But California, like many states, gives regulators the power to reject those requests. And the state forbids insurance companies from setting rates based on what they expect in future damages. Insurers are allowed to set rates only based on prior losses.
Ricardo Lara, California’s insurance commissioner, said he’s wary of letting insurers use models that may not be accurate.
“I want to be very cautious about opening the rate-approval process to anything that compromises the transparency and objectivity that exists today,” Mr. Lara said in a statement. “Protecting consumers is our top priority, and that is the lens we will use to evaluate any catastrophe risk models in the future.”
When insurers try to respond to risks they don’t understand, they tend to set premiums too high, to give themselves a buffer against error, according to Dr. Kousky of the Wharton Risk Center. But the problem with that, she said, is that when it comes to climate change, insurers may respond by setting premiums so high that insurance in many parts of the country becomes unaffordable.