties against wildfire risk.
• Reduced dependence on emergency moratoriums that temporarily ban non-renewals after each fire season.

“Right now, we’re stuck in a reactive system,” Susman explained. “This plan is about creating a proactive one.”

9. The Bigger Picture: Balancing Protection and Profit

Critics have pointed out that the Sustainable Insurance Strategy leans in favor of insurers, giving them tools they’ve demanded for years. But Lara and experts like Susman argue that this balance is necessary to keep the market functioning.

“You can’t protect consumers if there’s no one left to sell insurance,” Susman said.

California’s market is too large to fail — representing one out of every eight U.S. homeowners policies. Modernizing its regulations could set a precedent for other climate-stressed states facing similar challenges.

10. Looking Ahead: Can Reform Work This Fast?

Commissioner Lara has said Californians could start seeing results by mid-2025, with insurers resuming new business by the first quarter.

Susman agrees this is possible but cautions that recovery will take time:

“This isn’t going to fix everything overnight. But it’s the first serious plan we’ve had in decades — and it gives both consumers and carriers a reason to hope again.”

The Takeaway: Sustainable, Not Simple

California’s insurance crisis wasn’t built in a day — and it won’t be fixed in one. But with the Sustainable Insurance Strategy, the state is finally acknowledging the reality of modern risk and taking steps to align policy with science, data, and economics.

Yes, rates will rise before they stabilize. But as Susman and other experts emphasize, that’s the cost of rebuilding a functional market — one that rewards mitigation, ensures access, and restores trust between insurers and the people they protect.

“Once we have real competition again,” Susman concluded, “we’ll see rates come back down — not to where they were five years ago, but to where they should be in a sustainable, modern insurance market.”