Political groups posturing in California claim loudly that carriers are charging their state far too much in insurance premiums – despite suffering losses, but new research from the Public Policy Institute of California has some interesting data to share.
We’ve already reported on figures that show that the Golden State’s policies may have warped national premiums so that some other states pay a disproportional amount for their insurance coverage.
And a new report by Augustina Ullman and Eric McGhee seems to reveal that indeed, California’s homeowners might seem unusually fortunate. Despite enduring some of the most intense and costly climate-related disasters in the United States - from megafires to mudslides - they continue to pay some of the lowest home insurance costs in the nation.
Figures from 2023 reveal that the typical Californian household spends just 4.6% of its homeownership expenses on insurance, well below the national average. In states like Louisiana and Oklahoma, that burden climbs to 12.8% and 12.3% respectively. Even as climate events have intensified and rebuilding costs soared, California’s insurance costs have remained relatively modest.
But what appears at first to be a windfall for consumers has, in fact, become the crux of a deepening crisis in the state’s insurance market.
California’s home insurance rates have long been shaped by Proposition 103, a 1988 measure requiring insurers to price policies using historic loss data, rather than forward-looking catastrophe models. While this has helped keep premiums affordable, critics argue that it has made the market increasingly untenable for insurers forced to operate in a high-risk environment while relying on backward-looking metrics.
“This approach made sense in a more stable climate,” said one analyst. “But with fire seasons lengthening and property damage reaching record levels, the rules haven’t kept up with the risk.”
Over the past five years, more than 100,000 homeowners have lost coverage, as seven of the twelve largest home insurers in the state have scaled back or withdrawn. In their place, many residents are turning to the California FAIR Plan - the state’s insurer of last resort. While it provides a safety net, the FAIR Plan offers limited cover at a higher cost and has been forced to expand rapidly to meet growing demand.
The paradox of California’s insurance market is laid bare in the contrast between its affordability and its fragility. In Northern California - where wildfire devastation has been most severe - the insurance burden has risen to 7.7%, compared to 4–5% in coastal cities like San Francisco and San Diego. But even these higher burdens pale in comparison to those in parts of the southern United States.
This imbalance masks a more concerning trend. As Sean Kevelighan, CEO of the Insurance Information Institute (Triple-I), noted, “Insurers have sounded the alarm… but change has been slow and the consequences are now clear.” According to Triple-I, the state’s regulations, though well-intentioned, have limited insurers’ ability to cover reinsurance costs and accurately price for wildfire risk — forcing many to pull out or drastically reduce their exposure.
In an effort to stabilise the situation, California Insurance Commissioner Ricardo Lara has rolled out what he calls a Sustainable Insurance Strategy. This includes allowing reinsurance costs and catastrophe modelling to be incorporated into pricing - a significant regulatory shift.
More immediately, Lara has expanded the FAIR Plan’s coverage limits, enabling it to offer up to 20 million dollars in commercial property cover per building and 100 million dollars per location. Residential limits were previously doubled to three million dollars, and policyholders are now eligible for mitigation discounts and more flexible payment options.
“This targeted FAIR Plan expansion helps meet the urgent needs of homeowners associations, affordable housing developers, farmers, builders, and business owners who are being priced out or left without coverage altogether,” Lara said.
But even supporters of these reforms acknowledge they are only a stopgap. The long-term stability of California’s insurance system will depend on whether private insurers feel confident enough to return to the market — something that hinges not just on climate trends, but on regulatory clarity and actuarial freedom.
For now, California homeowners are still enjoying relatively inexpensive insurance, especially compared to peers in equally risky environments. Yet this affordability is increasingly underwritten not by actuarial prudence, but by regulatory constraints and a last-resort scheme nearing capacity.
As the state faces what may be another year of billion-dollar disasters, experts warn that unless reforms take hold and market dynamics improve, the era of low insurance costs in California could prove dangerously unsustainable.
