Why home insurers are stepping back in California and Florida — and what could make coverage more sustainable
A widening gap between disaster risk and affordable coverage
When two of the largest property and casualty insurers in the United States, State Farm and Allstate, confirmed they would stop issuing new home insurance policies in California, the decision landed as a major consumer shock. Yet it also fit a pattern that Florida and other hurricane- and flood-prone states have been living with for years: insurers retreating from markets where losses are high and the future risk outlook is difficult to price.
From a disaster-risk perspective, the direction of travel is clear. As losses from natural hazards rise, research suggests it is not a question of whether insurance will become unavailable or unaffordable in high-risk areas such as wildfire zones and hurricane-exposed coastlines. It is a question of when.
How insurance works — and why the model strains after repeated catastrophes
At its core, insurance is a vehicle for transferring risk. A homeowner pays a premium so that, if a covered event damages the property—such as a fire or a thunderstorm—the insurer pays for repairs or replacement up to policy terms. The model works because most policyholders do not experience major disasters in any given year, allowing insurers to collect premiums across many customers while paying claims for a smaller number.
But disasters are extremely costly when they occur, and that is where the system’s second layer becomes crucial: reinsurance. Insurers often buy their own insurance—reinsurance—to help cover large losses. This allows them to spread risk beyond a single state or region and protect their balance sheets when catastrophe claims surge.
In recent years, however, reinsurance has become markedly more expensive in response to costly disasters around the world. Risk-adjusted property-catastrophe reinsurance prices rose 33% on average at the June 1, 2023 renewal, following a 25% rise in 2022, according to analysis by reinsurance broker Howden Tiger.
When reinsurance becomes too expensive, insurers face a hard choice. If they cannot transfer enough risk to the reinsurance market at a viable cost, they are left “holding the risk”—meaning they must absorb more of the potential claims themselves. A single large enough disaster can push an insurer into insolvency. Alternatively, insurers may decide to reduce exposure by limiting new business or leaving a market entirely, as has been seen in California, Louisiana, and other states.
Why insurers pull back: portfolio decisions, data models, and “catastrophe exposure”
Insurance is a data-driven business that relies on sophisticated climate and risk modeling to estimate future losses. Insurers constantly reevaluate their portfolios—the mix of products and geographic exposures they hold across lines such as auto, life, property, and health—and they adjust prices and underwriting rules accordingly.
In explaining its decision to stop writing new high-risk personal and commercial property and casualty policies in California, State Farm cited “catastrophe exposure.” In practical terms, that refers to the likelihood that claims from a major event could exceed the amount of risk the company is willing to accept in that market.
From the outside, it can be tempting to ask why the most visible pullbacks happen in one state and not another with similar hazards. For example, California is not the only state with wildfire exposure; states such as Colorado and Arizona also face fire risk. Yet the reasons a particular insurer acts in a particular state are not fully transparent, because insurers do not publicly disclose the details of their exposure calculations.
What can be said, based on how exposure is typically assessed, is that a company’s decision depends on how many policies it already holds in a state, where those policies are concentrated (including in the wildland-urban interface, where fire risk is higher), and the value of the properties insured. State Farm also pointed to California’s increasing wildfire risk and rising home construction prices, both of which can increase the cost of claims when losses occur.
The role of state rules: pricing limits, coverage requirements, and unique legal standards
Beyond the physical hazards themselves, the regulatory environment can shape whether insurers believe they can charge premiums that match the underlying risk. State insurance regulations may limit premium increases, prohibit certain policy cancellations, or require specific levels of coverage. In California, these constraints have been cited by industry leaders as a factor in underwriting decisions.
For instance, Chubb’s chief executive referenced restrictions that left the company unable to charge “an adequate price for the risk” when explaining a 2022 decision not to renew policies for expensive homes in high-risk areas of California.
California also has a distinctive “efficient proximate cause” rule. Under this standard, property insurers can be required to cover post-fire flooding impacts such as mudslides. That matters because rainy winters—like 2023’s—can trigger destructive mudslides in areas recently burned by wildfire. The result is that a wildfire can lead to additional, related losses that insurers may still be responsible for under state law.
What happens when insurers leave: households and businesses retain the risk
When insurers pull out of a community or sharply restrict new policies, the immediate effect is that residents and businesses may struggle to find property and casualty coverage. Without insurance, they are effectively holding their own risk—and paying the price if a disaster strikes.
The recovery consequences can be severe. Uninsured residents and businesses tend to recover more slowly. Households without coverage may rely on donations, loans, or federal individual assistance. But that federal assistance is generally limited to catastrophic disasters and is designed to cover immediate needs rather than making a household financially whole after major losses.
Insurers of last resort: a backstop that can become expensive
To fill gaps when private insurers retreat, several states have created public or private insurance options of last resort. These mechanisms are intended to ensure that at least some coverage remains available, but premiums are often very high.
In states such as Louisiana and Florida, residents covered by these programs transfer risk to the state—meaning state taxpayers, who fund the programs, hold the risk directly or indirectly. California’s FAIR Plan, a privately insured option established in 1968, illustrates how quickly these backstops can grow during periods of market stress. The FAIR Plan wrote close to 270,000 policies in 2021, nearly double the number in 2018.
Flood risk offers a parallel example at the federal level. Anyone purchasing flood insurance through the National Flood Insurance Program (NFIP), created in 1968, is transferring risk to federal taxpayers. The NFIP currently insures almost $1.3 trillion in value across 5 million policies.
The affordability dilemma: political will versus financial capacity
In the near term, the likely trajectory is that insurance pools and state- and federal-run insurers of last resort will absorb more policies as private options shrink. State legislators may also look for ways to incentivize insurers to return. The political willingness to support these approaches may exist, but the financial resources to sustain them are limited.
The NFIP’s experience highlights the difficulty of balancing high exposure with affordable premiums. The program is more than $20 billion in debt. Texas has taken the step of charging insurers operating in the state to help cover costs associated with its program.
These examples underscore a central tension: when risk is high and growing, keeping premiums low does not eliminate the underlying exposure. It shifts who pays and when—toward taxpayers, future rate increases, or reduced coverage availability.
Why the problem keeps growing: building in harm’s way
Even as the risk of properties becoming uninsurable rises, development continues in places that are known to be hazardous. Communities still permit construction in floodplains, along coastlines, and in the wildfire-prone wildland-urban interface. At the same time, inadequate building codes can allow homes to be built in ways that cannot withstand severe weather.
The cumulative effect is that more people and more valuable property are placed in harm’s way. When disasters strike, losses rise, and the insurance system—already strained by expensive catastrophes and rising reinsurance costs—faces even greater pressure.
As climate change increases the frequency and severity of natural hazards, this cycle becomes harder to break without structural changes in land use, construction standards, and consumer understanding of risk.
What could improve insurability over time: practical steps focused on property risk
While no single policy change can “fix” insurance markets in high-risk states, there are steps that states and communities can take to reduce the underlying risk associated with property. The following approaches focus on limiting future exposure, improving resilience, and helping buyers and residents make better-informed decisions.
Make smarter land-use choices. Limiting development in high-risk areas can reduce the number of people and assets placed in harm’s way. This is a direct way to reduce future disaster losses, which in turn can help stabilize insurance availability.
Adopt more stringent building codes and safety standards. Stronger codes at the state and community levels can improve a home’s ability to withstand severe weather and other hazards, potentially reducing claims severity when events occur.
Price risk into home sales. Risk can be reflected during transactions through mechanisms such as an insurance contingency that allows a buyer to withdraw if they cannot secure coverage. Another approach is lowering assessed property values for real estate in high-risk areas, which can discourage builders and buyers from concentrating new development where losses are likely.
Require comprehensive risk disclosures. Providing buyers with clear information about present and future risks, along with historic claims associated with a property, can help households understand what they are taking on before they purchase.
Make risk information accessible and understandable. Research indicates many people struggle to grasp the likelihood of being affected by a catastrophic event. Better tools and clearer communication can help residents interpret risk in ways that resonate and support informed choices.
Support relocation where risk is extreme. Buyouts and managed retreat—returning land to nature or converting it to public uses such as parks—can reduce exposure in the most hazard-prone areas, though these approaches require careful planning and community engagement.
A market signal with broader implications
The pullback by major insurers in California, and the longer-running stress in Florida and other disaster-prone states, is more than a temporary market disruption. It is a signal that the cost of catastrophe risk—shaped by natural hazards, rising reinsurance prices, and the rules governing premiums and coverage—is colliding with the limits of what insurers can sustainably underwrite.
In the short run, last-resort insurance programs and political interventions may keep policies available for some homeowners. But without reducing the underlying exposure—through land-use decisions, stronger building standards, and clearer risk disclosure—the pressure on affordability and availability is likely to intensify. The central challenge is not simply how to spread risk, but how to avoid compounding it.