How Insurance Regulations Create Perverse Incentives

Here's the problem: In insurance markets that are unregulated, insurance companies tend to base rates on expected future payouts. Past losses are sometimes a good guide to future payouts, to be sure, but they're often not a good guide. Fires in California this year, for example, could easily mean fewer fires in the future because so many of the forests and trees otherwise at risk are now burnt.

But state insurance regulation doesn't allow rates to be based on expectations of future payouts.