California—known for breathtaking landscapes, ideal weather, and cultural diversity—is facing a financial inferno, burning through the housing market and leaving behind uncertainty as to the future of property ownership in the Golden State. In the past five years, nearly 25,000 Californian homes and buildings burned to the ground [1]. However, those left homeless are just a small fraction of the victims of the ever-increasing amount of wildfires plaguing our state; every Californian is feeling the heat. This uniting force is not flames or smoke but home insurance companies who, frustrated by California’s laws, are attempting to destroy Californians’ ability to buy a home. These companies are abandoning the California home insurance market because of increasing natural disasters due to climate change, leaving consumers effectively stranded. The insurance companies have forced the state government into a painful position, and the only viable short-term solution to the crisis is to yield to insurance companies’ demands and allow the insurance market to fluctuate, hoping that competition will naturally monitor prices. 

The goal of a market economy is for supply to meet the level of demand, and the current California Insurance Crisis is a market failure. Some of the largest home insurance suppliers in the country are pulling out of California entirely due to perceived risks. Most notably, State Farm, Allstate, and USAA have stopped writing new policies; these three companies represent more than half of California’s $12 billion home insurance market [2]. Many companies have refused to renew their existing customers’ insurance plans, and others are slowly beginning to write fewer new policies. In all fairness to these companies, they aren’t withdrawing from the market as revenge—they are simply unable to make a profit in California. Over the past ten years, direct profit on insurance transactions has been negative, with a measly 0.8% direct return on net wealth while the nationwide average is 7% [3]. These companies are rationally pulling out of a market where they project high future losses, but that doesn’t lessen the consumer demand for their services. While home insurance is not required by law, it is required to obtain a mortgage. As a result, the people most affected are middle-class homebuyers who cannot afford to purchase a home without a mortgage. 

Adding fuel to the fire is the issue of urgency, and we’re quickly beginning to see the effects of this insurance market chaos. The government does not have time to conduct studies on the market and carefully plan an intervention. In order to mitigate the crisis, the only choice is to pass policy now. By 2021, of the 13.3 million households in California, 235,000 faced insurance non-renewals—almost an entire 2% of the homes in California [4]. This means that around 700,000 people had their home insurance torn away from them. It would be extremely difficult to estimate the number of people who attempted to obtain a mortgage, were continually rejected by insurance companies, and were therefore unable to buy a home. It is important to note that these statistics are from 2021—State Farm and Allstate stopped writing new policies in 2023, and the number of recent non-renewals is not yet known. In the short-term, an unknown amount of Californians have and will continue to lose their homes to natural disasters. They will be left with absolutely nothing. In the past five years, 25,000 homes burned down; with the changing climate, it is unrealistic to expect that number to decrease in the future. 

If California doesn’t address this issue immediately, the long-term consequences have the potential to completely upend California’s economy and significantly expand income inequality. The average American household has $41,600 in savings, and the median household has $5,600 in savings [5]. The average transaction account balance of the 90th to 100th percentile–the top 10% wealthiest people–is $111,000 [6]. Meanwhile, the average price of a single-family home in California is $750,709, and the median price is $693,667 [7]. The proportion of Americans with $700,000 on hand between their transaction accounts is 0.65%. 

When no one can buy property except those who are able to pay the full cost upfront, the lower, middle, and even most of the upper class will lose the ability to buy property. For most people, a home is the largest long-term investment they will ever make in their lifetime and the starting point for accumulating generational wealth. Without insurance and therefore unable to obtain a mortgage, they will no longer have this opportunity. The upper-upper class, who can afford to swoop in and buy uninsured property, will collect more and more properties, renting them out as a form of passive income. Suddenly, California has become an economy where the middle and lower classes are permanently locked in rental agreements, with no shot of buying their own property while the rich grow wealthier. The state government must act now to ensure California’s future isn’t characterized by an exponentially widening wealth gap. 

Wannabe homeowners still have a shot at a mortgage through what is known as the Fair Access to Insurance Requirements (FAIR) plan overseen by the California Insurance Commissioner. This insurer of last resort is meant for those who have been rejected by regular insurance companies. The FAIR plan, although conducted by the government, is not funded by taxpayer dollars. All licensed private insurers in the state are required to fund the plan, sharing both the profits and risk across the entire market [8]. This means that when companies pull out of California, they pull support for the FAIR plan. Therefore, these insurance companies not only abandon the market, but they simultaneously destroy Californian consumers’ only backup plan. The FAIR plan also isn’t meant to be accessible—it’s actually more expensive than private insurance on average [9]. Still, the FAIR plan has more than doubled in size between 2018 and 2022 [10]. Consumers cast off by private insurers are already beginning to pay more by relying on the FAIR plan. Yet if a greater share of consumers must be covered by the FAIR plan, then it will impose a greater cost burden on whichever insurers remain in California, which could make these insurers more likely to follow in the footsteps of other companies and pull out of the state. In a domino effect, large insurers pulling out will increase consumer reliance on the FAIR Plan, increasing financial burdens on small insurers, which may push small insurers out. Essentially, the largest insurers have such a handle on the delicately balanced insurance market that if they continue pulling out, they will drag every other insurer and insurer-of-last-option with them, creating a violent policy failure that will forever change property ownership in California. 

Until this recent crisis, California’s insurance policy succeeded in protecting consumers from corporate greed. Despite California’s land being in high demand— and notoriously expensive—it still has the second-lowest average home insurance rate in the country [11]. Nationwide, the average cost of home insurance is around $2,777 annually, while Californians pay around $1,380 despite being in the state most prone to natural disasters [12]. The reason behind this strong consumer protection is 1988’s Proposition 103, which created a system where insurers must request government approval for any rate hikes, and the newly-created Insurance Commissioner is responsible to decide which are accepted and which are denied [13]. This gave the Insurance Commissioner the authority to determine the specific conditions under which rate increases can be approved, keeping a strict handle on the otherwise volatile industry. Insurance companies were frustrated by these restrictions on when and why they could raise rates, causing them to put intense pressure on the Insurance Commissioner for decades. Every day, new rate hike requests come in, and as soon as one is approved, there is another the next day. For decades, this system did its job of protecting consumers until the largest insurers decided it was no longer worth it to conduct business in California.

The current policy response to the California Insurance Crisis is still essentially in progress, but it is not enough to fully address the potential dangers of this crisis. An executive order from the governor in September 2023 forced the Insurance Commissioner into action. By December, the Department of Insurance announced “California’s Sustainable Insurance Strategy” as a policy response to the crisis taking over the insurance market [14]. This new strategy laid out new terms for how the Insurance Commissioner would evaluate rate hikes, specifically aiming to benefit the top 12 home insurance companies in the state which account for 85% of the insurance market. In order to tempt these companies to come back to California, the Insurance Commissioner agreed to allow estimates of future losses using catastrophe modeling as reasoning for rate hikes. Previously, companies could only use historical losses. The Commissioner also agreed to expedite rate hike reviews, improve rate hike filing procedures, and increase transparency. In return, insurance companies must agree to write no less than 85% of their market share in the areas most affected by the crisis [15]. This is the largest insurance reform in California since Proposition 103, which created the system of state approval for rate hikes. While it may take up to a year and a half to fully implement these revisions [16], this policy response is unlikely to have as large of an effect as needed in order to stabilize the market. 

While the current steps are meaningful, it is like throwing a bucket of water onto a wildfire. California lost control of its insurance market the day State Farm announced they would stop writing new policies in the state. Promises to expedite the rate hike review process may be convenient, but they are far from enough to bring companies back into a market where they see continual losses. Allowing companies to use disaster modeling for rate increases will allow companies to dramatically increase their rates—sparking intense backlash from groups like Consumer Watchdog who say the Insurance Commissioner is selling out to greedy insurance companies [17]. At this point, the government has no choice but to do anything in order to bring insurers back. If insurers keep leaving, the government will not have the funds to subsidize the increasing demand for the FAIR plan. California needs to take dramatic action now to convince insurers it is worth it to take on new high-risk policies and then begin to regulate again once they mitigate the short-term crisis. 

As disheartening as it is for the consumer, it is time to let the market shape insurance rates by significantly lowering the requirements for rate increase approval while simultaneously limiting non-renewals. California is a disaster-prone state with some of the highest rebuilding costs in the country [18], so it makes sense for our state to have higher insurance rates than average. Keeping Californian rates so low is not sustainable, making this crisis near inevitable. The only way to bring insurers back is to be generous with rate hike approvals. By limiting non renewals, California can ensure obtaining insurance becomes reliable, even if it is more expensive. By allowing dramatic rate increases, insurers will be encouraged to take on new business in the state, and therefore increase their contributions to the FAIR plan—which could allow for FAIR plan rates to lower—making it more than just the insurer-of-last-resort, but instead a viable competitor in the market. 

While reducing the amount of governmental regulation exercised over rate hikes will no doubt dramatically increase costs to the consumer, the market’s natural regulation will keep from price gouging. Despite the large market share State Farm and Allstate hold, home insurance is still considered a highly competitive industry with low economic concentration [19]. This is significant because it means that competition between firms will ideally keep prices feasible without the non-discretionary hand of the state government keeping them artificially low. Once rates rise and companies are actively competing to increase their market share, the state can raise the financial burden of the FAIR plan on competitors and use the added revenue, along with the decreased clients as consumers switch to cheaper private plans, to decrease rates for those who are in high-risk privately uninsurable areas. 

Of the other suggested options for alternative policies that will coax insurance companies back into California, most aren’t feasible or are too insignificant to adequately address the problem. The Federal Insurance Office, part of the US Treasury, issued a report outlining 20 recommendations for state insurance regulators to deal with a wave of insurance crises [20]. Most of the recommendations are essentially bureaucratic and overly vague, but a few stand out. One option is to subsidize insurance for lower income people to keep insurance accessible even in the midst of a market crisis. While this may be a short-term solution for other states, California is currently dealing with a $68 billion deficit meaning we do not have the ability to hand out non-essential subsidies [21]. Another option suggested is state encouragement of “managed retreat”, which essentially encourages people to move away from the areas most prone to natural disasters. Besides encouraging consumer abandonment, this solution destroys established communities and forces population concentration. The only viable option is to reduce the heavy hand of state regulation and allow for rates to increase while the root cause of the issue is addressed. 

The California Insurance Crisis is the complex consequence of a high-risk market with intense price restrictions that benefited the consumer for decades, but it is beginning to blow up in our faces. The short-term policy response should be to loosen governmental restrictions and free up market competition. This will bring stability back to the market, and, hopefully, market competition will mitigate the extra costs imposed on consumers. Overall, the California Insurance crisis demonstrates the power climate change has over markets and property ownership and the consequences of inaction in proactively mitigating natural disasters.