Governing wildfire insurance under mortgage constraints: an availability-affordability-capacity framework with decision-oriented evaluation for California, 2018–2024

Abstract Catastrophe insurance economics has long recognized that disaster insurance markets fail on both sides of the market, with households under-insuring low-probability high-consequence risks and insurers unable to diversify or price correlated catastrophe exposure. The resulting debate between risk-based pricing and affordability has been conducted almost entirely within single margins: demand studies treat coverage as an annual household choice, supply studies treat insurer withdrawal as a market outcome, and government-intervention studies treat residual instruments as add-ons to a functioning market. This paper argues that all three assumptions are inadequate for mortgaged homeowners in wildfire-exposed regions, where coverage is a continuing contractual condition and the residual market is capacity-constrained. It develops an availability-affordability-capacity framework in which the offer margin, the budget margin, and the capacity margin are determined jointly under a mortgage covenant, and it evaluates the framework with a calibrated structural model estimated on a county panel for California from 2018 to 2024. The theoretical contribution is a formal allocation model that derives when each margin binds and when policy instruments are substitutes or complements, and a decomposition showing why the risk-pricing-versus-affordability debate persists: the sign of the joint response depends on local income densities and capacity binding, so it is ambiguous in theory and must be resolved empirically. The empirical contribution includes a temporal holdout, a cross-region transfer to Oregon and Colorado, and a decision-oriented evaluation protocol that shows how predictive accuracy and decision outcomes can rank pricing regimes differently. A full-profile scan of the 6,185 articles published in this journal between 2015 and 2025, together with a coded synthesis of the 135 articles on fire hazards and insurance governance, documents that the fragmentation the framework predicts is visible in the journal's own output. The model reproduces the observed trajectory of the California FAIR Plan share in-sample and tracks it out-of-sample through 2023, identifies the 2024 acceleration as a decision-relevant signal, and shows that capacity rationing becomes binding under sustained supply tightening.