The Los Angeles Fires Will Put California’s New Insurance Rules to the Test: The state’s insurance industry was reformed in late 2024 to promote coverage in disaster-prone areas. Tens of billions in fire damage will stress-test the new regime.

> In return for this added coverage, the state is making a few big tweaks that will allow insurers to pass on the price of fire risk to their customers. California is the only state in the country that doesn’t allow insurance companies to use forward-looking “catastrophe models” when they set prices. It also prohibits companies from factoring in the rising costs of reinsurance, the insurance purchased by insurance companies to ensure they’re able to pay out big claims.

> These two restrictions have kept prices artificially low for years, and also prevented insurers from planning for climate change impacts, creating a de facto subsidy for homeowners in risky areas.

> “This addresses the major stumbling blocks that companies have been identifying for a decade, so that’s a positive,” said Rex Frazier, the president of the Personal Insurance Federation of California, the state’s leading insurance trade group.

> This trade-off has some residents in fire-prone areas worried. Insurance companies might now have to offer more policies in flammable zones, but they also have more latitude to increase prices.

This was the part that interested me. Apparently California was limiting the ability of insurances to rise prices so insurers dropped people’s coverages. Now they can charge closer to market-rate prices for their fire insurance. Still not sure if this will be enough, companies have been pulling out of Florida (where I live) like crazy due to climate change induced hurricanes and insurance is still expensive. It looks like Cali will be in a similar position soon.

TL;DR – California’s insurance regulation might as well be some right-wing caricature of government regulation run amok.

To understand the extent of the “insurance crisis” in California, you need to understand how insurance regulation works. Insurance is unique in that it is regulated at the state level (Dodd-Frank created a federal insurance office but it’s pretty irrelevant). When a company wants to sell a homeowners insurance policy, they have to go to a state’s department of insurance and disclose their pricing formula, which the state can refuse to approve (in homeowners insurance it’s common to require approval of changes before putting them into the market – California requires this). So the way it usually works is that an insurer puts together a set of documents (there’s industry standard practices but few requirements), there’s some back and forth, and maybe a few months later the rate change gets approved (if reasonable). California on the other hand has multiple required templates that you have to fill out. Once you submit those you embark on the journey of an approval process that will likely require many many back and forths over the course of at least A YEAR. The process of getting approval is so bad that there is an industry consultant who goes around peddling their influence, having “trained” some of the state at the California Department of Insurance (I personally sat through a pitch).

California, in short, has tried to implement price controls, “in the interest of consumers”, but has royalty f’d up their insurance market. I can go on and on about how until the recent reform the state required you to use 20 years of data for wildfire risk (what’s climate change) or the hair-brained rollout of the defensible space requirements, but suffice it to say that for those in the insurance industry works with California can turn a Leslie Knope into a Ron Swanson pretty quickly.