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Cali insurance, tariffs, good read,


" Before the devastating fires of 2025, California’s fire insurance market was already in a state of crisis, shaped by a combination of regulatory constraints, insurer withdrawals, and mounting wildfire risk.


Insurers were prohibited from using forward-looking catastrophe models to set rates for wildfire risk. Instead, they were required by law to base their rates on historical average losses over the previous 20 years. This approach became increasingly problematic as wildfires grew more frequent and severe, making historical data a poor predictor of future risk. Regulations also prevented insurers from raising premiums to reflect increased reinsurance costs, further limiting their ability to price policies according to actual risk.


Major insurers began withdrawing from the California market or ceasing to write new policies in fire-prone areas. Chubb stopped writing new policies for high-value homes in 2021, Allstate followed in 2022, and State Farm, the state’s largest home insurer, stopped writing new policies in 2023. In 2024, State Farm announced non-renewals for over 70,000 policies statewide, including thousands in high-risk areas like Pacific Palisades and Altadena, just months before the 2025 fires. Other insurers, including Tokio Marine America and its subsidiaries, also exited the market in 2024.


Homeowners who managed to keep their policies often faced dramatic premium hikes. For example, some saw their annual premiums rise from $4,500 to $18,000. As a result, many property owners either lost coverage or could not afford to insure their properties, leading to widespread underinsurance. By the time of the 2025 fires, fewer than a quarter of affected properties were insured against fire."


https://www.oaktreecapital.com/insights/memo/more-...

What people living on the Pacific Palisades, on east coast barrier island or in midwest flood zones forget (doublethink?) is that insurance companies are businesses which have to make profitable decisions, not public charities. In a similar vein, neither should the federal government be. If people insist on living in vulnerable areas (especially those wealthy enough to live "anywhere"), they should either take the risk of "self-insuring" or pay a fair price based on the actuarial probability that their house will have to be replaced in a relatively short period of time. This is not the insurance companys' fault nor the government's.

Jeff

At last, a voice of rationality!

"What people living on the Pacific Palisades, on east coast barrier island or in midwest flood zones forget (doublethink?) is that insurance companies are businesses which have to make profitable decisions, not public charities. In a similar vein, neither should the federal government be. If people insist on living in vulnerable areas (especially those wealthy enough to live "anywhere"), they should either take the risk of "self-insuring" or pay a fair price based on the actuarial probability that their house will have to be replaced in a relatively short period of time. This is not the insurance companys' fault nor the government's."

This is a legitimate point of view, but not entirely fair. The homeowners neither create the risk nor can they abate it except by relocating. The government and the utilities are the ones in control. The onus should be on them to protect the public. The homeowner is basically defenseless. They don't approve the utilities' plans nor allow building in fire-prone areas. Why do they bear so much of the risk?

Insurance is an extremely valuable mechanism for spreading these kinds of inevitable risks. If the system fails, it is bad for all. But requiring local homeowners to absorb all of the increased costs of growth and development is also problematic. People aren't going without insurance as a form of protest -- they can't afford it.

Perhaps the cost of insurance in certain areas should be subsidized by the utilities or the government? The policy justification would be that universal basic honeowner's coverage, like universal basic medical insurance, is desirable for lots of reasons. We'd just have to figure out how to pay for it lol. I am sure Ajit and Greg are thinking about this as we speak.

abromber

" Perhaps the cost of insurance in certain areas should be subsidized by the utilities or the government? The policy justification would be that universal basic honeowner's coverage, like universal basic medical insurance, is desirable for lots of reasons. We'd just have to figure out how to pay for it lol. I am sure Ajit and Greg are thinking about this as we speak.

abromber"

Nevada is one of the driest states. Decades ago, we aggressively began our conservation programs to use water more efficiently. We pulled landscaping front and back of the house and replaced it with rock etc. These areas need to be rebuilt with fire risks as a top priority if homeowners expect affordable insurance, with high deductibles.

What people living on the Pacific Palisades, on east coast barrier island or in midwest flood zones forget (doublethink?) is that insurance companies are businesses which have to make profitable decisions, not public charities. In a similar vein, neither should the federal government be. If people insist on living in vulnerable areas (especially those wealthy enough to live "anywhere"), they should either take the risk of "self-insuring" or pay a fair price based on the actuarial probability that their house will have to be replaced in a relatively short period of time. This is not the insurance companys' fault nor the government's.

I think you're very right about the first point - for society to run and people to be safe, there have to be disincentives to living in places that are not (or are no longer) safely habitable. Or at the very least, a lack of subsidies for that behaviour! As you note, the simplest start is for the person taking the risk to bear the fair market cost of that risk. It's not as if really high insurance premiums are the result of insurance companies making excess profits, they're not. It's because they're trying to price high risks sensibly. Their attempts may be off here and there, but it's not because they are profiteering as a group.

But I think you're wrong on the second point - the very specific news item raised, the disappearance of available insurance, is definitely government action. The quickest way for any government to make *any* good or service disappear from the marketplace is to cap its selling price below its cost of production. Nothing will clear the shelves faster. It's always a chuckle watching yet another government try to stem inflation with price caps, then being surprised at the outcome. Economists must feel like the guy who works the "perpetual motion machine" desk at the patent office.

Jim

It's not as if really high insurance premiums are the result of insurance companies making excess profits, they're not.

Well, maybe. It strikes me as odd that the tallest buildings in nearly every city I visit belong to insurance companies. New York, Boston, Los Angeles, Chicago, San Francisco, Hartford, Newark (for heaven’s sake) and many more. Not to mention a little company named Berkshire Hathaway which has a pretty substantial insurance division.

Watched the doc “Becoming Warren Buffett” again last night where they explained “float” (again). It intimated that the insurance industry is profitable, but is *extra lucky* because of “float.” Shouldn’t that just be part of the overall look at the industry? If a company wins on arbitraging prices between countries, that’s just a function of their business model. Likewise, “float” is just part of the insurance game, it’s not a lucky=strike-extra bonus.

Anyway, big buildings all over the place, but no Microsoft Tower, no McDonald’s skyscraper, no Budweiser castle. Probably a reason for that.

There would be no development in Pacific Palisades or Alta Dena if the local govt did not issue permits for housing. The privately owned utilities are heavily regulated by the govt. Plus LA DWP (Dept of Water & Power) which is local govt owned utility in LA failed to ensure water supply for fighting fires (the reservoir near Palisades was empty). The insurance market has been a terrible mess in California because of crazy Democratic policies in the state which Marks mentions in his memo.

So I definitely would blame the CA state & LA local govts for the disaster.

SCE has admitted that its equipment (power lines) may have caused the Altadena fire. I do not understand your comment how the issuance of permits for housing in Altadena (a generally old community) contributed to the fire. Many of the lots in the more affluent areas are fairly large and houses were not built close to each other.

Much of the damage in the Palisades was in the alphabet streets. This is an old section of the Palisades with approx. 50 foot wide lots. Perhaps if LA precluded replacing old houses with new structures your comment might have merit. However, bear in mind that there has long been a complaint in LA (not sure about Altadena) that there is not enough housing so preventing new residences where old ones once were is a non-starter.

pay a fair price based on the actuarial probability that their house will have to be replaced in a relatively short period of time.

I couldn't agree more. But one shouldn't overrate the actuarial rationality of insurance companies. A number of them, including mine (a well-known national brand), seem to have decided to stop doing business in California, regardless of relevant local conditions. My homeowners insurance (thirty years without a claim) was cancelled without recourse because the slate roof was dirty (!). There are other companies who do want my business; but not as many as there should be.

Baltassar

PS: The whole "clean the roof" thing was news to me. Turns out there are businesses who do nothing else. If I had been told I couldn't renew my policy if I didn't get my roof cleaned, I would have had no problem with that.

insurance companies are businesses which have to make profitable decisions, not public charities. In a similar vein, neither should the federal government be. If people insist on living in vulnerable areas (especially those wealthy enough to live "anywhere"), they should either take the risk of "self-insuring" or pay a fair price based on the actuarial probability that their house will have to be replaced in a relatively short period of time.

Agree, but with an added clause.

After the Great War, there was pushback from the victorious countries who had borrowed heavily to do so, principally from the US. President Calvin Coolidge was quoted by Winston Churchill as asking, "They hired the money, didn't they?"(1)

I have the same reaction to the insurance companies who have established " a pattern of delays and foot-dragging" in paying out claims. (2)

Since the longer a float persists untapped, the more lucrative it is, the company has an incentive to foot-dragging.

Here is where the state has a legitimate function in compelling the timely fulfillment of a contract. A deal is a deal. Pay. The. Claim.

Whether or not to continue to write (and buy) policies, and at what price, is an entirely separate issue. If no insurance is available, either self-insure, or live elsewhere.(3)

-- sutton

(1) Coolidge was demonstrably wrong here, as insistence on payment of war reparations was a substantial cause of the European theater of WWII. But I like the quote anyway.

(2): In this case, State Farm: https://www.nytimes.com/2025/06/12/realestate/stat...

(3) another Berkshire link: Charlie M self-insured his home

On September 11, 1960, Hurricane Donna makes landfall on Long Island as a Category 2 hurricane. While it cause little damage elsewhere, a stretch of cost in the "Manhattan Beach" neighborhood of Brooklyn, N.Y. was mauled as it busted up a concrete and stone causeway, known as "The Esplenade" (which connected Manhattan Beach and Brighton Beach along the shore) and tossed large portions of the slabs of concrete into the gardens of the high end houses along the shore and filled their first floors with sand and debris. The rest of the neighborhood was flooded and generally trashed.

As a youth, I used to swim the length of the mile-long remnant of the walkway or simply "mountain climb" from one beach to the other, wondering why it had never been cleared (I figure the people living alopng it felt this would discourage people walking behind their houses).

Anyhow, during the 1990's a number of Brooklyn's Russian oligarchs aquired the properties, bulldozed the rubble away and used it to build a burm, preventing street access to the entire area. This allowed them to have unchallenged waterfront views across thdeir now-unprotected laws.

None of the above should have been a secret from any insurance companies who were involved in the first event, yet many were shocked by the even higher level of devistation caused to these houses by hurrican Sandy in 2012, which while only 50 years after the previous event, was advertised a a "once in 500 year storm").

So, doing back of the envelope scribbling (using a vast set of two data points, but figuring global warming will not improve things), that should mean that insurance companies should charge 1/50 of the replacement cost of the property each year just ot break even. That would mean that, for a 7.5 million buck home, the insurance to cover this would run about $150,000 per year (or $12,500 per month). Certainly a lot just to pay for a "million dollar view", but the option would be to simply move somewhere safer to live.

Could they afford to live without insurance if they lost their house? Frankly, they would certainly be "peeved", but they generally have the resources to recover with more bruising to their pride than to their standard of living.

There are people living in Palm Beach, Fire Island, Hilton Head and their ilk who cry about this first-world problem of having to actually foot the proportional bill for living in a posh location. Most of them have the means to live nearly anywhere they decide suits them, but feel it should be the government's responsibility to provide "affordable" insurance so that they can continue to live economically in their chosen locales.

I have a high-deductable version of medigap insurance on my Medicare (Type G) as I figure I can afford to pay for any expeenses below catastrophic. I frequently go on expensive vacations with just a thin layer of insurance and take on the rest of the risk (other than also having an annual air-ambulance contract, again to cover the catastrofic tail of risk) as I figure, if I can afford to pay for a trip, I have already decided to "burn the money" and can afford to lose it (though, of course, I would be peeved).

I feel far more sympathy for those who get caught in floods or tornedos because they live in large flat rural areas where they farm than for those who have invested in beach-front property in areas set upon by hurricanes because of the view.

Jeff

abromber: "The homeowners neither create the risk nor can they abate it except by relocating."

For the Gulf Coast region, where I live, that is not true. There has been a tremendous amount of new development in the coastal areas, which has created hundreds of billions, if not trillions, of new flood and wind risk. I suspect that the same is true for other areas and other risks.

In defense of the empty reservoir in Los Angeles, on January 7, in Pacific Palisades: It was emptied for repairs to the cracked cover that kept the water safe and sanitary. When should they have started the repairs? Fire Season in Los Angeles is year round, now. However, June through October is when the risk is highest. -- from Google AI

The whole "clean the roof" thing was news to me.

You think that's bad? Here in Florida, many insurance companies are requiring customers to completely re-roof if they want their policy to be renewed (at ever increasing rates). And a new tile roof will cost $45k, and a new metal roof will cost $55k.

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