CRMBC CEO and insurance industry expert Kaya Stanley explains how no state has a surplus to cover the catastrophic economic losses associated with the Los Angeles wildfires.
California's insurance crisis is expected to get worse after being devastating Fire in the stateAnd experts say the decade-old law plays a key role in why insurance companies have fled the state in recent years.
In 1988, California voters passed Proposition 103, which gave the state's insurance department the power to approve rates or even roll them back. so, Insurance companies Those seeking to raise rates must go through a regulatory process that can take months or even years, hampering their ability to adjust rates adequately to cover losses and assess risk.
Smoke billows from a brush fire in Pacific Palisades, Calif., on Jan. 7, 2025. (David Swanson/AFP via Getty Images/Getty Images)
“Prop. 103 is essentially price regulation,” said Steven Greenhut, western region director of the R Street Institute in Sacramento, Calif. “It puts the kibosh on insurance companies' ability to adjust to the market.”
CA wildfire backlash: State Farm, other insurers slammed for dropping coverage
Greenhat said Fox business An interviewer said that because of this long-running process, insurance companies have started pulling out of California after previous battles with the wildfires that caused widespread destruction in the state a few years ago because carriers weren't able to adjust rates quickly.
A sign is posted in front of a State Farm Insurance office in Berkeley, Calif., on Jan. 3, 2024. (Justin Sullivan/Getty Images/Getty Images)
In 2023, Greenhut wrote an op-ed warning that California's insurance regulations would lead to the insurance crisis the state is now seeing. But when big insurers like State Farm began to pull back, he said, some elected officials blamed climate change.
Greenhut believes climate change could affect some catastrophic events but argues that doesn't change what he sees as the nature of the problem — that California's regulatory system hinders the ability of insurance companies to set rates where necessary and reduces competition over time.
Sen. Ricardo Lara joins union groups gathered for a rally in Wilmington on Wednesday, Oct. 3, 2018. Lara is the state's insurance commissioner and has proposed reforms to address California'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 reforms made In an effort to keep insurers in the Golden State, and Gov. Gavin Newsom has also acknowledged that there needs to be more competition in the state.
California's Democratic Governor Gavin Newsom (Getty Images/Getty Images via Jason Armond/Los Angeles Times)
But in California, an initiative can't be changed without going on the ballot. And, so far, there hasn't been enough political incentive for Prop. 103 to return to a public vote.
In the meantime, California has tried other solutions, such as setting up FAIR Plan, its state-created insurer of last resort that offers expensive, bare-bones policies. But as the number of FAIR Plan policies has grown beyond what it was designed to support, there has been some public discussion of concerns that it could go bankrupt, according to Greenhatt.
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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. And we'll have to wait and see the results, but that's another big problem.”