Navigating Change in the California Insurance Market

Published Date: 11/26/2023

Navigating Change in California’s Insurance Market: Why Transition Is Painful—but Necessary

The California insurance market is undergoing one of the most profound transformations in its history. Homeowners and consumers are facing record premiums, fewer carrier options, and an avalanche of regulatory changes—all unfolding against the backdrop of climate change, inflation, and mounting catastrophe losses.

For those trying to make sense of it all, insurance expert Karl Sussman, host of The Insurance Hour, offers a clear-eyed perspective: change is coming, but the real challenge lies in the transition. “Change is easy,” he says, “but transition is hard.”

So, what exactly is driving this transition? Why are insurers pulling back? And what can Californians expect once the dust settles?

Let’s unpack the current state of California’s insurance crisis and the path forward.

The Perfect Storm: How We Got Here

Over the last two decades, California has faced a dramatic shift in its risk landscape. Catastrophic wildfires, once considered rare, are now almost annual events. Historically, the insurance industry expected a “catastrophic event”—defined as a loss exceeding $1 billion—about once every six or seven years.

Today, that cycle has collapsed. As of late 2023, the U.S. insurance industry had already experienced 28 catastrophic events nationwide—and the year wasn’t even over.

For insurers, this surge in frequency and severity has completely upended traditional pricing models. Their business depends on predicting losses based on past data, but climate change has broken those historical patterns. Events that used to be “once in a decade” are now happening multiple times a year, leaving carriers unprepared and unprofitable.

The ripple effects extend all the way through the industry—from frontline insurers to the reinsurance companies that back them. As reinsurance costs rise, many primary insurers have found it impossible to operate profitably in California’s high-risk environment. Some have paused writing new business altogether, while others have withdrawn from the state entirely.

The Consumer Squeeze: Fewer Options, Higher Premiums

When insurers exit the market, competition disappears—and prices climb.

As Sussman explains, the basic economics are unavoidable: “When you have lots of insurance companies offering coverage, competition drives prices down. When you have only a few, prices go up.”

That’s precisely what’s happening in California today. In many regions—particularly wildfire-prone areas—homeowners who once had seven or eight carrier options now have just one or two. And those remaining insurers can afford to be selective.

Underwriting requirements have tightened, premiums have soared, and in many cases, even qualified homeowners are being non-renewed. The state’s FAIR Plan, originally designed as a last-resort option, has ballooned into a primary market for thousands of residents.

The frustration is widespread. Consumers feel trapped, and agents are left delivering bad news. Yet, as Sussman emphasizes, the pullback isn’t driven by greed. “Insurance companies make money by selling insurance policies,” he says. “If they’re not selling, it’s because they can’t make money doing so.”

In other words: if there were a profitable way to offer coverage, they would.

The Department of Insurance Responds: A Push for Reform

California’s leadership recognizes that the system needs fixing. Governor Gavin Newsom has urged the California Department of Insurance (CDI) to “do its job” and restore a functioning marketplace.

In response, CDI has begun rolling out new regulatory guidelines aimed at making the state more hospitable to insurers—without compromising consumer protection. These reforms are designed to encourage carriers to return, restore competition, and ultimately bring premiums back down to sustainable levels.

Here are the key elements of that regulatory shift.

1. More Granular Risk-Based Pricing

Historically, insurers in California have priced policies based on broad geographic zones—for example, one rate for a ZIP code or community. That meant homeowners who invested in fire-hardening measures, newer roofs, or defensible space often paid the same premiums as neighbors who didn’t.

Under the new regulations, carriers will be allowed to use granular, property-specific data to calculate risk and set premiums.

This means your rate will reflect your actual property profile—not just your neighborhood’s. Homes that are better maintained, fire-resistant, or updated to modern safety standards will benefit from more accurate, often lower, pricing.

This move toward fairness also makes the market more transparent: consumers can directly influence their premiums through proactive mitigation efforts.

2. Incorporating Forward-Looking Models and AI

Perhaps the most revolutionary change is the shift from backward-looking to forward-looking modeling.

Previously, California regulators only allowed insurers to use historical data to set rates—looking back 20 years or more to estimate future losses. But in an era of rapidly changing climate patterns, those models are outdated the moment they’re built.

Now, insurers will be permitted to use predictive tools and artificial intelligence—provided they can justify their assumptions with verifiable data and mathematical rigor.

This allows insurers to factor in evolving wildfire risk, inflation, reinsurance costs, and climate trends. The result? Rates that more accurately reflect real-world exposure and allow insurers to operate sustainably.

While some consumer advocates worry that predictive modeling could open the door to unfair pricing, regulators promise strict oversight. The CDI will require transparency and proof that any data used is both accurate and equitable.

3. A Path Back to Competition

Once insurers can price policies accurately—and profitably—they’re expected to re-enter the market.

That influx of competition should naturally drive premiums down. “It’s just math,” Sussman explains. “If more companies are competing for your business, prices fall.”

This competitive return won’t happen overnight, though. As Sussman notes, we’re in the transition phase—the painful middle ground between an unsustainable status quo and a more stable future.

Right now, consumers are enduring higher prices and fewer choices. But these temporary hardships are part of a long-term correction. As the new rules take effect and insurers return, the market should become healthier, fairer, and more resilient.

What Consumers Should Do During the Transition

For homeowners struggling through this turbulent period, Sussman offers pragmatic advice:

1. Don’t drop your current policy.

If you’re lucky enough to still have coverage with a major carrier, keep it. Even if your premium has increased, you’re unlikely to find a significantly cheaper option right now. Losing your policy through non-payment or cancellation could make it extremely difficult to get reinsured.

2. Use automatic payments.

Avoid lapses at all costs. Missed payments could give insurers a reason not to renew you, and with limited carriers in the market, reinstating coverage is no guarantee.

3. Verify your insurer’s financial stability.

If you’ve been moved to a lesser-known carrier, check its financial rating on AMBEST.com. Smaller companies may be less stable, and you want to ensure your coverage will be there when you need it.

4. Be proactive about mitigation.

Implement fire safety upgrades, clear vegetation, and improve your home’s defensible space. These actions not only reduce your risk but will soon play a larger role in determining your rates.

5. Stay patient—and informed.

Understand that the current pain is temporary. California is rebuilding a system that better reflects today’s risk environment. When it stabilizes, consumers will benefit from fairer pricing and expanded options.

Why the Future Looks Brighter

Despite the frustration, there’s cause for optimism. The California Department of Insurance is embracing innovation, encouraging competition, and modernizing how risk is assessed.

The state’s new direction reflects a broader industry truth: insurance markets thrive on accurate data, not outdated assumptions. By allowing forward-looking modeling and property-specific pricing, California is setting the stage for a more equitable system—one where consumers pay rates that truly reflect their risk, not their ZIP code.

It also aligns incentives: consumers want to prevent losses, and insurers want to insure safer properties. As Sussman points out, “Our goals are really aligned. Consumers don’t want their houses to burn down—and neither do insurance companies.”

Final Thoughts: Transition Today, Stability Tomorrow

Right now, California’s insurance market feels chaotic, uncertain, and unfair. Premiums are high, options are limited, and frustration runs deep. But beneath the turmoil, meaningful reform is taking shape.

If California can successfully transition to a modernized, data-driven insurance system, it will pave the way for a resilient, competitive, and consumer-friendly market—one that can weather the challenges of climate change, economic pressure, and evolving risk.

Sussman’s reminder is worth keeping in mind: “Change is easy. Transition is hard.”

California is living through that hard part now—but what comes next could restore both competition and confidence to one of the nation’s most important insurance markets.