By Jenny Jung
I. Introduction
Following the recent destructive wildfires in California, the state’s homeowners insurance market is experiencing a severe crisis.[1] Insurers are increasingly pulling out of vulnerable regions, raising policy premiums, or refusing to renew coverage, leaving many homeowners without protection.[2] This trend exposes residents to substantial financial risk and vulnerability, reflecting the insurance industry’s need to manage risk and maintain profitability. When the likelihood of large claims becomes too great, companies often respond by increasing premiums or, in some cases, discontinuing coverage in the most vulnerable areas. This situation especially affects lower-income and marginalized communities, often in disproportionate ways, raising critical questions about equity and access to insurance.
At the same time, California’s regulatory framework centered around Proposition 103’s prior-approval rate system limits the ability of insurers to price forward-looking risk or adapt their underwriting prices to reflect changing environmental conditions. The FAIR Plan has served as a residual mechanism by absorbing growing numbers of policyholders, but was not designed to function as a full-service insurer. This paper examines the shortcomings of Prop 103 and the FAIR Plan while calling for a balanced set of reforms that integrates regulatory modernization, climate adaptation, and equity considerations to create a sustainable insurance market.
II. Dilemmas Faced By Major California Insurances
California’s homeowners insurance crisis has entered a period of acute instability. In recent years, seven of the top twelve insurance companies have paused or restricted new business.[3] Top companies like State Farm, Allstate, Mercury, Farmers, and others have either stopped writing new policies entirely or drastically scaled back their operations in the state, citing mounting financial pressures from wildfires, other natural disasters, and structural economic and regulatory challenges.[4] For instance, QBE Insurance Corp. has announced its decision to exit the U.S. homeowners insurance market, affecting approximately 37,774 policyholders in California, as part of a broader strategy to narrow in on and refocus on its commercial insurance business.[5] These withdrawals have left many homeowners with fewer coverage options, higher premiums, and, in some cases, no private insurance at all.[6]
One of the primary drivers of insurer withdrawal and/or pauses is the accelerating impact of natural disasters in California.[7] Wildfires in particular have become more frequent, destructive, and costly.[8] The January 2025 Los Angeles wildfires alone caused an estimated$45 billion in insured losses, a figure that has already begun to influence property insurance costs across the state.[9] These wildfires often trigger cascading risks such as mudslides and debris flows, which frequently follow large fires and exacerbate property damage.[10]
For decades, insurers have relied on historical data to predict the likelihood of various events and price their products accordingly. However, with the accelerating effects of climate change, past trends are no longer reliable predictors of future risks.[11] Insurers now face a landscape where extreme weather events – floods, hurricanes, droughts, wildfires – are occurring with increasing frequency and intensity and in areas less prone to disasters historically. This shift has rendered traditional actuarial tools less effective, leaving insurers exposed to modeling uncertainty and large payouts.[12]
Insurers also face substantial economic pressures beyond regulation and climate risks. Rising inflation, supply-chain disruptions, and a shortage of construction labor have dramatically increased the costs of rebuilding homes following a natural disaster.[13] Reinsurance costs—the “insurance for insurers” that protects them from catastrophic losses—have also climbed sharply due to California’s elevated risk profile.[14]
Together, these factors have led to persistent underwriting losses. When claim payments exceed premiums collected, insurers experience capital strain that affects their long-term financial stability and ability to cover future claims. As a result, many homeowners have been forced into the California Fair Access to Insurance Requirements (FAIR) Plan, the state’s insurer of last resort, increasing its exposure and financial liability, which is discussed in detail below.
III. Legal and Regulatory Considerations
California’s homeowners insurance crisis cannot be fully understood without examining the state’s regulatory framework, which has long shaped insurers’ behaviors. California’s regulatory framework, established by Proposition 103, aims to protect consumers by requiring insurers to obtain prior approval from the California Department of Insurance before making any rate changes.[15] While the law was initially praised for increasing transparency and consumer protection, its rigid provisions now pose challenges for insurers facing escalating climate risks.[16]
A major regulatory constraint of Proposition 103 is the prior approval requirement, which forces insurers to submit detailed rate filings to the Department of Insurance and await approval before implementing any increase.[17] While designed to protect consumers, this regulatory structure has prevented insurers from adjusting premiums in step with escalating risks.[18] The approval process for rate increases is often lengthy and bureaucratic, causing delays that leave premiums lagging behind actual costs.[19] In a market characterized by rising wildfire frequency and severity, such delays can quickly render policies financially unsustainable for insurers.[20] One of the biggest challenges is the financial feasibility of the requirement that insurers write a significant portion of their statewide market share in high wildfire-risk areas.[21]
Many insurers cite these limitations as a reason for exiting the California market, arguing that the regulatory structure prevents them from pricing policies in accordance with the true risk of catastrophic loss.[22] As a result, homeowners–particularly those in wildfire-prone areas–face shrinking coverage options.[23]
The California FAIR Plan serves as the state’s “insurer of last resort,” stepping in when private insurers withdraw.[24] While the FAIR Plan provides a critical safety net, it is not a comprehensive solution and is only a temporary solution. Policies under the FAIR Plan are often more expensive and less comprehensive than private coverage, and the plan’s growing exposure places additional strain on remaining insurers.[25] The FAIR Plan’s role highlights a systemic equity issue: as private insurers retreat, homeowners with fewer resources are disproportionately funneled into a market that offers less protection at higher cost.[26]
Recent reforms, notably the Sustainable Insurance Strategy introduced by the California Department of Insurance in December 2024, aim to address these regulatory challenges.[27] Early results have encouraged some insurers to return to the market or expand their offerings, signaling that a more flexible regulatory framework can allow coverage without compromising consumer protection.[28]
Ultimately, California’s regulatory framework illustrates the tension between consumer protection, insurer solvency, and equitable access to insurance. While laws like Proposition 103 were designed to benefit homeowners, the law’s rigidity in the face of unprecedented climate risk has contributed to many insurers leaving the market, highlighting the need for reform efforts to restore both coverage availability and fairness for vulnerable homeowners.[29]
IV. Burden on Low-Income Communities
The increasing frequency and severity of wildfires, intensified by climate change, have expanded California’s designated high-risk zones and placed significant pressure on insurers. However, the effects of climate change are not distributed equally, raising critical equity and access issues. Homeowners in higher-risk areas—who are often older, low-income, or sometimes a part of historically marginalized communities—face the prospect of either paying unaffordable premiums or losing coverage entirely.[30] This dynamic not only threatens individual financial stability but also has broader societal implications, including unfair community displacement and increased reliance on state-administered emergency services.[31]
California should uphold its commitment to promoting homeownership in the state and supporting generational homeowners, especially those who are low-income, by maintaining regulations that ensure the accessibility and attainability of homeownership. Maintaining regulatory protections is essential to preserving stable homeownership and preventing climate impacts from exacerbating existing inequalities.
V. Policy Options and Recommendations
Addressing California’s homeowners insurance crisis requires a multifaceted approach that balances market stability, regulatory flexibility, and equitable access. The interplay of climate risks, regulatory constraints, and economic pressures demands urgent interventions to protect vulnerable homeowners while ensuring insurers remain financially viable.
Rate-setting framework. One of the most immediate policy levers can be through reforming the state’s rate-setting framework. The Sustainable Insurance Strategy introduced by the California Department of Insurance authorizes insurers to use forward-looking catastrophe models and include reinsurance costs in rate filings.[32] Expanding these reforms further could give insurers the ability to adjust premiums more accurately to reflect risk, reducing the incentive to withdraw from high-risk areas while ensuring homeowners are charged rates that are both fair and sustainable.[33] Streamlining the prior-approval process under Proposition 103 could also reduce delays and allow insurers to respond more quickly to rapidly evolving climate hazards.[34] Additionally, while the California FAIR Plan serves as the insurer of last resort, its capacity is limited and its policies offer narrower coverage than the private market.[35] While insurance itself will not solve the climate crisis, it can certainly be utilized as a lever to incentivize the protection of our communities through more resilient building. Hazard mitigation can complement FAIR plans by helping reduce the vulnerability of homes and neighborhoods, leading to safer communities, reduced financial strain on insurance programs, and more affordable access to coverage for at-risk populations.[36] Perhaps strengthening the FAIR Plan through increased funding, risk-pooling mechanisms, or partnerships with private insurers could enhance its ability to serve homeowners who have been priced out of private insurance.
Risk Mitigation Incentives. Policymakers should incentivize homeowners to invest in fire-resistant construction, defensible landscaping, and other mitigation strategies.[37] Effective wildfire mitigation programs require cooperation among insurers, regulators, and property owners. Each plays a critical role in building transparent and effective systems for risk-based pricing, which may help reduce property vulnerability and lower possibility for potential claims.[38] Insurers are more likely to maintain or expand coverage in areas where property risk is proactively managed.[39]
Targeted Assistance for Low-Income Homeowners. Equity considerations demand specific interventions for vulnerable populations. Homeowners in low-income or marginalized communities may face disproportionate exposure to wildfire risk and may lack the financial resources to relocate or rebuild.[40] Targeted programs such as premium subsidies or relocation assistance to these communities can help ensure that these households retain access to insurance coverage and avoid displacement.[41]
Encourage Market Participation. Beyond regulatory and mitigation reforms, the state can encourage insurers to re-enter or expand in high-risk areas through risk-sharing mechanisms, such as state-backed reinsurance programs.[42] By reducing the potential financial burden of catastrophic events on private insurers, these programs can stabilize the market while protecting homeowners. Early indications suggest that such measures, combined with the Sustainable Insurance Strategy, have already prompted companies like Farmers to commit to maintaining or expanding coverage in California.[43]
In summary, a coordinated approach combining regulatory reform, risk mitigation, FAIR Plan strengthening, and targeted assistance can address the concern of too many insurers leaving the market and for equity concerns. By aligning incentives for insurers with the goal of protecting homeowners, California can create a resilient insurance market that provides equitable access while accounting for the growing risks posed by climate change.[44]
VI. Conclusion
California’s homeowners insurance crisis illustrates the complex intersection of climate change, market forces, and regulatory policy. As wildfires and other natural disasters become more frequent and severe, insurers are withdrawing from high-risk areas or raising premiums beyond the reach of many homeowners as a way to ensure the sustainability of their own businesses. This withdrawal sometimes has disproportionate impacts on low-income and marginalized communities, highlighting the inequities embedded in the current system. Regulatory constraints, such as those imposed by Proposition 103, while originally intended to protect consumers, have unintentionally limited insurers’ ability to price risk accurately, exacerbating coverage shortages and financial instability in the market. The crisis underscores the urgent need for comprehensive, thoughtful reforms. Policies like the California Department of Insurance’s Sustainable Insurance Strategy, combined with an enhanced FAIR Plan capacity, alongside increasing incentives for risk mitigation, and targeted support for vulnerable homeowners, may be a strong place to start.
Ultimately, the insurance crisis in California is not simply a matter of business risk. It is a matter of equity, access, and social stability. Without deliberate interventions that address both market incentives and the needs of lower-income communities, the state risks deepening disparities, creating a market crisis, and undermining property rights. A coordinated approach that prioritizes both resilience and fairness is essential to ensuring that all Californians can access affordable, reliable homeowners insurance in an era of increasing uncertainty.
[1] Quintairos, Prieto, Wood & Boyer P.A., Wildfires, Premiums, and Cancellations: Understanding California’s Insurance Dilemma, QPWBLaw (Jan. 15, 2025), https://qpwblaw.com/wildfires-premiums-and-cancellations-understanding-californias-insurance-dilemma.
[2] Id.
[3] Cal. Dep’t of Ins., California’s Sustainable Insurance Strategy, https://www.insurance.ca.gov/0400-news/0100-press-releases/2023/upload/California-s-Sustainable-Insurance-Strategy-slides.pdf.
[4] Id.
[5] Megan Fan Munce, California Home Insurer to Drop 37,000 Policies as Part of Nationwide Withdrawal, S.F. CHRONICLE (Sept. 4, 2025), https://www.sfchronicle.com/california/article/home-insurance-qbe-leave-21031185.php
[6] Id.
[7] William Brangham, Sam Lane & Mike Fritz, California Faces Insurance Crisis as Homeowners Lose Coverage Amid Extreme Weather, PBS NEWSHOUR (Feb. 10, 2025), https://www.pbs.org/newshour/show/california-faces-insurance-crisis-as-homeowners-lose-coverage-amid-extreme-weather.
[8] Id.
[9] Zhiyun Li & William Yu, Economic Impact of the Los Angeles Wildfires, UCLA Anderson Forecast (Mar. 2025), https://www.anderson.ucla.edu/about/centers/ucla-anderson-forecast/economic-impact-los-angeles-wildfires
[10] Ricardo Lara, Notice: Coverage of Flood, Mudslide, and Earth Movement Claims Relating to Recent Wildfires (Sept. 19, 2025), California Dep’t of Insurance, https://www.insurance.ca.gov/0400-news/0100-press-releases/2025/upload/nr059CDImudslidenotice.pdf
[11] Id.
[12] Id.
[13] See, e.g., Why Home Insurance Rates Are Rising in California, eWay Ins. (Aug. 25, 2025) (noting rising construction materials, labor shortages, and supply-chain delays as drivers of higher rebuilding costs); How the 2025 California Wildfires Are Reshaping the Insurance Landscape (Mar. 19, 2025) (reaffirming surge in rebuild costs due to inflation, supply chains, and labor shortages).
[14] Allied Editorial Team, Insurer Exodus Cooling California Housing Market as Prices Rise, Allied Schools (May 28, 2025), https://www.alliedschools.com/blog/housing-deal-breaker-impact-insurers-leaving-california-on-housing-market/; see also Cal. Dep’t of Ins., California’s Sustainable Insurance Strategy, https://www.insurance.ca.gov/0400-news/0100-press-releases/2023/upload/California-s-Sustainable-Insurance-Strategy-slides.pdf.
[15] Rethinking Prop 103’s Approach to Insurance Regulation, LAW & ECON. CTR., Nov. 6, 2023, https://laweconcenter.org/resources/rethinking-prop-103s-approach-to-insurance-regulation/.
[16] Id.
[17] Prior Approval Rate Filing Review Process, CAL. DEP’T OF INS., https://www.insurance.ca.gov/0250-insurers/0800-rate-filings/rate-filing-review-process.cfm.
[18] Adam Beam, Things to Know About California’s New Proposed Rules for Insurance Companies, AP News (Sept. 28, 2023), https://apnews.com/article/california-home-insurance-wildfire-risk-premiums-047bdfa514ce93dac83c82735a15554a; see also Reuters, State Farm Seeks Rate Hikes in California to Offset Wildfire Payouts, REUTERS (Feb. 4, 2025), https://www.reuters.com/business/finance/state-farm-seeks-rate-hikes-california-offset-wildfire-payouts-2025-02-04/
[19] Id.
[20] Id.
[21] California’s Sustainable Insurance Strategy: Balancing Climate Risk and Market Stability, ROBINS KAPLAN LLP, https://www.robinskaplan.com/newsroom/insights/californias-sustainable-insurance-strategy.
[22] Adam Beam, Things to Know About California’s New Proposed Rules for Insurance Companies, AP News (Sept. 28, 2023), https://apnews.com/article/california-home-insurance-wildfire-risk-premiums-047bdfa514ce93dac83c82735a15554a; see also Reuters, State Farm Seeks Rate Hikes in California to Offset Wildfire Payouts, REUTERS (Feb. 4, 2025), https://www.reuters.com/business/finance/state-farm-seeks-rate-hikes-california-offset-wildfire-payouts-2025-02-04/
[23] Id.
[24] The FAIR Plan: Home Page, CAL. FAIR PLAN, https://www.cfpnet.com/ (showing that the FAIR Plan may be a temporary solution if one cannot obtain coverage in the traditional insurance market.).
[25] California’s ‘Last Resort’ Property Insurer Seeks Rate Hike, STATELINE (Oct. 24, 2025), https://stateline.org/2025/10/24/californias-last-resort-property-insurer-seeks-rate-hike-ringing-national-alarm-bells/.
[26] The FAIR Plan: Home Page, CAL. FAIR PLAN, supra note 6.
[27] California’s Sustainable Insurance Strategy, CAL. DEP’T OF INS., https://www.insurance.ca.gov/01-consumers/180-climate-change/Sustainable-Insurance-Strategy.cfm.
[28] Sustainable Insurance Strategy Updates (2023–2024), CAL. DEP’T OF INS., https://www.insurance.ca.gov/01-consumers/180-climate-change/Sustainable-Insurance-Strategy-Updates.cfm.
[29] Rethinking Prop 103’s Approach to Insurance Regulation, LAW & ECON. CTR., supra note 1.
[30] E. Serleth, California Homeowners Risk High Insurance Costs or No Coverage at All as Wildfires Escalate, 2025 J. CAL. ENV’T L. 1135, https://digital.sandiego.edu/cgi/viewcontent.cgi?article=1135&context=jcel
[31] Id.
[32] California Department of Insurance, California’s Sustainable Insurance Strategy, supra note 2.
[33] California’s Sustainable Insurance Strategy: Balancing Climate Risk and Market Stability, ROBINS KAPLAN LLP, supra note 12.
[34] Prior Approval Rate Filing Review Process, CAL. DEP’T OF INS., supra note 2.
[35] Alfonso Pating & Rob Moore, Can FAIR Plans Help Build a More Resilient Future?, NAT. RES. DEF. COUNCIL (Jan. 15, 2025), https://www.nrdc.org/bio/alfonso-pating/can-fair-plans-help-build-more-resilient-future.
[36] Id.
[37] Federato, Mitigation That Matters: Wildfire Exposure Credits Explained, FEDERATO (Oct. 25, 2025), https://www.federato.ai/library/post/mitigation-that-matters-wildfire-exposure-credits-explained; Lisa Dale & Kimiko Barrett, Missing the Mark: Effectiveness and Funding in Community Wildfire Risk Reduction(Headwaters Economics, June 2023), https://headwaterseconomics.org/wp-content/uploads/HE_2023_Missing-the-Mark-Wildfire.pdf.
[38] Id.
[39] California’s Sustainable Insurance Strategy, supra note 2.
[40] E. Serleth, California Homeowners Risk High Insurance Costs or No Coverage at All as Wildfires Escalate, 2025 J. CAL. ENV’T L. 1135, https://digital.sandiego.edu/cgi/viewcontent.cgi?article=1135&context=jcel
[41] Id.
[42] Bob Redell, Chris Chmura & Alyssa Goard, Farmers Insurance Says It Will Add More Policies in California, NBC Bay Area (Dec. 12, 2024), https://www.nbcbayarea.com/news/california/farmers-insurance-more-policies/3734524/.
[43] Id.
[44] Id.
