Price controls destroy wealth: California Fire Insurance

Noah Smith via Marginal Revolution, and Kim Mai Cutler.

•  The CA insurance regulator is elected, and is reluctant to allow higher rates for fire insurance, despite the big risks, lest she be voted out of office. 
• As a consequence, expected profits are low, so a majority of top insurers have stopped issuing fire insurance in CA. In 2024, State Farm decided not to renew tens of thousands of policies in the state, including about 1,600 in Pacific Palisades.
•  Instead, CA becomes the insurer of last resort through it FAIR program.
• FAIR insures risks of about $458B but has less than $700M in cash. The Jan 9, 2025 fires may cost FAIR about $24B. As a result, CA residents may face big surcharges to shore up FAIR's finances.
• Expect more insurance companies to exit the state because insurers in the state are on the hook to pay into the plan when FAIR can’t cover its claims.

BOTTOM LINE: insurance rates are too low and dont cover expected losses. Furthermore, they are not risk adjusted, so low risk homeowners subsidize higher risk ones. And the risks are getting worse, due to regulation that delays and deters fire prevention efforts, like controlled burns.

UPDATED WSJ:  

FAIR now covers about half a million homeowners who can’t obtain private coverage. Its exposure has ballooned to $458 billion as of last September from $153 billion four years earlier, with $5.9 billion in exposure in the Palisades. Yet it has only about $700 million cash on hand to pay claims.