Understanding Insurance Fairness: Navigating High-Risk Area Policies

Published Date: 07/26/2024

Understanding Insurance Fairness: Why Living in a High-Risk Area Costs More — and Why That’s Reasonable

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 pay far less. But is it unfair that riskier areas cost more to insure, or 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 explored 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.”

This shift from fairness to reasonableness is more than semantic — it’s central to understanding how modern insurance pricing works and why Californians in high-risk areas are paying what they are.

Defining Fairness vs. Reasonableness

When homeowners in wildfire-prone or rural areas open their renewal notices and see double-digit premium hikes, their first reaction is often anger. It feels unfair — especially if they’ve never filed a claim.

But as Lackey explained, “fair” is subjective. What’s fair to one person might feel unjust to another. “Reasonable,” however, can be explained, measured, 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 rates are calculated using actuarial science — a process that evaluates risk factors, loss history, exposure, and the cost of potential claims. When risk increases, so must the premium.

Wildfire-prone rural regions, for example, face far greater exposure than urban neighborhoods surrounded by concrete and hydrants. The same applies to properties near fault lines or floodplains.

In that sense, charging higher premiums for higher risk isn’t discrimination — it’s math.

The Rural Reality: Paying More, Getting Less

Assemblyman Lackey, who represents a largely rural district in California, acknowledged that many of his constituents are feeling squeezed.

“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 phrase — ability to pay — gets to the heart of the issue. When rates climb beyond what residents can afford, even “reasonable” premiums become unsustainable.

Lackey argued that while disparities between urban and rural areas are inevitable, regulators and insurers alike need to find a balance.

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

Entitlement or Expectation?

Susman asked an uncomfortable but important question:

“Do you think people in higher-risk areas feel there should be a way for them not to pay more just because of where they live?”

He shared an anecdote about a woman from Big Bear, who argued that her higher premiums were unfair because city dwellers 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 but stressed that insurance isn’t about shared experiences — it’s about individual risk.

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

In other words, while society may share certain costs collectively — like taxes or infrastructure — insurance is fundamentally a risk pool, not a social subsidy. If one property is far more likely to burn or flood, that risk must be priced accordingly, or else the entire system collapses.

Risk-Based Pricing: The Foundation of Insurance

To make the point clearer, Susman and Lackey drew an analogy to auto insurance.

“Auto rates depend on your zip code, accident frequency, and mileage,” Lackey noted. “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 agreed — and pointed out that this balance 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.”

That’s the essence of actuarial fairness: your rates are determined by your exposure to risk, not someone else’s.

It’s also why insurers can’t — and shouldn’t — charge everyone the same rate. Doing so would eliminate the financial incentive to reduce risk and could bankrupt insurers after major disasters.

The Catastrophe Conundrum

Still, Lackey acknowledged that recent years have tested even the most sophisticated risk models.

“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, which destroyed the town of Paradise, killing 85 people and leveling more than 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.”

That’s the new reality of climate volatility: events once considered rare are now alarmingly frequent.

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

Hope in “Reasonableness”

Despite the grim statistics, Lackey remains optimistic that a balance can be struck.

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

He believes transparency is key. If homeowners understand why they’re being charged certain rates, they’re less likely to feel targeted.

Susman agreed:

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

This kind of transparency, they argued, could go a long way toward restoring trust between insurers and consumers — something that has been eroding for years.

Leveling the Playing Field — Without Breaking the System

Lackey emphasized that while everyone deserves access to coverage, not all coverage can cost the same.

“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.”

That doesn’t mean nothing can be done. Policymakers and insurers can explore mitigation-based discounts, offering lower rates to homeowners who invest in fire-resistant roofs, defensible space, or community fire protection programs.

“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: A National Solution?

Before closing the segment, Susman mentioned an intriguing but little-known proposal: a federal bill introduced by Congressman Adam Schiff.

“It’s pending, but you don’t hear anything about it,” Susman said. “Every time I bring it up, people tilt their heads and say, ‘What are you talking about?’”

While the transcript didn’t go into detail about the bill, it likely refers to efforts to create a federal reinsurance or catastrophe fund — a mechanism similar to the National Flood Insurance Program (NFIP) that would help stabilize markets in disaster-prone states.

If passed, such a bill could provide a backstop for catastrophic losses, reducing the strain on state programs like the California FAIR Plan. However, critics worry that it could shift too much risk to taxpayers and further discourage private-market solutions.

Still, Lackey welcomed the discussion:

“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 Karl Susman and Assemblyman Tom Lackey wasn’t just about fire insurance — it was about honesty.

Honesty that some areas are riskier than others.
Honesty that insurance companies must be profitable to survive.
And honesty that “fair” doesn’t always mean “equal.”

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

As California grapples with rising wildfire frequency, stricter regulations, and a shrinking pool of private insurers, the challenge isn’t to make insurance cheap — it’s to make it sustainable.

Fairness, in this context, isn’t about making everyone pay the same. It’s about ensuring that everyone has access to coverage that’s actuarially sound, transparent, and — yes — reasonable.

Final Thoughts

For Californians living in high-risk areas, the path forward may mean accepting higher premiums — but also demanding better explanations and smarter policy design.

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

And for lawmakers like Tom Lackey, it means helping constituents understand that fairness in insurance isn’t about equality — it’s about equilibrium.

As Susman summed it up:

“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 to navigate a system caught between compassion and calculus — a reminder that in the world of insurance, fairness begins with facing the facts.