I think you've misread the question. I understood it as "what if the US gov doesn't (recognize the risk and allow insurers to raise rates)" rather than "what if the US gov (doesn't recognize the risk) and (allow insurers to raise rates)."
It makes sense that way, plus if "allow insurers to raise rates" was a separate clause the verb should be "allows".
> Perhaps the more pertinent question is what if the US gov doesn't recognize the risk and allow insurers to raise rates.
Breaking it down: if the US gov (or its subdivisions) believes the risk is "gouging" or "egregious" or "too expensive" and prohibits rate increases, an insurer thinks they'll lose money, and leave the market. When this happens either the gov steps in as an insurer of last resort (and loses tons of money, because underwriting isn't a political problem), or insurance products cease to be sold in that area.
If insurance is no longer available, the house is no longer eligible for a fannie/freddie conforming loan, and is for all practical purposes ineligible for a mortgage. The local property market dies overnight.
> Hence my confusion: Why is it bad for the US government to let insurers raise rates?
Because of a very, very, bad decision to make the California (and I really should have written California gov, not US gov) an elected position. And people like voting for the guy who prevents prices from going up.
The question you posed as a future potential problem is: "What if the US gov ... allow insurers to raise rates".
So again, color me confused. What is the problem with the government allowing insurance companies to raise premiums?