When insurance companies began not renewing tens of thousands of homeowners policies in California, should residents have complained more vigorously? Or should they have packed their bags?
Maybe they should have packed — and moved.
Insurance companies base prices in part on Cat Models, Catastrophe Models. These models help assess the future risk of losses in an area, and also help set the price of homeowners insurance.
These massive Cat Models consider all the information about the company's policies, home locations, physical characteristics of the insured properties, and insurance coverage amounts. They also consider fire conditions and history, economics (inflation), and the cost of reinsurance. When insurance companies started to pull out of California, Cat Models probably showed that the risks were too high, the potential losses too great, to even do business in state. It was a signal of unsustainable risk levels, according to the Cato Institute.
Every major insurance company estimates risk — and so do the companies that insure the insurance companies, called reinsurance companies. When these reinsurance companies estimated the risk was too great, they raised their own rates. But retail insurance companies could not raise rates because the state capped the rates, holding prices below market, according to Cato.
The intention was noble because California didn't want ordinary people to have to pay huge insurance rates. But the effect, in the end, was to make it impossible to insure the area at all, according to Cato.
According to Milliman PRM analytics, the insurance situation in California was dire before the fires of 2025. The 2017 wildfire season alone wiped out over 10 years of profits for California insurers. And that was followed by the disastrous 2018 season.
Milliman argues that Cat Models could also enable insurance companies to give discounts to homeowners who take fire mitigation efforts.
