CRMBC CEO and insurance industry expert Kaya Stanley explains that there is no state surplus to cover the catastrophic economic losses associated with the Los Angeles wildfires.
California’s insurance crisis is expected to get worse after the devastation forest fires raging across the countryand experts say the 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 Department of Insurance the power to approve rates or even reverse them. So, insurance companies that want to raise rates must go through a regulatory process that can take months or even years, hampering their ability to adequately adjust rates to cover their losses and assess risk.
Columns of smoke from a brush fire burning in Pacific Palisades, California on Tuesday. (David Swanson/AFP via Getty Images/Getty Images)
“Proposition 103 is essentially a price control,” said Steven Greenhut, western regional director for the R Street Institute in Sacramento. “It calls into question the ability of insurance companies to adjust rates to meet the market.”
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Greenhut said FOX Business in an interview that this lengthy process caused insurance companies to start pulling out of California after the previous bout of wildfires that caused widespread destruction in the state a few years ago because carriers were unable to adjust rates quickly.
State Farm announced last year that it would cancel 72,000 insurance policies in the Golden State. (Justin Sullivan/Getty Images/Getty Images)
In 2023, Greenhut wrote an author warning that California’s insurance regulations would lead to the insurance crisis the state now faces. But when big insurance companies like State Farm began pulling out, he said, some elected officials blamed climate change.
Greenhut believes climate change could affect some of the catastrophic events, but argues that it doesn’t change what he sees as the nature of the problem — that California’s regulatory system prevents insurance companies’ ability to set rates where they need to be, and that reduces competition over time.
Ricardo Lara is the commissioner of the California Department of Insurance and has proposed reforms to address the state’s insurance crisis. (Brittany Murray/Digital First Media/Long Beach Press-Telegram via Getty Images/Getty Images)
California Insurance Commissioner Ricardo Lara recently began allowing rate increases and brought reforms in an effort to keep insurers in the Golden State, and Gov. Gavin Newsom also acknowledged the state needs more competition.
California Democratic Governor Gavin Newsom. (Jason Armond/Los Angeles Times via Getty Images/Getty Images)
But in California, an initiative can’t be changed unless it goes to the ballot. And so far, there hasn’t been enough political impetus to return Proposition 103 to a popular vote.
Meanwhile, California has tried other solutions, such as establishing the FAIR Plan, its state insurer of last resort that offers expensive, bare-bones policies. But as the number of FAIR policies has jumped beyond what it was designed to support, there has been some public talk of concern that it could go bankrupt, according to Greenhut.
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“It’s a real disaster in the making,” he said. “Now we have these big wildfires in Southern California, which are terrible. We’ll have to wait and see the result, but it’s another big problem.”
