system
Given the following post, respond as if you're commenting on Reddit:
human
Why would an insurance company not renew a policy rather than raise the premium?

Our homeowner's insurance in San Diego is being "not-renewed" due to fires. But isn't it more rational to raise rates? I understand what's called "material change in risk," such as renovations. But, to effectively cancel a large portion of your region's customers' policies seems like found money. What am I missing?
gpt
That just means that insurance companies believe that nobody would buy insurance at the price they would charge. 

There is an important distinction between idiosyncratic risk (1% of houses will have kitchen fires while 99% will not) and systemic risk (with 1% probability a natural disaster will burn most houses and with 99% probability it will burn none).

Because of the way probability works (law of large numbers) insurance companies face little risk when insuring idiosyncratic risk. Maybe one year 0.8% or houses will burn and the next year it will be 1.2%, but it will never be 50%. 

In contrast, when it comes down to systemic risk, we are talking about a 1% chance that the insurance company suffers devastating losses on a given year. Therefore, providing insurance from systemic risk is much more expensive.