In the aftermath of the devastating fires that swept through Los Angeles neighborhoods in January, I visited the area to see the damage firsthand and meet with affected customers and employees. It was a heartbreaking scene – families mourning lost homes, businesses facing uncertain futures, entire communities grappling with unimaginable loss.
While the full impact of the event is still unfolding, and much remains to be done to support these communities in their recovery, it is important that lessons from a tragedy like this lead us toward better approaches. That means taking meaningful steps to mitigate and adapt to more frequent extreme weather, as well as addressing the underlying factors that leave communities vulnerable to both personal and financial harm.
While climate change is rightly cited as an explanation, this is an incomplete answer to a more complex problem. Economic inflation, aging infrastructure and population migration into higher-risk areas have emerged as primary drivers of rising weather-related losses – trends that will likely continue. There is also a constellation of other factors. Consider, for example, the staggering cost of litigation abuse, as well as development decisions and building practices that fail to account for foreseeable extreme weather events.
Insurance plays a critical role on the sustainable path forward. At its core, insurance is a cost-sharing mechanism, bringing individuals and businesses together to pool resources through premiums that accurately reflect each policyholder’s exposure to risk. When insurers can properly assess risk and set fair prices, this system functions reliably – even in the face of extreme weather. Importantly, insurance also serves as a crucial barometer of the true cost of building or rebuilding in higher-risk areas, allowing these costs to be properly considered during planning and development.
When this risk-sharing equation breaks down, it destabilizes the insurance marketplace and creates protection gaps. While most insurance markets across the U.S. remain stable and competitive, a number of states face significant disruptions due to localized policy decisions and market dynamics. For an insurance market to function properly, pricing and terms must be permitted to reflect the evolving level of risk. Regulatory policies that disconnect pricing and terms from actual risk drive insurers out of the market, reducing competition and limiting consumer choice.
Markets of last resort, such as FAIR plans and wind pools, serve a vital role by ensuring that coverage remains available for everyone. Unfortunately, some programs have evolved far beyond their intended purpose, increasingly becoming markets of choice that mask underlying market failures. Many have seen rapid growth driven by pricing that is neither actuarially sound nor reflective of the current risk environment. These pricing inadequacies become painfully evident during extreme events, such as the January wildfires, when these programs prove unsustainable – often leaving consumers as the ultimate financial backstop.
When an insurance marketplace fails to function, families and businesses bear the consequences. Costs rise, coverage shrinks and economic opportunity suffers. These challenges will not be easy to solve, but it is well past time we get started. Real progress will require committed partnership among policymakers, carriers and consumers. The urgency is clear – we are seeing the damaging consequences in troubled markets. Without prompt action, the road ahead will only grow more difficult.
*As published by Alan Schnitzer on LinkedIn on March 31, 2025