How does the insurance thing work?

(my broad understanding is that property insurance is a relatively functional market where they won't underwrite a policy that doesn't make sense)

Insurers aren't perfect. For example, the Northridge earthquake was so expensive it caused insurance companies to exit the California earthquake insurance market. Now the state provides earthquake insurance with high deductibles.

I wouldn't be surprised to see wildfires go a similar route in California if the situation isn't resolved.

It’s already like that. Most houses in the Tahoe area that are surrounded by a certain amount of trees are insurable only via the California FAIR plan.

I keep waiting for the insurance war that will break out due to 'managed retreat' by the Coastal Commission.

As someone else said, it's easy to have either extremely high insurance rates or unavailable insurance if you live in the wrong area on someone's map. The result was FAIR plans with add-ons from insurance companies.

California also has government sponsored fire insurance for property owners that can't obtain commercial insurance. While this is good for individual property owners it's not really fair that taxpayers have to subsidize them. We're not allowing the free market to efficiently price in risks.

https://www.cfpnet.com/

Subsidized, but not fully sponsored. I live about a mile outside the edge of the 2021 CZU fire, and our insurance costs about tripled, even with the CA FAIR plan. We’ve followed the CalFire “defensible space” guidelines and covered vents with fine screen, but improving survivability for that existing house from there would mean reroofing with metal or tile, removing or replacing all wooden decking, and covering T-111 siding with stucco or stone. Not cheap. Also effectively a different house. Multiplied by all the homes in woodlands, still not cheap. For anyone who has always wanted to live in the woods, consider living near the woods instead.

Yeah those retro-fits would be very expensive. It doesn't make a lot of sense to me that insurance companies paid to rebuild a lot of homes out of materials that aren't suitable for the homes' fire risk. Though, I don't have a ton of knowledge about this.

The insurance thing is interesting. Along the gulf coast insurance has retreated over time, and There are no significant areas that used to be developed that got wiped out in a hurricane and were not rebuilt. Perhaps the same will happen in California.