Catastrophe Modeling and California’s Insurance Future
Published Date: 09/17/2024
On September 17, 2024, the California Department of Insurance (CDI) held one of its 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 the moment: a turning point for a state struggling to maintain an affordable, functioning insurance market in the face of growing climate risks.
Susman’s message was direct: California’s insurance market is in freefall, and unless regulators modernize how insurers assess risk, availability will continue to erode.
“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.”
A Home Insurance Market on the Brink
California’s insurance market has been under strain for years. Increasingly destructive wildfires, rising reinsurance costs, and strict rules under Proposition 103 have pushed major carriers to scale back or stop writing new policies altogether.
Key pressure points include:
- State Farm, Allstate, Farmers, and others pausing or limiting new homeowners’ policies
- The California FAIR Plan — the last-resort insurer — now covering hundreds of thousands of homes
- Rural and suburban communities facing non-renewals, surging premiums, and shrinking options
Susman did not sugarcoat the situation:
“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 clear: stabilize the system without abandoning transparency or consumer protections.
Why Catastrophe Modeling Is Central to Reform
At the core of the proposed reforms lies a technical but transformative change: allowing insurers to use forward-looking catastrophe models when setting rates.
Historically, California has required insurers to base pricing largely on past loss experience. They’ve been limited to what has already happened, not what is likely to happen.
That backward-looking approach may have worked decades ago, but in an era of climate-driven wildfires and rapidly changing risk, it falls short.
“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 advanced science and data — climate projections, satellite imagery, topography, vegetation, and construction details — to estimate future risk at a granular level. In short, they let insurers price based on what’s coming, not just what’s in the rearview mirror.
Fairness and Incentives: Rewarding Mitigation Efforts
One of Susman’s strongest arguments in favor of catastrophe modeling 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 neighbors in the same ZIP code might pay similar premiums even if one had:
- Cleared defensible space
- Installed fire-resistant roofing
- Upgraded vents and siding
…while the other had not.
Catastrophe modeling changes this. It allows insurers to distinguish between mitigated and unmitigated properties, rewarding those who invest in safety with more accurate, often lower rates.
“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 approach doesn’t just feel fair — it also encourages wider adoption of fire-safe practices and reduces overall community risk.
Tackling the “Black Box” Myth
Critics of catastrophe modeling warned that it could lead to “black box underwriting” — secretive algorithms setting rates without meaningful oversight.
Susman addressed this concern head-on.
“Let me tell you right now — this is not true. Just read the guidelines.”
He pointed to a key transparency safeguard built into the proposed rules: the Pre-Application Required Information Determination Procedure, or PRID.
The PRID requires that:
- Insurers disclose the methodology and key assumptions behind their catastrophe models
- The CDI and the public can review how models are being used for rate-making
- Only truly proprietary elements unrelated to rate impacts are protected as intellectual property
Susman even added a bit of levity:
“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.”
His point was clear: the new rules would actually offer more transparency than the current system, not less.
Balancing Transparency and Innovation
Susman emphasized that innovation and openness do not have to conflict. The PRID process is designed to give regulators and consumer advocates meaningful visibility into how catastrophe models influence rates, while still protecting legitimate trade secrets.
“This balance promotes openness without compromising the intellectual property of model developers,” he explained. “It literally provides the public with more information than they are getting under today’s current regulations.”
In other words, the reforms aim to modernize risk assessment while strengthening, not weakening, public oversight.
Beyond Politics: Focusing on Outcomes
Susman also cautioned against letting politics or special interests derail needed reforms.
“You might hear some folks this morning bemoaning these updated regulations,” he said. “Let’s not attack before something has even happened.”
He urged decision-makers and the public to consider who is opposing the changes — and why.
“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.”
For Susman, the focus should remain on outcomes: a functioning insurance market where consumers can actually get coverage.
The “Guarantee” Trap and the Role of Competition
One pointed question raised at the hearing was whether regulators had any guarantees that insurers would return to the California market if these reforms were enacted.
Susman called that a “lose-lose question.”
If regulators say yes, critics accuse them of doing the industry’s bidding. If they say no, opponents argue the reforms are pointless.
Susman reframed the issue:
“The reality is straightforward. 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 lever. When insurers can price risk accurately, they are more likely to participate. When more carriers compete for business, availability improves — and pressure on prices follows.
It’s not about guarantees. It’s about building conditions where a healthy market can exist.
Connecting to the Sustainable Insurance Strategy
Susman’s testimony fits within the broader framework of Insurance Commissioner Ricardo Lara’s Sustainable Insurance Strategy — a plan designed to stabilize and modernize California’s insurance market.
Key pillars include:
- Allowing catastrophe models to reflect current and future risks
- Recognizing reinsurance costs in rate-making
- Requiring insurers to write more business in high-risk areas in exchange for these new tools
Together, these changes are intended to bring carriers back, reduce reliance on the FAIR Plan, and restore a baseline of normalcy to a market that has become unpredictable and strained.
Why California’s Reforms Matter Nationally
California is often a bellwether for national policy, and insurance is no exception.
States like Florida, Colorado, and Louisiana are facing similar challenges: severe climate risk, rising reinsurance costs, and public anger over affordability.
By crafting a system that:
- Embraces predictive catastrophe modeling
- Demands transparency through processes like PRID
- Balances consumer protection with market viability
California could set a template for other states searching for solutions.
From Crisis to Renewal: What’s at Stake
Karl Susman’s remarks at the September 17 hearing underscored that California’s insurance system has reached a critical inflection point.
The old, backward-looking methods can’t keep up with today’s climate risks. The new, data-driven tools — if implemented with transparency and accountability — offer a path to a sustainable future.
“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.”
Ultimately, the catastrophe modeling reforms are about more than just spreadsheets and algorithms. They’re about whether homeowners, renters, and businesses across California will continue to have access to meaningful insurance protection.
“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.”
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