California’s insurance crisis is expected to get even worse after the devastating wildfires raging in the state, and experts say a decades-old law plays a significant role in why insurance companies have fled the state in recent years.
In 1988, California voters passed Proposition 103, which gave the state’s Department of Insurance the power to approve rates or even roll them back. So, insurance companies that want to raise rates have to go through a regulatory process that can take months or even years, hindering their ability to adequately adjust rates to cover their losses and assess risk.
“Prop 103 is essentially price controls,” said Steven Greenhut, western region director for the R Street Institute in Sacramento. “It puts the kibosh on the ability of insurance companies to adjust the rates to meet the market.”
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Greenhut told FOX Business in an interview that because of this long-running process, insurance companies began pulling out of California after the previous bout of wildfires that caused extensive destruction in the state a handful of years ago because carriers were not able to quickly adjust rates.
In 2023, Greenhut wrote an op-ed warning that California’s insurance regulations would lead to the insurance crisis that the state is seeing now. But when major insurers like State Farm began pulling out, he said, some elected officials blamed climate change.
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Greenhut believes climate change could be affecting some of the catastrophic events but argues it does not change what he views as the nature of the problem — that California’s regulatory system impedes the ability of insurance companies to set rates where they need to be, and that reduces competition over time.
California Insurance Commissioner Ricardo Lara recently began allowing rate increases and enacted reforms in an effort to keep insurers in the Golden State, and Gov. Gavin Newsom has also acknowledged there needs to be more competition in the state.
But in California, an initiative cannot be changed unless it goes to the ballot. And, so far, there has not been enough political incentive for Prop 103 to make it back to a vote by the people.
In the meantime, California has attempted other solutions, such as setting up the FAIR Plan, its state-created insurer of last resort that provides expensive, bare-bones policies. But as the number of FAIR Plan policies has soared beyond what it was designed to support, there has been some public talk over concerns that it could go bankrupt, according to Greenhut.
“It’s a real disaster in the making,” he said. “Now we have these big wildfires in Southern California, which are horrific. And we’ll have to wait and see the result, but it’s another huge problem.”
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