How regulation hurts the California insurance market

See Great Moments in Denying Reality by David Henderson. 

"California has some of the strictest insurance regulations in the country. It is the only state where insurers are not allowed to base their rate hikes on catastrophe models — forward-looking calculations of risk — or the rising cost of reinsurance premiums, according to both Zimmerman and the Department of Insurance.

Under current regulations, insurers are only allowed to use catastrophe models to calculate rates for earthquake insurance. One proposed change under the Sustainable Insurance Strategy would expand that to wildfire risk, as well as the risk of post-earthquake fires and terrorism. Another proposed regulation yet to be released would also allow insurers to incorporate reinsurance costs into rate hikes, the department previously announced.

The above quote is from Megan Fan Munce, “Major California home insurer could resume writing new policies. Here’s what it would take,” San Francisco Chronicle, April 24, 2024.

In case you haven’t heard, price controls on home insurance are causing a number of insurers not to write new homeowners’ insurance policies and, in some cases, to quit the business in California. The two paragraphs above lay out one important way in which prices are controlled. Insurers are not allowed to base rates on expected risks.

While my wife and I are lucky because State Farm has said it will renew our policy, I’m not so lucky in another role. I’m a limited partner who owns approximately 1% of a large apartment complex in Bakersfield. Our insurer has told the general partner that it will not renew our insurance and he has been unable to find any insurer that will."