Catastrophe Modeling Could Reshape California Insurance

Published Date: 04/23/2024

When a homeowner in California opens their mail today, they might find one of three things: a non-renewal notice, a sharp rate increase, or a referral to the FAIR Plan. For years, insurers have been retreating from the state, citing wildfire losses, outdated regulations, and growing catastrophe risk.



Behind the headlines, however, a quiet revolution in insurance science is emerging — one that could change how California prices risk and rebuilds trust between consumers, insurers, and regulators. That revolution is catastrophe modeling.

During an April 2024 Department of Insurance workshop, insurance expert Karl Susman delivered a clear message:

“It’s time for California to follow the data — not the fear.”

His comments underscored both the urgency and the opportunity in embracing catastrophe models for rate-making. To understand why, it’s essential to first clarify what catastrophe modeling is, what it isn’t, and how it could reshape California’s insurance landscape.

What Catastrophe Modeling Is and How It Works

At its core, catastrophe modeling is a scientific method for predicting losses from natural disasters such as wildfires, earthquakes, floods, and hurricanes. It relies on complex computer simulations that evaluate:

• The probability of an event occurring
• The potential intensity of that event
• The exposure at risk, including homes, businesses, and infrastructure
• The vulnerability of those assets based on location, construction, and mitigation

By combining these variables, catastrophe models estimate potential losses across millions of possible scenarios, not just for a single property but across entire regions.

As Susman emphasized, this is not speculation or artificial intelligence guesswork. It is the same methodology used by reinsurers, capital markets, and most other U.S. states to set realistic and sustainable insurance rates.

“Catastrophe modeling isn’t a black box,” Susman said. “It’s a transparent, data-driven system that can make insurance both more available and more affordable if used correctly.”

California’s Regulatory Challenge Under Proposition 103

California stands apart from every other state due to its Proposition 103-era rate approval process. Enacted in 1988, Proposition 103 requires insurers to justify rates primarily using historical loss data rather than forward-looking risk analysis.

This backward-looking framework made sense when losses were relatively stable and climate patterns were predictable. Today, however, wildfires are larger, more frequent, and more destructive. The past no longer reliably predicts the future.

Because insurers cannot price risk accurately under the current framework, many have chosen to pause or withdraw business entirely rather than operate at guaranteed losses. Catastrophe modeling offers a bridge between outdated historical methods and modern climate-driven exposure.

“We can’t price tomorrow’s risk with yesterday’s data,” Susman said.

Why Catastrophe Models Are Used Nationwide but Not in California

Forty-nine other states already allow the use of catastrophe modeling in some form. Regulators in Florida, Texas, Colorado, and other high-risk states have relied on these models for decades to manage hurricane, wildfire, and storm risk.

California’s resistance is rooted in two primary concerns:

• Transparency, ensuring models are open to regulatory scrutiny
• Consumer protection, guarding against unjustified rate increases

However, as Susman noted, both concerns are manageable through proper oversight. Adoption does not require blind trust. It requires regulated use, peer review, and accountability.

“Transparency doesn’t mean paralysis,” he said. “We can regulate how models are used without ignoring them entirely.”

The Benefits of Data-Driven Rate-Making

If implemented effectively, catastrophe modeling could deliver meaningful benefits to both insurers and consumers.

More accurate risk assessment would allow models to account for local terrain, vegetation, wind patterns, and home hardening efforts. Homeowners who clear defensible space, upgrade roofs, and install ember-resistant vents could finally see those investments reflected in lower premiums.

Insurance availability would become more stable as insurers gain the ability to price risk with precision rather than withdraw from entire ZIP codes.

Premiums would become fairer, as property-level modeling reduces the need to spread risk broadly across entire regions. Lower-risk properties would no longer be forced to subsidize higher-risk areas as heavily.

Community-level resilience would improve because consumers would be incentivized to mitigate risk when they see tangible financial benefits.

“Cat modeling rewards behavior that makes everyone safer,” Susman said. “That’s good insurance, and good public policy.”

Debunking the “Black Box” Myth

Critics often characterize catastrophe models as opaque algorithms controlled entirely by insurers. In reality, many of the leading models have been tested and refined for decades by actuaries, researchers, and reinsurance markets worldwide.

Platforms such as RMS, AIR, and CoreLogic are already used to manage trillions of dollars in insured assets. The issue is not whether the models are credible, but whether California will implement the right oversight framework.

A transparent adoption process could include state-approved model vendors, regular audits and recalibration, public disclosure of assumptions, and regulatory authority to review or adjust outputs. The goal would be openness rather than secrecy.

Balancing Innovation With Consumer Oversight

Susman acknowledged that catastrophe modeling is not a cure-all. It cannot stop wildfires, eliminate losses, or make insurance inexpensive overnight. What it can do is restore a functioning market where pricing reflects real-world risk and responsibility is shared equitably.

“We can’t regulate our way out of climate change,” he said. “But we can regulate intelligently.”

With proper oversight, modeling becomes a tool of consumer protection rather than a threat to it.

A Turning Point in California’s Insurance System

The Department of Insurance workshop was part of Commissioner Ricardo Lara’s Sustainable Insurance Strategy, announced in late 2023. The initiative focuses on three major reforms:

• Allowing catastrophe modeling in rate-making
• Recognizing reinsurance costs in pricing
• Reducing reliance on the FAIR Plan by restoring private market participation

Together, these reforms represent the most significant modernization of California’s property insurance framework in more than 35 years.

Susman warned that continued delays will only deepen the crisis, driving more homeowners to the FAIR Plan and accelerating private carrier withdrawals.

“We’re seeing the consequences of inaction,” he said. “We need to modernize before the market collapses entirely.”

Why Catastrophe Modeling Matters to Homeowners

For homeowners, catastrophe modeling may sound abstract, but its impact is immediate and personal.

It directly affects whether coverage is available at all. It influences how much insurance will cost. And it determines whether home hardening and mitigation efforts are recognized financially.

This is not just an industry policy debate. It is a question of accessibility, affordability, and fairness.

“When homeowners make smart choices, they should see it reflected in their bill,” Susman said. “That’s the promise of modeling done right.”

The Path Forward: Following the Data

As wildfires intensify and climate volatility reshapes the insurance landscape, California faces a clear choice. It can cling to outdated formulas that no longer reflect reality, or it can adopt the best scientific tools available to manage modern risk.

Catastrophe modeling offers a path toward restoring balance, expanding availability, and rebuilding public trust. But it will require regulatory courage, insurer collaboration, and public transparency.

“We’re not asking for new rules,” Susman said. “Just for the ability to use the best tools we already have.”

The Bottom Line

California’s insurance crisis is at a crossroads. Continuing to rely solely on historical rate-making will deepen market instability and expand FAIR Plan dependence. Embracing catastrophe modeling — with strong oversight and transparency — offers a way to make insurance smarter, fairer, and more sustainable.

The real choice is not between data and consumer protection. It is about using data to protect consumers better in a world where climate risk is no longer theoretical.