…Regulatory factors in California “have really been the hidden driver” causing insurers to reduce their footprint in the state, Jerry Theodorou, the director of the finance, insurance, and trade program at the R Street Institute, told the Washington Examiner.

While “plenty of other states have seen a rise in natural catastrophes” in recent years, none have seen a drop-off in property insurance the way California has, he said…

Each year, insurance companies evaluate what percent of their losses was the result of natural disasters — historically, this falls around 6% — and will then set different coverage and deductible options for consumers, as well as determine the reinsurance they plan to buy.

Not being able to reflect those rates in premiums has made it extraordinarily difficult, and expensive, for providers to do business in the Golden State.

Insurance companies can cover climate risk and weather risk, “but they need the flexibility to adjust their pricing and their coverage so that it’s something that doesn’t bankrupt them,” Theodorou said.

Looking ahead

These problems are likely to get worse for homeowners as California endures more widespread and intense wildfires affecting more properties than ever before — and as reinsurance rates continue to spike.

“You have these conditions which are different. And actuaries, the quantitative folks at the insurance companies that determine rates, need to factor in the exposure, not just the experience,” Theodorou said…

Actuaries must look at both experience and exposure ratings to determine where to set premiums. “The right way to do it is to look at the factors that tell you what is the exposure, what is the potential for loss, what is the likelihood of a loss. Then you’re pricing it more accurately and you can stay in business,” Theodorou explained.

“But if someone is tying your hands and saying no, you can’t charge this amount, the company’s hands are tied. And if they see that they’re losing money or bleeding red ink, they pull up stakes and then go to places where they can make a buck.”