Fairness vs. Risk in California Insurance Pricing

Published Date: 07/26/2024

When it comes to insurance, few topics spark as much debate as fairness. Homeowners living in wildfire zones, earthquake-prone regions, or rural communities often feel penalized by higher premiums and limited options, while their urban counterparts typically pay far less. But is it unfair that riskier areas cost more to insure, or is it simply reasonable?



In a recent Insurance Hour discussion, host Karl Susman and Assemblyman Tom Lackey — a former California Highway Patrol officer turned state legislator — tackled this very question. Their conversation peeled back the emotion and politics surrounding the issue and examined what “fair” really means in the context of insurance.

As Lackey put it, “Instead of using the word fair, what we really need to talk about is what’s reasonable.” That shift from fairness to reasonableness is central to understanding how modern insurance pricing works and why Californians in high-risk areas are paying what they are.

Fairness vs. Reasonableness in Insurance Pricing

When homeowners in wildfire-prone or rural areas open renewal notices showing double-digit premium increases, the first reaction is often anger — especially for those who have never filed a claim. It feels unfair.

But as Lackey explained, “fair” is subjective. What feels fair to one person may feel unjust to another. “Reasonable,” on the other hand, can be measured, explained, and justified with data.

“If insurers can explain the reason why these rates are where they are,” Lackey said, “then that meets the definition of reasonable. Because it’s hard to argue that any rate is truly fair.”

Insurance pricing is driven by actuarial science — the evaluation of risk, loss history, exposure, and claim costs. When risk increases, premiums must rise to match it. Wildfire-prone rural regions, earthquake zones, and properties near floodplains face far greater exposure than dense urban neighborhoods surrounded by infrastructure and emergency services.

In that sense, higher premiums in high-risk areas are not discrimination — they are the mathematical foundation of insurance itself.

The Rural Reality: Paying More, Getting Less

Assemblyman Lackey, who represents a largely rural district, acknowledged that many of his constituents are being squeezed by rising rates and shrinking options.

“Right now, the rates for some of these rural areas, in my opinion, are not reasonable,” he said. “Are they fair? Depends who you talk to. But reasonableness has to do with the ability to pay it.”

That concept — ability to pay — is where actuarial logic collides with economic reality. When premiums rise beyond what residents can afford, even technically “reasonable” rates become functionally unsustainable.

Lackey stressed that while disparities between regions are unavoidable, regulators and insurers must still seek balance.

“We’ve got to get there,” he said. “Because the public deserves that, and the institution deserves it.”

Entitlement vs. Expectation in High-Risk Communities

Susman raised a difficult question: Do people in higher-risk areas believe they shouldn’t have to pay more just because of where they live?

He shared a story of a Big Bear resident who argued that higher premiums were unfair because city residents benefit from her community’s tourism economy.

“I live in Big Bear,” she told him. “You come here to vacation. So, in a way, I’m subsidizing you when you visit — just like you subsidize me when I come to the city.”

Lackey sympathized with the sentiment but emphasized that insurance is not based on shared economic benefit — it’s based on individual risk.

“I don’t know how you get away from not doing that,” he said. “These are realities that exist.”

While society shares certain costs collectively through taxes and public services, insurance is fundamentally a risk-pooling system. If one property carries a much higher probability of loss, that risk must be reflected in pricing or the system fails.

Risk-Based Pricing as the Foundation of Insurance

To clarify the principle, Susman and Lackey compared property insurance to auto insurance.

“Auto rates depend on your zip code, accident frequency, and mileage,” Lackey said. “If you live in an urban area with lots of traffic, your likelihood of being in a collision is higher, so your rate is higher. In rural areas, it’s lower.”

Susman added that the reverse often goes unnoticed.

“People in high wildfire zones talk about how unfair property insurance feels,” he said, “but they benefit from lower auto insurance rates. It works both ways.”

This is actuarial fairness: your rate reflects your individual exposure to loss, not someone else’s. Charging everyone the same would eliminate incentives for risk reduction and could financially cripple insurers after major disasters.

The Catastrophe Conundrum and Climate Reality

Lackey acknowledged that recent years have pushed even the most advanced risk models to their limits.

“Because of the catastrophic circumstances over the last few years, many communities have been devastated,” he said. “We had an entire city go up in flames. That’s never happened before.”

He was referring to the 2018 Camp Fire that destroyed Paradise, claiming 85 lives and over 18,000 structures.

“Those claims were enormous,” he said. “And insurers call those ‘100-year events’ — but we’ve seen seven of them nationwide in just a decade.”

What were once rare outliers are now recurring realities. Climate volatility is reshaping what “reasonable” risk looks like.

“Clearly,” Lackey said, “something has to be adjusted somewhere.”

Finding Hope in “Reasonableness”

Despite the daunting trends, Lackey expressed cautious optimism.

“I do hope — and I have to have hope — that reasonableness can actually be reached,” he said. “But there are going to be disparities.”

Transparency, he argued, is essential. If homeowners understand how and why rates are set, trust can begin to rebuild.

Susman agreed.

“If insurers can show their math, people may not like the answer — but they’ll at least know it’s not arbitrary.”

Clear explanations and data-driven decisions, they suggested, are key to restoring confidence in a system many Californians now view as opaque and unfair.

Leveling the Playing Field Without Breaking the System

Lackey emphasized that equal access to insurance does not mean equal pricing.

“It’s like any form of insurance,” he said. “If you drive more miles, your rate goes up. If you live where fires are frequent, your property insurance goes up. These are realities that can’t be ignored.”

Still, there are ways to soften the impact without distorting the risk model. Policymakers and insurers can expand mitigation-based incentives, such as discounts for:

• Fire-resistant roofs
• Defensible space and vegetation management
• Community fire protection measures

“Maybe there are mitigating things we can do to soften it,” Lackey said. “Make it what I call reasonable. But first, we need to start being honest — that there are going to be disparities.”

The Federal Angle and National Risk Sharing

Before concluding, Susman referenced a little-known federal proposal introduced by Congressman Adam Schiff that could influence disaster insurance nationwide.

“It’s pending, but you don’t hear anything about it,” Susman said.

While details weren’t fully explored, the proposal likely involves a federal catastrophe backstop similar to the National Flood Insurance Program. Such a program could help stabilize disaster-prone insurance markets by sharing catastrophic risk at a national level.

Supporters see it as a possible solution to capacity shortages. Critics warn it could shift too much financial burden to taxpayers and discourage private insurers from staying in the market.

Still, Lackey welcomed discussion of the idea.

“Maybe we’ll have to face that at some point,” he said. “But we’ve got to talk about it.”

The Takeaway: Honesty, Transparency, and Balance

At its core, the conversation between Susman and Lackey was not just about wildfire insurance — it was about honesty.

Honesty that some areas are inherently riskier.

Honesty that insurance companies must be financially viable to provide coverage.

Honesty that “fair” does not always mean “equal.”

“Insurance people want to make a profit,” Lackey said. “But they also just want to be able to exist.”

As California faces rising wildfire frequency, tightening regulations, and a shrinking pool of private insurers, the true challenge is not making insurance cheap — it is making it sustainable.

Fairness, in this context, is not about uniform pricing. It is about ensuring access to coverage that is actuarially sound, transparent, and reasonable.

Final Thoughts

For Californians living in high-risk areas, the road ahead may require accepting higher premiums — while demanding clearer explanations and smarter policy design.

For regulators, it means carefully balancing consumer protection with market viability.

And for lawmakers like Tom Lackey, it means helping constituents understand that fairness in insurance is not about equality — it is about equilibrium.

As Susman summarized:

“Being honest about it, realizing that maybe it’s not all bad — that’s the first step. It’s a little bit of balancing the scale.”

Until that balance is restored, Californians will continue navigating a system caught between compassion and calculus — a reminder that in the world of insurance, fairness begins with facing the facts.