Since 2022, seven out of the top twelve insurance companies in California have restricted new business by either not writing new property and casualty insurance policies or declining to renew existing policies. Insurers took those actions because, due to Proposition 103, their premiums do not reflect the high risks that they face.
In California, The Wall Street Journal reports that “insurers are paying out $1.09 in expenses and claims for every $1 they collect in premiums.” From 2012 to 2021, the national average direct underwriting profit for homeowners’ insurance companies was 3.6 percent. In California, it was negative 13.1 percent. As insurers flee the state, access to insurance for thousands of homeowners has dried up.
The cause of this crisis is Proposition 103, the Insurance Rate and Regulation Initiative, which was barely approved by voters in 1988 (51 percent). The proposition created a “prior approval system,” in which the state insurance commissioner must approve rates before implementation. The measure also created a mechanism by which consumers and their representatives can challenge insurance rates and recover their costs, expenses, and attorney’s fees.
The most prolific “consumer intervenor” is Consumer Watchdog, which has been accused of exploiting the intervention process for financial gain, collecting more than $11 million in fees from insurance companies during the past two decades. Unsurprisingly, Consumer Watchdog was founded by Harvey Rosenfeld, the author of Proposition 103.
An insurance market functions properly when companies charge premiums that reflect their long-term expected average cost of claims, plus a normal risk-adjusted return on capital. The difference between “actuarially sound” rates and those permitted by regulators is called “regulatory rate suppression.”
Research by the International Center for Law & Economics revealed that California has the worst regulatory rate suppression for both home and auto insurance in the nation. The annual cost of homeowners’ insurance in California is nearly $700 below the national average, despite California being relatively more expensive and prone to natural disasters, especially wildfires.
When insurers are prevented from setting actuarially sound rates, incorporating all relevant variables into their rate calculations, and are forced to wait months to raise their rates—often only by 6.9 percent, the maximum amount permitted without a rate hearing—they cannot respond effectively to changing conditions. Amid increasingly devastating wildfires and rising rebuilding costs, it is unsurprising that premiums have become disconnected from reality, causing insurers to flee.
California’s prior approval system must end so that insurance rates can be set freely in accordance with risk and changing cost conditions. Competitive rates will allow insurers to be properly compensated for the risk that they assume and provide an incentive to remain in the state.
California would then return to an “‘open competition’ state in which competition regulated the [insurance] marketplace,” as previously described by the California Department of Insurance. In such a market, people have access to willing insurance providers that compete with each other through pricing. If a company charged a premium to a homeowner that exceeded the homeowner’s actual level of risk, competitors would see it as a profit opportunity to take the homeowner’s business.
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All of the state’s current insurance problems trace back to Proposition 103, which by law cannot be amended except to “further its purposes.” Therefore, to fix California’s broken insurance market, voters must advance a ballot initiative to repeal Proposition 103 once and for all.
Kristian Fors is author of “Why California’s Home Insurance Market Collapsed—and How to Fix It.” He is director of the California Golden Fleece® Awards at the Oakland-based Independent Institute.
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