Tusk Strategies Inc

Marla H. Kanemitsu

Marla Kanemitsu is a consultant at Tusk Strategies Inc. advising portfolio companies on regulatory and growth strategies, focusing on fintech ventures. With over 20 years of experience, she has helped startups and established companies navigate complex regulatory challenges. A former law firm partner specializing in insurance disputes, she has been recognized by The Legal 500 and Best Lawyers in America.

Through this article, Kanemitsu emphasizes the urgent need to modernize insurance regulations, advocating for comprehensive reform to foster a more adaptive, competitive and sustainable insurance system.

As the devastating fires in California recede, a shift is emerging in the conversation around insurance. Yes, some continue to blame ‘greedy’ insurance companies and question why insurers were ‘allowed’ to leave the state or drop policies. And we still hear calls for government intervention to mandate coverage at lower premiums. But these familiar narratives are now accompanied by a growing acknowledgment that our current insurance system is not equipped to address the elevated risks we face due to climate change.

This realization presents both an opportunity and an imperative for regulators nationwide. But beyond discussions of house hardening and bolstering FAIR plans, it is time to have a meaningful dialogue about how insurance regulations affect the industry and impede potential solutions. Outdated rules, while often created with good intentions, are increasingly counterproductive.

Innovation Stifled by Regulation

From my vantage point at a venture capital firm, I have observed innovation in the insurance sector progressing far more slowly than in other industries of similar size. Investment in insurtech lags behind comparable industries and new insurance companies or business models remain rare. Most startups in this space focus on providing solutions to existing insurers or partnering with existing insurers rather than trying to reinvent the market.

“The problem lies in the regulation itself. It grows by accretion. Layer upon layer of rules accumulate over time, rarely undergoing comprehensive scrutiny or reform. While regulators may have good intentions, their focus on expanding authority can lead to a system that no longer effectively serves the public.”

The primary reason for this sluggish momentum is regulation. The regulatory burden is so high, the hoops so numerous and the time required to get through them so lengthy that the insurance space is less attractive to both founders and investors.

While some argue that robust regulations are necessary to protect consumers, not all regulations serve this purpose. For example, consider seasoning rules. Over 30 states still enforce seasoning laws, requiring a new insurance company to operate for several years in another state before being licensed to sell policies locally. So, if a new insurance company based in Connecticut wants to expand to Virginia, they can’t – not for five years. This rule, presumably intended as a consumer protection measure, now serves only to entrench incumbents and stifle competition.

Another example is California’s former restrictions on using wildfire catastrophe (cat) modeling for setting rates. These rules were finally changed last year after insurers began fleeing the state, but the reform came far too late. Had these regulations been updated decades earlier, the insurance landscape in California might look very different today. More homeowners could have had coverage, potentially mitigating many’s devastating financial losses. California Insurance Commissioner Ricardo Lara has acknowledged the need for reforms to bring insurers back, but it is a lesson learned the hard way.

The Broader Impact of Outdated Rules

Seasoning laws and cat modeling restrictions are not isolated examples. Research has shown that rate and form controls can be counterproductive and unnecessary overall. An AEIBrookings study concluded that rate regulation does not significantly reduce consumer prices in the long run. However, it decreases coverage availability, increases price volatility and reduces the quality and variety of services, all while encouraging riskier behavior by subsidizing high-risk policyholders.

Meanwhile, Illinois, which does not have rate regulations for private auto insurance, demonstrates that markets can operate effectively without these constraints. Illinois’ market has shown no unusual trends in profitability, rate increases, or insolvencies, challenging the assumption that strict regulations are always necessary to maintain stability.

The problem lies in the regulation itself. It grows by accretion. Layer upon layer of rules accumulate over time, rarely undergoing comprehensive scrutiny or reform. While regulators may have good intentions, their focus on expanding authority can lead to a system that no longer effectively serves the public. In today’s climate-challenged world, this dynamic is becoming increasingly untenable.

A Call for Comprehensive Reform

The fires, hurricanes and other disasters of recent years have magnified the cracks in our insurance regulatory framework. But this crisis also creates an opportunity for meaningful change. Regulators and legislators must look hard at existing rules, evaluating their purpose and—more importantly—their real-world impacts. Are they genuinely protecting consumers or creating unnecessary barriers that drive up costs, reduce competition and stifle innovation?

The current crisis should be a wake-up call for the insurance industry and its regulators. We need a more resilient and adaptive insurance system. Achieving this requires eliminating outdated regulations that no longer align with current realities. If we seize this moment to enact meaningful reform, we can create a more sustainable market for everyone.