Why insurers are retreating from California and Florida—and what could make coverage more sustainable
Insurers stepping back is a trend, not a one-off
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 drew widespread attention. Yet the move fits a pattern that Florida and other hurricane- and flood-prone states have experienced for years: insurers reducing their exposure in markets where losses from catastrophic events have become harder to manage.
Insurers have been retreating from high-risk, high-loss markets for decades, particularly after major disasters. One early turning point was Hurricane Andrew in 1992, which produced unprecedented insured losses of about US$16 billion across Florida. Since then, repeated multibillion-dollar disasters have contributed to insurer insolvencies and have pushed many remaining companies to reassess what they are willing to insure, at what price, and under what conditions.
Research that tracks disaster losses and hazard impacts indicates that, as losses from natural hazards steadily rise, the key question for many high-risk areas is no longer whether insurance will become unavailable or unaffordable—it is when. That framing matters because it shifts the discussion from short-term market reactions to longer-term structural pressures that are building across the insurance system.
How insurance works—and why disasters strain the model
At its core, insurance is a mechanism for transferring risk. A homeowner pays a premium to transfer the risk of expensive repairs to an insurer if the home is damaged by a covered event, such as a fire or thunderstorm. In most years, most policyholders do not experience major disasters, and that gap between premiums collected and claims paid is a central reason insurers can remain profitable.
The challenge is that disasters, when they occur, can be extraordinarily costly. A single severe event can generate a surge of claims large enough to overwhelm an insurer’s finances. To manage that possibility, insurers typically purchase their own insurance—known as reinsurance—so they can transfer a portion of their risk to the reinsurance market.
But reinsurance has been getting more expensive. In response to costly disasters around the world in recent years, reinsurance prices have risen sharply. Risk-adjusted property-catastrophe 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 costly, insurers can find themselves unable to transfer as much risk as they previously could. In practical terms, that means they are “holding the risk”—exposed to paying claims when disasters strike. If a disaster is large enough, it can push an insurer out of business. Alternatively, a company may decide to reduce its exposure by leaving a state or by limiting new policies, as has been seen in California, Louisiana, and other places facing elevated catastrophe risk.
Portfolio decisions, data-driven pricing, and “catastrophe exposure”
Insurance companies are not structured to gamble on extreme outcomes. When risk rises or becomes harder to price, insurers typically review their portfolios—the different lines of business they offer, including auto, life, property, and health insurance—and reevaluate both coverage terms and pricing.
This process is heavily data-driven. Insurers use sophisticated climate and risk modeling to forecast future risks, including the likelihood that a property will be damaged by wildfire or other natural hazards. Those models are used to estimate potential losses and to decide how much exposure the company is willing to take on in a given region.
In California, State Farm cited “catastrophe exposure” as a reason for ending new high-risk personal and commercial property and casualty policies. In this context, catastrophe exposure refers to the likelihood that costly claims could exceed the level of risk the company is prepared to accept.
A natural question follows: if wildfire risk exists in other states as well, why stop issuing new policies in California but not in other wildfire-prone states such as Colorado or Arizona? Without access to company-specific exposure data—which insurers generally do not publicly disclose—any answer is necessarily speculative. Exposure depends on how many policies an insurer holds in a state, how concentrated those policies are in higher-risk areas such as the wildland-urban interface, and the value of the properties insured.
State Farm pointed to increasing wildfire risk and higher home construction prices in California. However, other influences can also shape insurers’ decisions, including the regulatory environment and the scope of coverage required under state rules.
Regulation can shape whether insurers can “charge an adequate price for the risk”
State insurance regulations can limit premium increases, restrict policy cancellations, and require certain levels of coverage. These rules are designed to protect consumers and maintain market stability, but they can also affect insurers’ ability to adjust prices to match changing hazard conditions.
One example raised in the extracted material involves a statement by the chief executive of insurer Chubb, who referenced restrictions that left the company unable to charge “an adequate price for the risk” as part of the reason for a 2022 decision not to renew policies for expensive homes in high-risk areas of California.
California also has a distinct “efficient proximate cause” rule that requires property insurers to cover post-fire flooding impacts, such as mudslides. That matters because rainy winters—like 2023’s—can trigger destructive mudslides in wildfire burn areas, creating additional loss pathways that insurers must account for when evaluating risk.
In other words, the pressures on insurers are not only about the frequency and severity of hazards themselves. They also involve how risk is distributed across private insurers, reinsurers, policyholders, and—when private markets retreat—public programs and taxpayers.
What happens when insurers pull out: risk shifts to households and governments
When insurers pull out of a community or stop writing new policies, residents and businesses can be left without access to standard property and casualty insurance. In that situation, they are effectively holding their own risk and paying the price if a disaster occurs.
From a societal perspective, this can slow recovery after catastrophes. Uninsured residents and businesses tend to recover more slowly, often relying on donations, loans, or federal individual assistance. However, federal individual assistance is generally limited to catastrophic disasters and typically covers only immediate needs, not the full cost of rebuilding.
To fill the gap, several states—including California, Florida, Louisiana, and Texas—have created private or public “insurers of last resort.” These options are designed to provide access to coverage when private insurers decline to write policies, but premiums are generally very expensive.
These arrangements also shift risk. In states such as Louisiana and Florida, residents covered by state programs transfer their risk to the state—meaning taxpayers, who fund the programs, hold the risk directly or indirectly. In California, the FAIR Plan—an option in existence since 1968—wrote close to 270,000 policies in 2021, nearly double the number in 2018. Growth in these plans can be a signal that the private market is narrowing in certain regions or property types.
Flood insurance offers another example of risk transfer to the public. Anyone purchasing flood insurance through the National Flood Insurance Program (NFIP), established in 1968, is transferring risk to federal taxpayers. The NFIP currently insures almost $1.3 trillion in value across 5 million policies.
Public backstops face financial limits
Expanding last-resort coverage can ease immediate access problems, but it does not remove the underlying drivers of loss. The extracted material notes that, in the short term, insurance pools and federal- and state-run insurers of last resort are expected to add more policies, and that state legislators may try to incentivize the return of insurers.
However, political willingness does not automatically translate into sustainable funding. The NFIP is highlighted as a cautionary case: it carries more than $20 billion in debt. Meanwhile, Texas has resorted to charging insurers operating in the state to help cover its program’s costs. These examples illustrate the difficulty of balancing exposure while keeping premiums affordable—especially as hazard losses continue to mount.
Another constraint is that politicians are not catastrophe risk experts and do not make decisions based on data alone. That can complicate efforts to align insurance pricing, land-use policy, and building standards with the realities of hazard risk.
Development patterns and building standards can amplify losses
Even as the risk of properties becoming uninsurable grows, communities continue to permit development in floodplains, along coastlines, and in the wildfire-prone wildland-urban interface. The extracted material also points to inadequate building codes that allow developers to build homes that cannot withstand severe weather.
These practices have placed millions of residents—and the things they value—in harm’s way. As climate change continues to increase the frequency and severity of natural hazards, the gap between where and how communities build and what insurers can sustainably cover may widen further.
In this context, “fixing” the insurance problem is not simply about persuading insurers to return or about creating larger public insurance pools. It also involves reducing the level of risk that is being created or concentrated in the first place.
Steps states and communities can take to lower risk
The extracted material outlines several actions that states and communities can take involving property and development to lower risk. These measures do not eliminate natural hazards, but they aim to reduce exposure and vulnerability—two key factors that drive losses and, ultimately, insurance availability and affordability.
Make smarter land-use choices. Limiting development in high-risk areas can help avoid placing people and property in harm’s way, particularly in floodplains, along coastlines, and in wildfire-prone areas.
Adopt more stringent building codes and safety standards. Stronger codes at state and community levels can improve a structure’s ability to withstand severe weather and other hazards, potentially reducing damage and claims.
Price risk into home sales. Approaches mentioned include using an insurance contingency that allows a buyer to withdraw if they cannot secure insurance, or lowering assessed property values for real estate in high-risk areas to discourage builders and buyers from taking on extreme risk.
Require comprehensive risk disclosures. Providing buyers with disclosures of present and future risks, along with historic claims associated with a property, can help people make more informed decisions before purchasing.
Make risk information accessible and understandable. Research cited in the extracted material indicates many people struggle to grasp how likely they are to be affected by a catastrophic event. Better tools and clearer communication can help risk information resonate and support more realistic choices.
Support relocation from the highest-risk areas. Buyouts and managed retreat can help residents move away from places with repeated or severe hazard exposure, returning land to nature or public uses such as parks.
Why these changes matter for insurance affordability
Insurance markets reflect risk. When the probability or severity of loss rises—or when uncertainty increases—premiums tend to rise, coverage terms can tighten, and insurers may reduce exposure. Reinsurance costs, regulatory requirements, and concentration of policies in high-risk zones can accelerate those dynamics.
The measures above focus on reducing the underlying drivers of loss: where development occurs, how structures are built, and how transparently risk is communicated. Over time, lowering exposure and vulnerability can reduce the pressure that forces risk back onto households, state programs, and federal taxpayers.
In the near term, last-resort plans and policy incentives may expand to keep coverage available. But the extracted material suggests a clear constraint: without addressing land use, building standards, and risk awareness, the financial resources required to sustain ever-growing public backstops may not be there.
A narrowing window for proactive decisions
The retreat of insurers from parts of California and the long-running challenges in Florida are not isolated stories. They are signals of a broader tension between rising hazard losses and the capacity of private and public systems to absorb them.
As natural hazards become more frequent and severe, communities face a choice. They can continue patterns of development that increase exposure and then rely more heavily on costly last-resort insurance and post-disaster aid. Or they can take steps—through land-use planning, building codes, pricing signals, disclosures, risk communication, and relocation support—to reduce the level of risk that needs to be insured in the first place.
Insurance is often discussed as a financial product, but in high-risk regions it also functions as a measure of whether communities are building and living in ways that can be sustained. The decisions made by insurers, regulators, and local governments will help determine how widely available and affordable coverage remains in the years ahead.