California’s Insurance Crisis;

A long-term change in the frequency or intensity of extreme weather events would indeed alter the risk of loss. But insurance is about the management of risk. Without risk, insurance could not exist. As Cuthbert Heath, an early innovator in catastrophe insurance, explained more than a century ago: “Any risk is insurable at the right price.”

Changing risk does not lead to uninsurability. However, changing risk while restricting the ability to price appropriately in response, could lead to uninsurability. It is pricing, not risk, that underlies California’s insurance crisis. Let’s take a closer look.

Back in 1998, soon after Chris Landsea and I published our first paper estimating what damage past hurricanes would do under contemporary levels of population and wealth, we were contacted by someone in Florida’s government involved with insurance regulation. We were asked if we could apply our normalization just to hurricanes that affected Florida. We performed the requested analysis and shared our findings with Florida officials — Normalized hurricane losses for Florida under our methods implied much greater risk of loss than other contemporary methods of loss estimation, and thus implied a need for higher insurance rates for Florida homeowners. We did not hear back.