This is an insurance problem more than anything else.
If insurers were allowed to and incentivized to price accurately, homes in dangerous areas (flood plains, fire hazards) would be too expensive to buy, and people... wouldn't.
Especially given that if you can't get insurance, you can't get a mortgage, which drastically limits your buyers.
Legislation generally opposes granular insurance policies, as it is discrimination.
But in the case of home insurance, unlike health, people actually have a choice: build there or do it somewhere else.
Artificially forcing blended home insurance rates lessens the pricing signal that this particular area might be too risky to build in.
At the end of the day, it's developers and the city/county making money while offloading the risk to insurance companies and government mortgage buyers.
There have been endless lawsuits by homeowners alleging discrimination in their insurance rates. All this impairs granular risk assessment and insurance rates. A recent WSJ article was about lawsuits from homeowners who were quoted higher insurance rates because their roof was rotten and/or there were trees that could fall on their house.
The same has happened with auto insurance rates (men and women have different accident rates, so used to have different rates), and, glaringly, medical insurance rates.
It's discrimination when it's based on uncontrollable situations. It is not discrimination when it's based on factors one can control. And an indefensible structure in a fire zone is most certainly something you can control. Pricing it appropriately would keep builders from building them in the first place and it would get the people that have them to do what they can to make it more defensible.
The problem is people come to the legislature screaming about being charged a rate that actually reflects the risk. The legislature eventually responds by making insurance spread the costs over it's policy base. This results in people to screaming to the legislature because their rates are skyrocketing to pay for the idiots in the danger zone. The legislature eventually responds by not allowing insurance companies to charge enough--and they walk.
By the time you reach the point of the insurance companies walking you've already had many chances to fix the problem. But we never learn, people are determined to have their cake and eat it also.
I 100% agree with that, but the way pricing works is generally not sufficiently granular. You either get underpriced government backed plans, or a plan that does not take into account your actual circumstances. Eventually sufficient big data might be able to solve the pricing problem. Defensible construction will have cheap insurance and indefensible buildings will not be economically insurable. The problem is insurance is by county (lol) or by "city". Neither work in CA mountains.