The Cost of Ignoring Reality
Jeff Hulett, founder and president of Personal Finance Reimagined (PFR), is on a mission to empower individuals to make smarter financial decisions through education and thoughtful resource allocation. At the core of PFR’s approach is a belief that markets, when allowed to function freely, often provide the best solutions to even the most complex problems—solutions rooted in transparency, efficiency, and sustainability. The ongoing crisis in California’s property insurance market, driven by devastating wildfires and state intervention, serves as a stark reminder of the consequences of ignoring these principles.
This is not just an insurance crisis—it is a fundamental breakdown in decision-making. Californians are grappling with skyrocketing risks, capped insurance premiums, and fleeing insurers. These challenges highlight a deeper reality: climate change is rendering it progressively less economical to reside in certain areas of California. While it might be trendy to dismiss climate science, your insurer certainly does not. The market, if left to function properly, would have communicated this reality far sooner, giving residents the chance to make informed, albeit difficult, choices. Instead, government intervention has obscured the true cost of risk, leaving many Californians unprepared for the financial and emotional toll of disasters.
In this article, we will explore how insurance markets are designed to function, why free-market solutions are often superior to bureaucratic interventions, and why California’s efforts to cap premiums have not only failed but exacerbated the problem. Finally, we will confront the provocative conclusion: it is time to consider that moving may be the best long-term solution for many Californians—and the state’s role should be to assist in this transition, not distort market signals.
About the author: Jeff Hulett leads Personal Finance Reimagined, a decision-making and financial education platform. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions.
Jeff is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM.
How Insurance Markets Work: The Intersection of Risk and Cost
At its core, insurance is a mechanism for managing risk. Insurers pool premiums from customers to cover the cost of potential claims, using historical data and actuarial science to predict the probability and severity of events. In fire insurance, which falls under the broader umbrella of property and casualty insurance, the expected cost of a policy is determined by analyzing the frequency and magnitude of wildfires and covered hazards in a given area. These estimates drive the premiums insurers charge their customers.
In an ideal market, insurers price policies to reflect the true risk. Customers in areas with high fire risk pay higher premiums, while those in safer areas pay less. This system not only ensures that insurers remain solvent but also provides critical signals to consumers about the true cost of their choices—whether it is where to live, how to build their homes, or how to mitigate risk.
However, California’s approach has undermined this fundamental principle. By capping premiums, the state has artificially suppressed the cost of risk, preventing insurers from charging enough to cover the rising frequency and severity of wildfires. The result? Many major insurers, including State Farm and Allstate, have stopped issuing new policies in California, leaving homeowners scrambling for coverage and exposing taxpayers to increased financial risks.
The Consequences of Market Manipulation
There is another subtle but important factor driving insurance costs. Housing has become much more expensive. Rapid appreciation increases the cost impact on insurers if a claim is filed. Since the government revenue base comes from ad valorem (or "from the value") property taxes, the bureaucracy is funded by increasing home values. The government sustains itself by creating a tax revenue-friendly environment, like hiding the true cost of owning property in California. A market free to price in all costs will have an appropriately chilling effect on home value appreciation. Lower appreciation means less tax revenue to pay bureaucrats' salaries.
California’s decision to cap premiums may have some well-intentioned motivations, but it reflects a fundamental misunderstanding of how markets work. By preventing insurers from adjusting prices to reflect real-world risks, the state has effectively subsidized high-risk living, encouraging development in fire-prone areas and leaving residents vulnerable to disaster.
This is a classic example of bureaucratic resource misallocation. Instead of allowing prices to signal the true cost of living in high-risk areas, California’s intervention has created a distorted market where insurers cannot generate enough premium revenue to offset their claims costs. The predictable result has been market withdrawal, reduced competition, and limited options for consumers.
For homeowners, the implications are profound. Without access to affordable insurance, many are left with inadequate coverage or are forced to rely on the state’s high-risk insurance pool, which is often more expensive and less comprehensive. This vicious cycle exacerbates inequality, as wealthier residents can afford alternative solutions while low- and middle-income families bear the brunt of the crisis.
The Bigger Reality: A Climate-Driven Exodus
The elephant in the room is climate change. Wildfires in California are becoming more frequent and severe, driven by rising temperatures, prolonged droughts, and poor forest management. These trends are making living in many parts of the state increasingly difficult- and expensive.
Californians would have faced this reality years ago if the insurance market were allowed to function without interference. Skyrocketing premiums would have sent a clear signal: living in high-risk areas is unsustainable. This would have prompted homeowners to either invest in fire-resistant infrastructure or consider relocating to safer regions. Instead, the state’s efforts to shield residents from the true cost of risk have delayed this reckoning, leaving many unprepared for the inevitable. “Law and regulation require insurers to balance fairness to policyholders while assuring financial stability of the insurers conducting business, but California’s State Insurance Commissioner seems to ignore the latter—creating a market where insurers simply cannot survive.” – Barry Rabkin, Insurance Industry Expert
The solution is not to double down on market distortions but to embrace the difficult truths that markets reveal. Rather than capping premiums, California could have provided relocation assistance to residents in high-risk areas, enabling them to make proactive decisions before disaster strikes. By doing so, the state could have facilitated a more orderly transition, helping residents adapt to the realities of a changing climate without undermining the insurance market.
Conclusion: Choosing Reality Over Illusion
California’s insurance crisis is a microcosm of a larger problem: the tendency to prioritize short-term convenience over long-term sustainability. By capping premiums, the state has attempted to shield its residents from uncomfortable truths—but at what cost? Insurers are fleeing, homeowners are struggling, and the risks are only increasing.
It is time to confront the reality that living in certain parts of California may no longer be viable. The market, if allowed to function freely, would have communicated this reality far sooner, empowering residents to make informed choices. Instead, state intervention has delayed the inevitable, leaving Californians to face a harsh reckoning.
But this reckoning does not have to be catastrophic. California has an opportunity to lead—not by distorting markets but by embracing them. The state could provide relocation assistance to help residents transition to safer areas, invest in fire-resistant infrastructure where it makes sense, and focus on long-term solutions rather than short-term fixes.
At Personal Finance Reimagined, we believe in the power of informed decision-making. The lessons of the California wildfires are clear: markets are not the enemy—they are the messenger. Ignoring their signals only makes the message louder and the consequences more severe. It is time to listen, learn, and act before it is too late.
By accepting the truths that markets reveal and empowering individuals with the tools to make better decisions, we can create a future that is not only sustainable but also equitable and resilient. And that, ultimately, is the goal of Personal Finance Reimagined: to help individuals navigate life’s uncertainties with confidence, clarity, and purpose.
Resources for the Curious
National Association of Insurance Commissioners. "State Insurance Regulation and Consumer Protection." www.naic.org
California Department of Insurance. "Wildfire Insurance and Preparedness Resources." www.insurance.ca.gov
Munich Re. "Wildfire Risk in a Changing Climate." www.munichre.com
Hayek, Friedrich. The Road to Serfdom. University of Chicago Press, 1944.
IPCC. "Climate Change 2022: Impacts, Adaptation, and Vulnerability." www.ipcc.ch
Cato Institute. "Why Free Markets Work Better Than Government Intervention." www.cato.org
Insurance Information Institute. "How Insurance Pricing Works." www.iii.org
RAND Corporation. "The Impact of Climate Change on Insurance Markets." www.rand.org
National Fire Protection Association. "Reducing Wildfire Risks to Communities." www.nfpa.org
Pew Research Center. "Public Attitudes Toward Climate Change and Government Policies." www.pewresearch.org
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