Trends and Insights: California’s Risk Crisis

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Even as California moves to address regulatory obstacles to fair, actuarially sound insurance underwriting and pricing, the state’s risk profile continues to evolve in ways that underscore the importance of risk-based insurance pricing and investment in mitigation and resilience.

In a dynamically evolving risk environment that includes earthquakes, drought, wildfire, landslides, and -- in recent years, due to “atmospheric rivers” – damaging floods, Proposition 103 has made it hard for insurers to profitably write coverage in the state. In some cases, this has led to insurers deciding to limit or reduce their business in the state.

With fewer private insurance options available, more Californians are resorting to the state’s FAIR Plan, which offers less coverage for a higher premium. This isn’t a tenable situation.

In September 2023, California Insurance Commissioner Ricardo Lara announced a Sustainable Insurance Strategy for the state that includes allowing insurers to use forward-looking risk models that prioritize wildfire safety and mitigation and include reinsurance costs into their premium pricing. In exchange, insurers must cover homeowners in wildfire-prone parts of the state at 85 percent of their statewide coverage.

(As of March 6, 2024)