Top Five Reforms to Stop California's Property Insurance Crisis
Hint: We Need Risk-Based Rates, Not Regulatory Ruin
Here’s my best shot at trying to write something digestible about a subject of critical importance to all Californians…
Market Crashes Hard
The state's homeowners’ insurance market is collapsing due to regulatory overreach and escalating wildfire risk. The 1988 Proposition 103 initiative created an elected Insurance Commissioner and requires state approval to increase rates, preventing insurers from writing premiums that reflect skyrocketing costs and risks. Price suppression forces insurers to pay claims of $1.09 for each dollar received, while nationally, insurers generate a $0.036 profit per dollar. Seven large insurers have ceased writing new policies or renewals since 2022, and homeowners are scrambling for protection.
Bailouts Burn Policyholders in Low-Risk Areas
The California FAIR Plan, the last-resort marketplace for homeowners unable to obtain coverage, is de facto insolvent due to soaring demand. Premiums, $700 below the national average, decrease supply and increase expenses. When short on cash, the FAIR Plan charges insurers unlimited amounts, which they pass to policyholders in lower-risk areas—causing cross-subsidization. After the recent Los Angeles wildfires, the FAIR Plan levied a $1 billion fine on insurers. (Everyone should get ready for a bill from their insurance companies as much of that, under the law, is recouped by charging it off on all of their insured). In 2021, the state requested a 40% increase, but the Department of Insurance allowed only 15% two years later, starving the FAIR Plan and forcing lower-risk buyers to subsidize higher-risk ones. An open market solution is needed to align prices with risk and protect homeowners.
There are five essential reforms that I believe are needed to end this crisis:
1. Repeal Prop 103
Dismantling Proposition 103's "prior approval" system would enable insurers to set rates based on actuarial data and market conditions, thereby allowing for more competitive pricing. This encourages competition to offer equitable, risk-based premiums, bringing insurers back to California. States like Texas and Florida, with less rate regulation, have viable insurance markets despite high disaster risk. In California's system, the Department of Insurance takes one year to review rate filings. No insurer can survive such delays—they’ll refuse to cover costly customers.
2. Charge True Risks
Allow insurers to provide premiums for wildfire and rebuilding risk. Homeowners in high-risk areas, such as Pacific Palisades, would pay realistic premiums, leading to informed choices. These premiums signal risks of building near unmanaged vegetation in regions with seasonal hot, dry winds and curvy roads that hinder evacuation. Fleeing residents can block firefighters from reaching fire lines. Competition can keep premiums lower without artificial restraints.
3. Cut Rate Shackles
Replace Prop 103's slow process with a "file-and-use" system, allowing insurers to implement rates promptly while regulators oversee the process. Quicker approvals of the 2024 Sustainable Insurance Strategy are a start, but full streamlining requires repealing Prop 103.
4. Pass Real Fire Prevention
Accelerate controlled burns, utility hardening, and grid hardening. Deregulate rules that stifle Pacific Gas & Electric's fireproofing efforts to minimize wildfire risk. Prioritize mitigation over costly climate mandates, saving insurers and homeowners money.
5. Drain the FAIR Plan
A growing FAIR Plan signals a failing market. Its one-size-fits-all approach offers lower benefits at high costs, leaving customers with limited coverage. Others cross-subsidize them, exacerbating inequity. The state must incentivize insurers with faster rate approvals to offer better alternatives, drawing customers back to the open market. Fundamentally, people who choose to live in low-risk areas should not be expected to “cover” the risk of those who do not.
In Conclusion… Choice Beats Crisis
California's insurance crisis is a regulatory failure. Past Commissioners kept rates low for political gain, causing insurers to seek double-digit rate increases. Repealing Proposition 103, adopting risk-based pricing, reducing approvals, encouraging wildfire mitigation, and prohibiting bailouts will rebuild a competitive market. These reforms respect choice, promote risk management, and protect taxpayers. A ballot initiative offers a solution for a healthy market without public costs. Insurers, as businesses, exited due to losses—but this can be corrected.