Karl Susman's Comments at California DOI Catastrophe Modeling and Ratemaking Hearing - Sept 17, 2024

Published Date: 09/17/2024

The Future of Insurance in California: Why Catastrophe Modeling Matters

On September 17, 2024, the California Department of Insurance (CDI) held one of the most consequential public hearings in decades — a rulemaking session on catastrophe modeling and rate-making reform.

Among the speakers was Karl Susman, a 30-year insurance broker, expert witness, and host of Insurance Hour. His testimony captured both the urgency and the opportunity of this moment: a turning point for a state struggling to maintain an affordable, functioning insurance market in the face of growing climate risks.

Susman’s comments were clear and pointed: California’s insurance market is in freefall, and unless regulators modernize how insurers assess risk, availability will continue to collapse.

“Relying solely on historical data to project future losses is no longer sufficient,” he said. “The world has changed — and our tools to predict have to change as well.”

The Context: A Market on the Brink

California’s insurance market has been reeling for years. Increasingly destructive wildfires, rising reinsurance costs, and strict regulations under Proposition 103 have pushed major carriers to scale back or stop writing new business altogether.

• State Farm, Allstate, and Farmers have paused new homeowner policies in many regions.
• The state’s FAIR Plan, a last-resort insurer, now covers hundreds of thousands of homes — far beyond its original purpose.
• Rural and suburban communities are facing non-renewals, skyrocketing premiums, and shrinking options.

Susman called it plainly:

“The insurance market is in full free fall right now. Coverage isn’t available. The FAIR Plan is blown beyond its design parameters. Large insurers are having financial difficulties or leaving California.”

For regulators, the challenge is existential: how to stabilize the system without sacrificing consumer protection or transparency.

Why Catastrophe Modeling Is the Key

At the heart of the proposed reforms is a technical — but transformative — idea: allowing insurers to use forward-looking catastrophe models to set rates.

Historically, California has required insurers to base their pricing on past loss experience — meaning they can only use data from previous disasters, not predictive tools that estimate future risk.

That approach made sense decades ago, when disasters were relatively stable and predictable. But in an era of climate-driven wildfires, it no longer works.

“With the increased frequency and severity of wildfires and other climate-related events,” Susman explained, “they have outpaced our traditional methods of assessing risk.”

Catastrophe models use cutting-edge science — climate simulations, satellite data, topography, vegetation density, and building materials — to estimate how likely a property is to be affected by future disasters.

In short: they let insurers price risk based on what’s coming, not just what’s already happened.

Fairness Through Data: Rewarding Homeowners Who Protect Their Property

One of the most powerful arguments Susman made was about fairness.

“These regulations promote fairness,” he said. “Advanced models can account for risk mitigation efforts taken by property owners and communities.”

Under the old system, two homeowners in the same ZIP code might pay the same rate, even if one had cleared defensible space, replaced their roof with fire-resistant materials, and upgraded vents — while the other had not.

Catastrophe modeling fixes that. It allows insurers to differentiate between mitigated and unmitigated properties, rewarding those who invest in safety.

“When individuals invest in making their properties safer by clearing brush, installing fire-resistant materials, or implementing other safety measures, they deserve to see those efforts reflected in their insurance rates,” Susman said.

This isn’t just fair — it’s strategic. By financially incentivizing prevention, the system encourages widespread adoption of fire-safe practices, reducing the overall risk across communities.

Addressing the “Black Box” Myth

Perhaps the most contentious issue raised during the hearing came from critics who warned that catastrophe modeling could lead to “black box underwriting” — meaning insurers would use secret, proprietary algorithms to justify rate hikes without public scrutiny.

Susman directly challenged that claim.

“Let me tell you right now — this is not true. Just read the guidelines.”

He pointed to a new transparency safeguard written into the proposed rules: the Pre-Application Required Information Determination Procedure (PRID) — a mouthful, but a critical addition.

The PRID ensures that:

• Insurers must disclose the methodology and assumptions used in their catastrophe models.
• The Department of Insurance and the public can review these details before any rate approval.
• Proprietary information unrelated to rate-making (like trade secrets) remains protected — balancing transparency with intellectual property rights.

Susman even injected humor into his testimony:

“Anytime this morning you hear someone talking about black box underwriting, take out your bingo card and just write P-R-I-D. That’s what’s in the actual regulations.”

He emphasized that this process would actually give the public more information than they currently receive under existing law.

Balancing Openness and Innovation

Susman’s comments highlighted an often-overlooked truth: innovation and transparency are not mutually exclusive.

The PRID mechanism gives regulators and consumer groups full access to the inputs and logic of catastrophe models while maintaining the confidentiality of unrelated intellectual property.

This dual framework — openness for oversight, protection for innovation — could serve as a national model for other states grappling with similar issues.

“This balance promotes openness without compromising the intellectual property of model developers,” Susman explained. “It literally provides the public with more information than they are getting under today’s current regulations.”

A Warning Against Political Posturing

Midway through his remarks, Susman turned to a broader concern — the role of politics and special interests in delaying solutions.

“You might hear some folks this morning bemoaning these updated regulations,” he said. “Let’s not attack before something has even happened.”

He urged policymakers and advocacy groups to focus on outcomes, not ideology:

“Before you take any of those complaints to heart, just look to see who the people are complaining — and what they have to lose versus what the California consumer has to gain.”

The message was unmistakable: this moment is not about scoring political points. It’s about saving a market on the brink of collapse.

The Lose-Lose Question

One of the more nuanced points Susman made came in response to a common challenge:

“Do you have guarantees from the insurance industry that they will re-enter the California market if these regulations are implemented?”

He called it a “lose-lose question.”

If regulators say yes, critics accuse them of bowing to industry pressure. If they say no, opponents claim the reforms are pointless.

But as Susman explained, that’s the wrong way to frame it.

“The reality is straightforward,” he said. “The sustainable insurance strategy — and specifically utilizing forward-looking catastrophe modeling — creates an environment in which insurance carriers can compete effectively.”

Competition, he argued, is the real solution.

When insurers are able to price risk accurately, they can return to writing policies. When they compete, availability increases and affordability follows.

That’s not a promise — it’s economics.

From Crisis to Competition

The hearing underscored a reality that homeowners already feel every day: California’s insurance system is no longer sustainable.

But with modernized catastrophe modeling, transparent rate-making, and accountability built into the process, there’s a path forward.

“It isn’t about helping one person or organization,” Susman concluded. “It’s about maintaining the viability of the entire insurance industry in California.”

That viability matters to everyone — homeowners, businesses, and communities alike. Without a functioning private market, Californians are left with limited FAIR Plan policies, higher premiums, and greater exposure to financial loss.

The Broader Picture: California’s Sustainable Insurance Strategy

Susman’s testimony fits within the broader framework of Commissioner Ricardo Lara’s Sustainable Insurance Strategy, which aims to balance consumer protection with market stability.

The strategy includes:

• Using catastrophe models to reflect current and future risks.
• Recognizing reinsurance costs in rate-making — another long-overdue modernization.
• Requiring insurers to write more business in high-risk areas in exchange for these new flexibilities.

Together, these reforms could rebuild confidence among insurers and consumers alike — restoring a sense of normalcy to a market long defined by volatility and fear.

Why This Matters Beyond California

California is often the testing ground for national policy trends — and insurance is no exception.

Other states, from Florida to Colorado, are facing similar challenges: skyrocketing wildfire and hurricane risks, escalating reinsurance costs, and consumer outrage over affordability.

By implementing a transparent, data-driven catastrophe modeling system, California could set a new national precedent — one that proves it’s possible to balance climate realities with consumer fairness.

Final Thoughts: From Regulation to Renewal

Karl Susman’s remarks at the September 17 hearing captured the essence of California’s insurance crossroads.

• The old methods — based on history, not science — no longer work.
• The new tools — grounded in predictive modeling and transparency — offer hope for a sustainable future.
• The real challenge lies not in the math, but in the mindset — shifting from fear and politics to facts and progress.

“This isn’t the time for politics or special interest groups to try and stay relevant,” Susman warned. “It’s about math — and creating an environment where insurance companies can compete for business.”

California’s insurance crisis was decades in the making, but with leadership, innovation, and public accountability, its recovery can begin in earnest.

If implemented thoughtfully, the CDI’s catastrophe modeling reforms won’t just fix rates — they’ll rebuild trust in one of the most vital financial systems in the state.

“It’s about maintaining the viability of the entire insurance industry in California,” Susman concluded. “Because when the system works, everyone benefits — from the largest carrier to the single homeowner trying to protect their home.”