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'Catastrophe models' could bring major change to home insurance: 'Allow for better quantification of ... risk'

While the crisis remains, these efforts to address it offer hope.

While the crisis remains, these efforts to address it offer hope.

Photo Credit: iStock

California has been in a homeowner's insurance crisis for some time now, in part because of the impacts of our changing climate. Fortunately, government efforts to address the issue are finally making some headway, and they're doing so with the help of predictive computer models.

The predictive computer models, or "catastrophe models," are used to gauge risk by simulating catastrophes and estimating their costs. This approach to risk assessment had long been heavily restricted by states. However, in an effort to address the insurance crisis, concessions are being made and restrictions are being lifted.

The first step in this process involves insurance companies sending their catastrophe models to the state for review. The first to do this was Verisk, an analytics company representing a variety of insurance companies. 

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According to Verisk president of extreme event solutions Rob Newbold, its catastrophe model will "allow for better quantification of wildfire risk to the California insurance market."

Wildfires are one of the main reasons why some insurance carriers have pulled out of the state or drastically reduced coverage in California. That includes major companies such as Allstate, Farmers Insurance, State Farm, and Nationwide.

The rising global temperature has been exacerbating drought conditions and extending fire season in California for years now. These issues paired with the climbing cost of just about everything have increased risk enough that insurance carriers are unwilling to sell new policies. That's the insurance crisis in a nutshell. 

By permitting catastrophe models, the state hopes that carriers will be better equipped to manage that risk. With a greater ability to manage risk, these companies could offer new policies to California customers. 

Allowing catastrophe models isn't the only way the state has attempted to address the insurance crisis, either. It also stepped in for 750,000 wildfire victims in Southern California in late 2024 and placed a moratorium on canceled coverage.

While the crisis remains, these efforts to address it offer hope. Whether or not that hope becomes a reality is yet to be seen, but the process is underway, and that's certainly a good thing. 

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