More than 800,000 homes in California currently lack insurance coverage — 40% higher than the national average. As wildfires grow more frequent and severe, homeowners struggle to find insurers willing to cover their properties. The crisis became impossible to ignore after the Eaton and Palisades fires, when many residents found themselves displaced and uninsured. Public outrage quickly turned toward insurance companies, which were accused of abandoning homeowners in their time of need. Nevertheless, studies from the federal government and leading universities suggest that this trend began years before these fires started. They point to a different culprit: state-imposed price control regulation that makes it financially unsustainable for insurers to operate in high-risk areas.
Why? Insurance companies operate on probability and risk assessment. There is uncertainty in predicting the exact number of claims they will receive and have to pay out, so insurers rely on statistical models to adjust their premium prices. The insurers analyze past data and use probability to adjust that data for future trends. This allows insurers to offer premium prices that accurately reflect the risk associated with insuring someone’s life, property, land, and so on.
However, California’s Proposition 103 requires insurers to obtain government approval prior to increasing premiums. This is not an uncommon practice in other states. However, Proposition 103 goes further: it prohibits insurers from using forward-looking risk models that account for rising threats, such as climate change. This significantly impacts insurers’ ability to accurately allocate risk through the pricing of their insurance premiums in California. Proposition 103 forbids insurers from considering the increasing severity of wildfires, as they can only adjust their prices based on historical data. The problem arises as climate change has dramatically altered wildfire patterns — burn areas have grown fivefold since 1979, and the United Nations predicts a 57% increase in extreme wildfires by the end of the century. Nevertheless, because California law prevents insurers from pricing in this growing risk, the cost of insuring homes remains artificially low.
Insurance companies have had to reinvent their pricing structure to keep operating under this unsustainable business model. They began to raise the prices of premiums in lower-regulated states, subsidizing their operations in high-risk areas, such as California. This effectively and unfairly transferred the rising risk of climate change to homeowners living in less-risky areas, while artificially inflating home prices in those areas. However, this business strategy still doesn’t generate enough profit to allow insurers to operate in high-risk areas. Therefore, they have halted operations in areas where they have determined it is too risky to cover wildfires.
Another unexpected externality is that homeowners have been flocking to areas with a high risk of wildfires. There are two reasons for this. The first one is that home prices have been kept artificially low by insurance premium control measures that do not reflect the actual risk of wildfires. Attracted by low real estate prices, the demand for homes in high-risk wildfire areas has increased. The second factor is gentrification. As homes in high-wildfire-risk regions are destroyed, insurers are compelled to cover the costs of rebuilding. These rebuilds mean that homes tend to be newer, with better appliances. This works in conjunction with the previous factor: new homes in wildfire-prone areas are extremely attractive to new homeowners, as they are brand new and sold at low prices that overlook the risk of wildfires. Homeowners are being misled, and the California government ultimately puts the people it claims Proposition 103 is trying to protect in danger.
This does not mean that corporate greed should be left entirely uncontrolled by state regulation. Insurance companies operate as profit-maximizing businesses, and consumers need some degree of protection from this. However, California’s wildfire insurance crisis is a failure of policy that has distorted the way risk is priced and distributed. California should consider that its strict price control measures tend to dampen investment and growth. In this case, it even endangers possible homeowners. By forcing companies to rely solely on historical data, the law ignores the reality of a rapidly changing climate, leading insurers to withdraw from high-risk areas altogether. Without reform, what other possible remedies can the California government implement to address this crisis? It can only force insurers to operate in a market they are unwilling to or establish a state-sponsored insurance policy. Neither of these options looks sustainable in the long term.
To avoid further destabilizing its insurance market, California policymakers must permit insurers to utilize forward-looking risk models that account for climate change. The state’s focus should shift from suppressing premium increases to reducing actual wildfire risk—through stronger building codes, fireproofing incentives, and relocation programs for the most vulnerable areas. Without these reforms, the state risks deepening its insurance crisis: leaving more homeowners uninsured, more lives at risk, and an already fragile housing market on the brink of collapse.