The little-known office of the California Insurance Commissioner is coming up for election this year. Because of California’s significant exposure to natural disasters — earthquakes, wildfires, you name it — this is the most important office in the state after Governor. It is tremendously important that California gets insurance right, but unfortunately it has gone deeply wrong over the past few years. An insurance availability crisis is unfolding, and ordinary Californians are left holding the bag for tens, if not hundreds of billions of dollars1 the next time a natural disaster strikes.
Of all the candidates for the office, Patrick Wolff — chess grandmaster, former global macro investor, and insurance brokerage leader — is far-and-away the best candidate. Patrick has my endorsement. I recently interviewed Patrick to discuss what’s gone wrong with insurance in California and how to fix it. I hope that you’ll enjoy our conversation, and tell your friends in California to vote for Patrick Wolff.
You can listen to the Podcast here on Substack or on Spotify.
Prelude
00:00 [Patrick Wolff]
This is not exactly a sob story because he’s a wealthy guy, but I know a developer who built a house on spec, like a $5 million house… and ended up throwing the keys away because he could not get insurance to sell it.
John Loeber interviews Patrick Wolff, Candidate for California Insurance Commissioner
00:19 [John Loeber]
There’s something that you know, and that I know, but almost nobody else knows, which is that the insurance commissioner is arguably the second most important office here in the state of California. That election is coming up this year. You’re running. Maybe kick it off with this question: why is insurance so important in California?
00:44 [Patrick Wolff]
The function that insurance plays really comes down to two things.
The first is it spreads the risk. And spreading the risk is really important because if some terrible event happens to you, you don’t want to be wiped out by it. We, as a whole, can bear the loss, but any individual person or company might not be able to bear the loss. And so the first thing insurance does is it spreads the risk of that loss in such a way that we take away that wipe-out risk. So that’s a very, very important function.
The second thing that insurance does is it prices risk. I can’t emphasize enough how important this is. It’s the kind of thing you don’t think about, but when you really get into it, it becomes — well, at least for someone like me and maybe you — becomes endlessly fascinating.
01:41 [John Loeber]
Sure!
01:41 [Patrick Wolff]
There’s a lot of risk, and when we’re able to price that risk, we’re able to understand it and quantify it, and then we’re able to make intelligent decisions to reduce that risk.
Let’s talk about wildfires, for example. There are some things we need to do to reduce the risk of wildfire that only the government can do because it’s public land. We need to do more responsible controlled burns, better clearing of underbrush, and to manage the land so these fires don’t get out of control. That’s something the government has to do. (And by the way, we’ve not been doing nearly enough of that for some time.) In order for the government to see the risk, that risk needs to be priced.
So that’s one function of a well-functioning insurance market, to really demonstrate and quantify what the risk is. But also, there are things that could be done at the local level, at the home level, and the community level. And when people understand what the true price of the risk is, that creates an incentive — and there are absolutely cases where there’ll be equity reasons why we want to help people, and that absolutely can and should be done — but first we need to see what the true cost is through the pricing. There are ways that we can align incentives, because if you’re an insurance company and your job is to go out and underwrite risk, you don’t just want to price the risk. You want to find smart ways that people can reduce the risk, and tell people, “I want your business. If you do these things and you reduce the risk, I’ll be able to underwrite you more cheaply.”
And you want lots of insurance companies competing with each other to reduce that risk, to harden our homes, to make the land safer from catastrophic wildfires. There are all sorts of things we can do, and we need the pricing signals to tell us that so that we can be guided, and people can be incentivized to find ways to reduce the risk, and insurance companies get their business by helping people reduce the risk. That’s what a well-functioning insurance market can do for us.
04:00 [John Loeber]
But why is it that we haven’t been having a very well-functioning market in California? There’s a lot of regulation at the insurance commissioner’s office. What is it that’s gone wrong in California?
04:15 [Patrick Wolff]
What we’ve gotten wrong are fundamentally the regulations in the state of California. We’ve gotten the rules wrong, and because we’ve gotten the rules wrong, we’ve been pushing out companies rather than bringing the companies in to provide that function, that service that is so valuable, that we were talking about a couple minutes ago. And if you get the rules wrong, if you have a lot of power, you can actually kind of mess the market up. So let’s talk about how we messed the market up.
Back in 2017 and 2018, there were a couple of terrible fires in Northern California, and when those fires happened, the insurance companies realized that they really had to reprice the risk of catastrophic wildfire. Climate change means it’s changing for the worse if we don’t take actions to mitigate that, and so the insurance companies had to incorporate that into their models. In other words, what it fundamentally meant was looking backwards was no longer going to be a good prediction of what that catastrophic wildfire risk was. They had to use models to predict it going forward.
But the Department of Insurance said, “no, you can’t do that.” They said, “no, you have to use historical experience. You can’t use forward-looking models to try to project the risk.”
And the insurance companies said, “well, we can’t operate under those circumstances,” and they began to leave the state. And so over several years, a number of insurance companies left the state, and the insurance of last resort, which is called the FAIR Plan, grew in size — and the FAIR Plan, for anybody who’s familiar with it, is not satisfactory — and people got more and more disgruntled because they were relying on this, and more and more insurance companies left the state, and eventually it really caused an availability crisis, and that’s the immediate cause.
A larger problem that we have is Proposition 103 which puts in place a system that allows for very strict review of insurance company filings. Basically, if an insurance company wants to come to market, they want to price their product in a certain way. “Here’s our product terms, here’s our pricing.” The Department of Insurance has to review that and approve it before they can go to market. But the Department of Insurance has been taking a very, very long time, and they’ve been micromanaging the reviews of these filings, and that’s caused enormous delays, and those delays have compounded the problems of not being able to use forward-looking models and not being able to in other kinds of ways incorporate all their costs, which has worsened the problem of making it difficult for insurance companies to be able to operate in California. That’s been the fundamental issue.
The Department of Insurance is starting to address it. There’s a lot more that needs to be done. Those are the things that need to be fixed. There’s a lot of stuff we can talk about, but that’s the big picture, how we got into this problem of insurance companies leaving the state of California. And the last thing — I know I’ve been talking a while — I just want to emphasize one last thing, which is that it is uniquely bad in California, but we really have created this problem for ourselves. We can fix this problem for ourselves. We can handle pricing the risk. Insurance companies know how to do this. We can create the rules to make it work. We just need to get the right person in there, and we need to get the right set of rules in place to make it work.
07:50 [John Loeber]
Now, one thing that you touched on in passing was the FAIR Plan. The FAIR Plan is a very unique feature of California. It’s worth diving in on. What is the FAIR Plan and how does it work?
08:07 [Patrick Wolff]
Many years ago, in the 1960s, the state of California created the FAIR Plan. It is an insurance company that is mandated by the state of California, but it’s not run by the state of California. It is run by a board appointed by insurance companies. So I want everyone just to think about that for a moment. It’s a private company that’s mandated to exist by the state of California, that’s run by a board that’s appointed by a whole bunch of other companies that otherwise compete with each other. So that doesn’t sound like it’s going to be a very well-run company, and it’s not.
What that insurance company does is it is the insurance of last resort. No matter what, if you can demonstrate that you tried to get fire insurance a couple different times and you were denied, you can get fire insurance from this company called the FAIR Plan that has to underwrite you. But it’s only basic fire. It’s not all the other coverages that come with home insurance. It’s just basic fire. Now, typically, the FAIR Plan is more expensive than what’s generally available and less good. It doesn’t have good underwriting. It doesn’t have good service. But until recently, people didn’t think much about it because it was very small. It was really only ever designed to be a last-ditch stopgap, so that if you don’t have insurance and you’re in between coverage, there is someone that will take you. You can get that so that you have emergency coverage, and then you have time to find another insurance company to get better and cheaper coverage.
But as I was saying, a while ago, during the 2017-2018 period and the aftermath of that, when insurance companies started pulling out, the FAIR Plan started exploding in size, and it’s now — last I checked — somewhere around 6-7% market share of the state of California. It’s one of the largest insurance companies operating in the state of California, and it’s one of the fastest — I think it is the fastest-growing insurance company — and that is because it’s mandated by law to cover people, even though it’s not very good, doesn’t offer very good coverage, because it’s been the only resort for people. So it’s just a sign of how broken the insurance market is.
10:39 [John Loeber]
So then, the next question: we’ve got this unusual entity here that’s now responsible for a staggering amount of insurance in California. And it’s taken on this responsibility very quickly since the traditional carriers like State Farm and Allstate and such have been basically leaving. Who ends up footing the bill for the FAIR Plan?
11:03 [Patrick Wolff]
Yeah, that’s a really good question, and it demonstrates something that I think is really important for everyone to understand, which is in the end, someone foots the bill, and oftentimes if it’s not working well, it’s us, even if you can’t see how.
So let’s break this down. So the FAIR Plan has to offer fire coverage, right? And it often offers fire coverage in the riskiest places. Now, by law, the rates are supposed to be actuarially sound, which is a fancy way of saying the price is supposed to be roughly equivalent to the risk. It’s supposed to pay for itself. But it has not been paying for itself. The prices have not been actuarially sound. So who foots the bill?
Well, for many years when the FAIR Plan was really small, there were no real losses, and it was sort of fine. And then the FAIR Plan grew during the 2020s, and for a while there was no catastrophic fire, and then of course 2025 happened. In 2025, there was a billion-dollar assessment that was made on the insurance companies. So the insurance companies that all underwrite the FAIR Plan had to foot a billion-dollar bill.
Now just another layer of complexity, sorry, you might ask, “well, how do they decide how they pay for it?” Every insurance company participates by law in the FAIR Plan relative to its market share in the whole of the state. So if you’ve got 10% market share, then that means you have 10% of the profit or losses, which means of this billion dollars, you pony up $100 million. If you’re 5% market share, it’s 5%. So that’s how it’s spread between the insurance companies.
So the insurance companies had to pony up the bill. And first of all, and just as an aside, that billion dollars was way in excess of the cumulative profits, which have been very small, of the FAIR Plan over its entire existence. So the FAIR Plan now has dug a big hole for itself with that billion dollars.
13:19 [John Loeber]
Patrick, just to jump in here for a sec. If we’re thinking about the incentive structure: the problem that we have is that these insurance carriers keep leaving the state because they’re not allowed to price the risk fairly, they can’t run the business and last. So they’re leaving the state, but they still have some exposure to the state, and so they’re forced to participate in the FAIR Plan. And then they have to pony up the money for the FAIR Plan, which only incentivizes them even further to leave the state, because, of course, with any participation in the FAIR Plan — they’re losing money every year. Right? This is a vicious cycle.
13:56 [Patrick Wolff]
Bingo. It’s a vicious cycle.
So the first way that we end up bearing the cost is if the insurance companies, exactly like you just said, think, “holy cow, I just got hit with a billion dollar (in aggregate) bill, and who knows what more could be coming. I need to pull back from the state.” So you’re exactly right. Now what happened was the insurance companies actually made a deal with the Department of Insurance for all future assessments, and they said, “okay, here’s the deal. The first $500 million, insurance companies in aggregate, they have to pony up the bill totally. The next $500 million is 50/50, 50% the insurance companies, 50% they get to issue a surcharge on customers not on the FAIR Plan. Above a billion dollars, 100% of that they get to issue a surcharge on customers not on the FAIR Plan.”
Editor’s Note: after the interview, Patrick pointed out that he misspoke. The reality is even worse. Insurers do not cover 100% of the first $500 million. They must cover only 50% of the entire first $1 billion. The loss sharing deal applies also to the first $1 billion assessment.
So first of all, now we have the situation where the FAIR Plan represents continued exposure for insurance companies, which they know is not being priced accurately, which means if they want to operate in the state, they have to try to make it up in how they charge people on other policies, or they just need to stay away from the state, which means there’s not enough adequate insurance. That’s the first way we bear the cost. And then secondly —
15:22 [John Loeber]
Wait, wait, Patrick, I just want to be really explicit here. So when we’re talking about customers not on the FAIR Plan bearing the cost: this means that if somebody has a house in wildfire territory, and they’re on the FAIR Plan, and that house predictably burns down, is a big loss, every other customer of that insurance company, even people who are living in cities that have no wildfire risk at all, they end up still bearing the cost.
16:00 [Patrick Wolff]
Yeah. I mean, I wouldn’t say predictably, let’s call it probabilistically. But yes, that’s exactly right. So you have this mispricing of the risk.
And also, as we were saying earlier, it’s an impediment for the insurance companies to a certain point, but then also it’s being put to people above a certain point not on the FAIR Plan, and that is further misaligning the incentives because now the FAIR Plan is cheaper than it should be, and the regular insurance is more expensive than it should be.
So what we have to do is we’ve got to fix the regular market, make it much easier for insurance companies to come in, make sure that they can charge economic prices, but also make sure we’re holding insurance companies accountable and make sure that people are being treated fairly and customers are being empowered, which is a super important part of good regulation.
As we fix that regular market, we have to allow the pricing of the FAIR Plan to adjust once people have all those options so they can get off the FAIR Plan. Because the only way we’re gonna shrink the FAIR Plan back to what it needs to be is fixing the regular market so people have better options, better choices, and getting the pricing right so we’re no longer pushing the cost onto other people. It should be a small last resort to cover all the little patches and holes. We want the regular market to get fixed so people can get better and cheaper coverage there. That’s what we’ve got to get to.
17:41 [John Loeber]
Yeah. Fundamentally, it’s very ironic, right? We had regulation that in its intent was meant to provide consumers with better, fairer prices.
But the effect has been that the regulation has ended up meaningfully diminishing the options that consumers have access to, which in turn means that the remaining options that they have are not very good or quite expensive (possibly both) or in the third case, the consumer has to get onto this FAIR Plan, which is growing far beyond what it was intended to cover and that ends up diminishing the price signal, reducing information, and socializing losses in a way that’s just not equitable for Californians across the state.
18:39 [Patrick Wolff]
100%. And there’s something I really want to emphasize, which is insurance is and needs to be a regulated industry. So I don’t think of it as too much or too little regulation. I think of it as smart and effective versus not smart and not effective regulation.
So the place where I think we have gotten in our way in our regulation has been in the pricing. It’s really important to make it much easier for insurance companies to come offer competitive quotes and competitive products and compete with one another, and we need to make that system operate much more quickly, and effectively get out of our way so that we can get way more choice and competition. But also, insurance is a business where you give a company money today so that if something bad happens, they’ll give you more money in the future. If that’s not a regulated industry, I don’t know what is.
And so one thing that I believe we’re not doing nearly enough of is the regulation of market conduct, which is the behavior of insurance companies. We should be doing much smarter and more effective regulation.
One of the things that I want to do — I care very much about this — is that I want to provide a public report card on every single insurance company, specifically on how they pay claims. And that data exists. It’s collected by the Department of Insurance in what’s called Market Conduct Annual Statements. But that data is kept anonymous at the company level, because the insurance companies have pressured the regulators to do that.
I think that is exactly the information that people need to have. Putting that information into the market is exactly the function of a good regulator, because there’s no private market that will provide that information, and there’s this enormous time lag between when you buy the insurance and when the insurance company pays out, and they only pay out in a small number of cases, and it gets stretched over a long period of time, and it’s very difficult to observe the actual behavior of insurance companies, which means the reputation they get — they can hide, they can obscure their true reputation.
But a regulator that collects all of that information, analyzes it, and puts it into the marketplace can empower customers and realign the incentives so now bad actors are disincentivized, because they’re exposed when they’re doing what in the industry is called delay, deny, defend. (You delay paying, you deny payment, and you defend in court.) But the good actors are incentivized to be good actors, because they are rewarded for their good behavior. So again, I really want to emphasize: it’s smart regulation, it’s effective regulation. It’s not more or less regulation.
21:44 [John Loeber]
That’s very interesting. I did not know the part about the claims anonymization piece.
21:50 [Patrick Wolff]
I know, right? Most people don’t.
21:51 [John Loeber]
And it’s interesting because structurally it looks as if the power of regulation has been applied at the wrong end of the insurance value chain. You’ve got pricing on the one hand, you’ve got claims on the other hand. The regulation’s been all focused on price, like, what are consumers paying for it? It has not been focused on what are the ultimate outcomes. What does the consumer get out of this? Which is ironic, come to think of it, because the FAIR Plan coverage is much worse than other available coverage.
The thing to do, it seems to me, is to ease up on the pricing front so you allow more competition. It brings down costs for consumers. And then in the meantime, you focus the regulatory pressure on opening up these claims, exposing who’s doing a good job, who isn’t, which in turn allows consumers to make even better choices and should thereby, in theory, continuously make the market more and more competitive. And then we’re finally able to spread the risk evenly with a razor-thin margin for the insurer.
23:02 [Patrick Wolff]
Yes. I think that’s exactly right, and I’d add two things to what you just said, which I completely agree with.
The first is that when I have these conversations, people tend to focus too much on the average price. Insurance companies underwrite differently, and I saw this in my experience when it was my job to oversee a competitive national brokerage where you would get multiple competitive quotes. The same customer can get very different quotes from a range of very good, reputable insurance companies. And so it’s not just the average price, it’s being able to get the right price because one company will understand your risk, or one company will give you a set of ways to reduce your risk that other companies won’t, and that’s the value of having that competition. So exactly to your point, you really want the competitive marketplace.
But the other thing I would say is there’s a fear that people have — which I totally understand — which is if we don’t tightly control the price, then we’ll be taken advantage of. Because insurance is a hard market to understand. It’s a hard market to know what the real price is. So I would say a couple things to that.
One is, again, if you can get four, five, or six competitive quotes, you at least have somewhat more comfort that even if you don’t understand why the price is what the price is, at least you know that’s what the market price is. So that’s the benefit of a competitive market.
But you know that famous line, you don’t want to just trust, you also want to verify. Another thing I want to do as the insurance commissioner, I want to provide an annual report that explains to people the state of the insurance market in California in terms of pricing and availability and service and compares California to all the other states around us. So people can see: is our pricing out of whack? Is there something wrong? Because you want to have a competitive marketplace, but you also want to compare across states to make sure. And you have to adjust for cost of living and cost of rebuild and all that stuff. But if you do it right and track it over time, then you can see: are there any deviations? Why do we think there are deviations? Is there some indication that in some areas maybe insurance companies are gaining market power and we need to take some actions around that? So that transparency component is very important in addition to having choice and competition and having the accountability of insurance companies. The transparency is very important.
25:35 [John Loeber]
Now, one thing that’s apparent to me as you’re describing all of this is that you’re taking an insurance macro perspective. You’re looking at the big system: where are the points of leverage, where you can make meaningful adjustments, and then drive beneficial outcomes for consumers. I know that you were a global macro investor for about 12 years or so, in the earlier 2000s. What was something that you took away from your time looking at global financial macro?
26:14 [Patrick Wolff]
I was doing global macro analysis and investing during the period of 2005 to 2010, and I saw up close and personal the global financial crisis and how getting the pricing and the incentives wrong had absolutely catastrophic effects, and how those would ripple through the system. It was not nearly as much an insurance crisis, of course, it was a mortgage crisis and a banking crisis. But all these markets have similar features and it made a very, very big impact on me to see just how devastating it was to get the rules wrong. And I want to emphasize this, getting the insurance rules wrong can really have a very bad impact. It’s had a very bad impact in the state of California in terms of this crisis of availability.
I’d like to digress and give you another example. In the early 1970s — the FAIR Plan was created in the 1960s, and it was not just California-created, it was actually a national program, many states created their own versions of the FAIR Plan — well, New York State created a FAIR Plan, and the FAIR Plan was designed to allow building owners to get cheap insurance. What ended up happening is a terrible fact.
Owners of apartment buildings in slums — slumlords — were getting very cheap insurance. Now, if you’re a slumlord, if you own apartment buildings and you have very cheap insurance and the building is worth more to you burned to the ground than standing, and if you have no moral compass, what do you think happens? And the answer is there was a wave of arsons in particularly the Bronx and some other areas of New York City, basically caused by and perpetuated by this system of mispriced insurance. Now, not to take any moral responsibility away from the people who did these terrible things — this was a horrible, horrible thing ultimately caused by an insurance system where we got the rules wrong.
This stuff can be dry and a little bit abstract. It has real-world consequences. And to bring it back to what you started with, it’s why this role matters. It’s why it’s so important to have someone who’s competent and knowledgeable and qualified and really focused on getting the job right. And it’s why I really want to step up and take a crack at doing this for the people of California.
29:22 [John Loeber]
Sounds like a good plan. Patrick, this has been great. Thank you so much for your time.
29:25 [Patrick Wolff]
Thank you for having me. It’s a real pleasure. Thank you.
This transcript has been edited for brevity and clarity.
Necessary disclosure on conflicts: while I spent about eight-and-a-half years in the insurance industry, I am no longer operating in the industry. I hold a number of minor passive investments in insurance-related startups, but I don’t believe this election to be relevant to or impactful for any of them.