Abstract:
The January 2025 Los Angeles wildfires became the most destructive and costly natural disaster in US history, and swiftly exposed profound vulnerabilities in California’s property insurance market. In the fallout from the fires, long-standing regulatory constraints, rising risks, and insurer retreat in high-risk areas collided, destabilizing a system meant to safeguard homeownership.
The case situates California’s crisis within the broader ecosystem of U.S. homeowners’ insurance and the basic tenets of actuarially fair pricing. Readers trace the origins of the state’s distinctive regulatory regime to Proposition 103, a 1988 ballot initiative that imposed strict rate-approval rules and required insurers to justify pricing using only historical loss data. This constraint led to widespread underwriting losses and insurer retreat, prompting high numbers of homeowners to enroll in the California FAIR Plan, the insurer of last resort.
Readers explore the complex tensions between consumer protection, actuarial soundness, and political feasibility. In California, relaxing price caps may restore insurer participation but risks making insurance unaffordable for millions; maintaining them may accelerate insurer flight and push more homeowners into public backstops. Ultimately, the case poses a central dilemma: Can a regulated insurance market remain affordable, available, and solvent in an era of escalating risk?
Learning Objectives:
After reading the case and participating in a class discussion, students will:
- Understand how insurers set prices in a competitive market and apply the impact of changing risks to an actuarially fair pricing model.
- Predict the effects of government policies, such as price controls, on insurance market outcomes.
- Propose and evaluate several policy alternatives, considering how each might interact with considerations of fairness, efficiency and political feasibility.
