Karl Susman Comments during Workshop Regarding Catastrophe Modeling & Ratemaking - April 23, 2024
Published Date: 04/23/2024
Catastrophe Modeling and California’s Insurance Future: Why It’s Time to Follow the Data
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 For years, insurers have been retreating from the state, citing wildfire losses, outdated regulations, and growing catastrophe risk.
But behind the headlines, 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 called catastrophe modeling.
During an April 2024 Department of Insurance workshop, insurance expert Karl Susman delivered a clear and powerful 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, we first need to unpack what catastrophe modeling is, what it isn’t, and how it could reshape the state’s insurance landscape.
What Is Catastrophe Modeling?
At its core, catastrophe (cat) modeling is a scientific way to predict losses from natural disasters like wildfires, earthquakes, floods, or hurricanes. It uses complex computer simulations that factor in:
- The probability of an event (like a wildfire igniting),
- The intensity of that event (how large or destructive it becomes),
- The exposure at risk (homes, businesses, infrastructure),
- And the vulnerability of those assets (materials, location, fire mitigation).
By combining all these variables, models estimate potential losses — not just for one property, but across millions of possible scenarios.
As Susman explained, this isn’t “guesswork” or “AI magic.” It’s the same modeling that reinsurers, the global capital markets, and most other U.S. states already rely on to set fair and realistic rates.
“Catastrophe modeling isn’t a black box,” he said. “It’s a transparent, data-driven system that can make insurance both more available and more affordable if used correctly.”
The Regulatory Backdrop: California’s Unique Challenge
California stands apart from every other state in one major way: its Proposition 103-era rate approval process. Enacted in 1988, Prop 103 requires insurers to justify rates based primarily on historical loss data — what’s already happened — rather than on forward-looking risk models that reflect the new reality of climate volatility.
This backward-looking rule made sense when losses were relatively stable. But as wildfires have grown larger, more destructive, and more frequent, past data no longer predicts the future. Insurers, unable to charge actuarially sound rates, have chosen to pause or withdraw business entirely.
Catastrophe modeling represents the bridge between these outdated methods and modern climate risk. It offers a statistically rigorous way to project future exposure based on current science — something traditional models simply can’t do.
Susman framed it succinctly:
“We can’t price tomorrow’s risk with yesterday’s data.”
Why Every Other State Uses Catastrophe Models — and California Doesn’t
Forty-nine other states already allow catastrophe modeling in some form. Regulators in places like Florida, Texas, and Colorado have used it for decades to manage hurricane and wildfire risk. The models aren’t perfect, but they provide a shared framework that helps insurers stay solvent while giving consumers access to coverage.
California’s reluctance stems from two concerns:
- Transparency — ensuring that models are open to regulatory review and not proprietary black boxes.
- Consumer protection — fears that models could justify excessive rate hikes.
But as Susman pointed out, both of these challenges are manageable. The goal isn’t blind trust in technology; it’s regulated adoption. California can — and should — require model disclosure, peer review, and periodic recalibration.
“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 unlock multiple benefits for both insurers and policyholders:
1. More Accurate Risk Assessment
Models account for local topography, vegetation, wind patterns, and even home hardening efforts. That means homeowners who take proactive steps — clearing defensible space, upgrading roofs, installing ember-resistant vents — could finally see those investments reflected in their premiums.
2. More Stable Insurance Availability
When insurers can price risk more accurately, they’re less likely to exit markets entirely. Instead of blanket withdrawals, companies can differentiate by region, exposure, or mitigation level.
3. Fairer Premiums
Rather than averaging risk across entire ZIP codes, catastrophe models enable property-level precision. Homeowners in lower-risk zones may no longer be forced to subsidize higher-risk areas.
4. Enhanced Climate Resilience
When consumers see that mitigation lowers their cost, they’re incentivized to harden homes, clear vegetation, and retrofit structures — all of which reduce community-level losses over time.
“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 portray catastrophe models as opaque algorithms controlled by insurers, hidden from regulatory or public scrutiny. But as Susman emphasized, these models are not new, not secret, and not untested.
Most have undergone decades of validation by actuarial societies, reinsurance markets, and academic researchers. Models like RMS, AIR, and CoreLogic are widely used to manage trillions in insured assets worldwide.
The real question, he noted, isn’t whether the models are “trustworthy” — it’s whether California will establish the right oversight framework to ensure accountability.
A transparent adoption process might include:
- State-approved model vendors and methodologies,
- Periodic audits or calibration updates,
- Public reporting requirements on model assumptions, and
- Regulatory authority to review or adjust outputs before approval.
In short: sunshine, not secrecy.
Balancing Innovation and Oversight
During the workshop, Susman acknowledged that catastrophe modeling isn’t a silver bullet. It can’t eliminate risk, stop wildfires, or make insurance cheap overnight. But it can restore a functioning market, where both carriers and consumers understand the true cost of risk — and share it fairly.
“We can’t regulate our way out of climate change,” he said, “but we can regulate intelligently.”
By embracing model transparency, the Department of Insurance can empower actuarial science to work as intended — not as an adversary to consumer protection, but as its ally.
A Turning Point in California’s Insurance History
The workshop was part of Commissioner Ricardo Lara’s Sustainable Insurance Strategy, announced in late 2023. This initiative aims to modernize the state’s insurance framework through three key reforms:
- Catastrophe modeling in rate-making,
- Reinsurance cost recognition, and
- FAIR Plan depopulation through a return of private carriers.
Taken together, these changes represent the most significant overhaul of California’s property insurance system in 35 years.
Susman’s remarks reflected broad industry sentiment: that data-driven pricing, guided by strong oversight, is the only path forward.
He warned that delaying adoption would deepen the crisis. Without reform, more insurers will limit exposure, and homeowners will face spiraling FAIR Plan dependence — a state-run system never meant to serve as a permanent market replacement.
“We’re seeing the consequences of inaction,” Susman said. “We need to modernize before the market collapses entirely.”
The Consumer Perspective: Why It Matters
For California homeowners, catastrophe modeling may sound like an abstract regulatory issue. But its real-world implications are immediate and personal:
- It could determine whether you can get insurance at all.
- It could affect how much you pay for coverage.
- It could decide whether your home improvements actually matter to your premium.
In other words, this isn’t about industry theory — it’s about accessibility, affordability, and fairness.
Susman believes consumers deserve to see the benefits directly. “When homeowners make smart choices, they should see it reflected in their bill,” he said. “That’s the promise of modeling done right.”
The Path Forward: Following the Data
As wildfires grow more destructive and the insurance market strains under the weight of climate risk, California’s future depends on science, not sentiment.
Catastrophe modeling offers a path to modernize the system, protect consumers, and restore balance to an industry on the brink. But doing so will require courage from regulators, collaboration from insurers, and clarity for the public.
Karl Susman’s message to policymakers is as simple as it is urgent:
“We’re not asking for new rules — just for the ability to use the best tools we already have.”
Key Takeaway
California stands at a crossroads. Clinging to outdated rate-making formulas will only deepen the crisis. But embracing catastrophe modeling — with transparency and accountability — can make insurance smarter, fairer, and more sustainable.
In the end, the choice isn’t between data and consumer protection. It’s about using data to protect consumers better.
Author