California’s property insurance market had been on the precipice before the massive wildfires wreaked havoc in Pacific Palisades and Altadena this year, with insurers fleeing the state following a series of costly wildfires from 2017 to 2021. January’s fires were among the worst in the state’s history, with estimated industry losses that could reach $40 billion. State officials and consumers—many of whom had been experiencing non-renewals—expected the worst.
And yet the latest news is encouraging. As CBS News Sacramento reported, “The California Department of Insurance confirmed … that Mercury Insurance, CSAA, USAA, Pacific Specialty and California Casualty all announced plans to ‘stay and grow in the state.’ Together, they represent three of California’s top seven largest homeowners’ insurance providers.” This good-news story gained attention after Gov. Gavin Newsom announced these commitments during a conversation with former President Bill Clinton.
This news is consistent with previous reports. Insurance Insider reported in March that Farmers, Mercury, AAA SoCal, USAA, Nationwide, CSAA and Allstate had indicated their intentions to increase their underwriting. The Department of Insurance at the time credited its Sustainable Insurance Strategy, which makes it easier for insurers to adjust rates to reflect rising reinsurance costs, allows them to use forward-looking catastrophe modeling and speeds up the rate-review process.
Likewise, Newsom last week echoed those points: “We had to address the capital needs of these companies and we also had to address the fact that California, and you wouldn’t know this, is among the most affordable insurance markets in the country because the voters initiated a framework on regulation that denied significant rate increases.” Newsom is correct that this framework, otherwise known as 1988’s Proposition 103, suppressed rates—and the latest reforms helped insurers price policies to better reflect their risks.
Prop. 103 is the source of the state’s insurance woes. It instituted a prior-approval insurance system, whereby the insurance commissioner gained the power to approve any rate hikes and could even roll them back. It also turned the commissioner into an elected position. Obviously, no statewide elected official—and most politicians seeking that post see it as a stepping stone to other offices—wanted to be known as a tool of the insurance industry.
Meanwhile, the wheels of bureaucracy turn slowly, which has created long delays in a costly approval process. The initiative also created a so-called intervenor process, whereby trial attorneys who supposedly represent consumers argue against rate increases. The measure required insurers to pay the legal fees of those intervenors, so it’s easy to see that this convoluted system created a massive disincentive for insurers to increase rates. It’s nice seeing Insurance Commissioner Ricardo Lara attempt to rein in this process.
The initiative’s supporters boast about the resulting cost savings for consumers, but as with all price controls the long-term results for consumers are not good. Prop. 103 kept rates artificially low. As a 2023 report from the International Center for Law & Economics explained, “Insurers naturally respond to rate regulation by tightening their underwriting criteria, forcing some consumers to have to turn to the higher-priced residual market for coverage. In extreme cases, rate suppression can lead some insurers to exit the market altogether.”
And exit they did. The big jolt came in May 2023, when State Farm General Insurance Co.—the state’s largest home insurer, with a nearly 21% market share—announced that it would “cease accepting new applications including all business and personal lines property and casualty insurance.” A year later, the company announced that it would non-renew 72,000 homeowners, rental and commercial apartment policies in high fire-risk areas.
It should go without saying that a healthy property insurance market is fundamental to the state’s real-estate market. From an urban policy perspective, a competitive market is crucial as California tries to jumpstart housing construction to address California’s affordability crisis.
Two years ago, I argued in my Southern California News Group column that the pull outs “will send homeowners running for the far-overburdened FAIR [Fair Access to Insurance Requirements] Plan, a government created insurers’ collective that offers bare-bones policies to property owners … who are unable to find a regular insurer.” Even before the L.A. wildfires, the FAIR Plan was overburdened—and in February it received a $1 billion cash infusion from insurers to fend off insolvency.
Yet when I talked to insurance experts about needed reforms after the Palisades and Eaton fires, they took a wait-and-see attitude, as they had hoped that the sustainability plan that went into effect late last year would work. It appears to be working. It didn’t hurt that the Department of Insurance also approved every rate hike. This has outraged consumer activists, but the alternative would have been a continued exodus—and the continued overburdening of the state’s barebones FAIR Plan, which is better than nothing but maybe not by much.
The Department of Insurance was slow to act, but at least in the face of a real crisis it did finally allow the rate hikes that, as Newsom put it, protect the capital needs of the insurance industry. If companies can’t earn enough to justify their presence in California, they will tighten up underwriting, non-renew policies and even pull out of the market altogether. No one wants higher-priced premiums, but a costly policy is better than no policy, an unregulated surplus-lines policy or the FAIR Plan.
Those who champion Prop. 103 often forget to mention that at least until recently the rate-review process has taken far longer than the initiative required. Furthermore, the initiative doesn’t only ban “excessive” or “unfairly discriminatory” rates—it also bans “inadequate” ones. Since its passage, the department focused on restricting excessive rates, so it’s about time it took seriously the verbiage assuring adequate pricing to keep insurers from leaving.
Keeping the insurance industry from careening over the ledge simply required long sought-after reforms that allow the industry to charge rates that better reflect its risks. Now we’re seeing the positive results. Is this ideal? Of course not. At some point, California needs to revisit Prop. 103. (A recently proposed initiative doesn’t appear to have serious backing.) But for now Californians should be relieved that the market is at least stabilizing.
Steven Greenhut is director of the Pacific Research Institute’s Free Cities Center. Write to him at [email protected].
