OPINION: Insurance Companies Are Quietly Fleeing California
Voters and lawmakers imposed price controls that leave residents more vulnerable to disasters.
By Steven Greenhut
March 17, 2023 5:06 pm ET
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The words “California” and “crisis” seem to go together as the state bounds from one intractable problem to another. The recent spate of flood-level storms in Northern California brought attention to the Golden State’s ailing levees. As an “atmospheric river” pummeled the low-lying Sacramento region, a nearly endless parade of trucks carrying rubble raced to shore up an aged system.
It would never dawn on the state’s political leadership to invest in infrastructure improvements before near-catastrophic failures stressed levees to the breaking point. Nor would it occur to them to invest in water infrastructure. Shortly before the storms, which brought nearly as much rain in three weeks as California had experienced in a year, the state was already facing another weather-related crisis: a mega-drought that led to water rationing. Such a problem had long been predicted, yet until recently the state didn’t move urgently to approve new desalination plants or improve infrastructure.
The recent floods and wildfire season have also have saddled insurance companies with as much as $1.5 billion in losses. Insurance markets could weather these blows, but California’s government-controlled insurance system won’t let them. Thus, insurers are pulling out of the state or reducing their underwriting, leaving many homeowners dependent on the bare-bones insurer of last resort: the state-created (though insurer-funded) Fair Access to Insurance Requirements Plan. As Jerry Theodorou, an R Street Institute insurance expert, observed in the Orange County Register, the number of FAIR Plan policies has increased 240% since 2017.
Car insurers are backing away, too, Mr. Theodorou notes, as losses increased 25% in one year, while premiums rose only 4.5%. That statistic offers insight into the problem. In 1988 California voters approved a ballot measure backed by tort lawyers that turned the insurance commissioner into a rate-setting czar. “Proposition 103 . . . requires the ‘prior approval’ of California’s Department of Insurance before insurance companies can implement property and casualty insurance rates,” the department’s website explains. “The ballot measure also required each insurer to ‘roll back’ its rates 20 percent. Prior to Proposition 103, automobile, property and casualty insurance rates were set by insurance companies without approval by the Insurance Commissioner.”
Thanks to Republicans’ longtime weakness in statewide races, the commissioner, Ricardo Lara, won re-election last year by 20 points, despite controversies involving campaign contributions from people linked to companies he regulates. But the real problem isn’t Mr. Lara; it’s the powers vested in his office. Since Proposition 103’s passage, California has endured similar problems with all insurance commissioners, including Republicans. Elected commissioners have every incentive to oppose premium hikes. Insurers are reluctant to propose any changes because doing so would trigger an administrative process in which “intervenors”—consumer groups that get reimbursed to advocate for the public in the rate process—rack up legal fees.
In 2016 State Farm General Insurance, which provides fire insurance to 20% of the state’s homeowners, proposed raising rates by 6.9%. The insurance commissioner at the time, Democrat Dave Jones, instead ordered the company to slash rates by 7% and rebate consumers $100 million. Small wonder that insurers avoid this process and instead quietly pull back from the market.
The Department of Insurance uses a formula to determine rates based partly on a company’s revenues. In State Farm’s case, the department, along with a group called Consumer Watchdog, calculated what the company’s premiums should be based on the overall revenues of an out-of-state group of State Farm-affiliated companies. Though a state appeals court rejected this method in a harshly worded ruling, a San Diego County court nevertheless awarded Consumer Watchdog $2.2 million in legal fees for its far-fetched opposition in its role as an intervenor.
This regulatory environment explains why California insurers can’t charge rates that reflect their actual risks. It also shows why there’s so little competition in the state’s insurance industry. Over the long run, competition keeps rates low. Insurance commissioners can certainly hold premiums down by edict, but the result is a contracting market. Homeowners then have little choice but to buy inadequate policies in a government-run marketplace.
Proposition 103 isn’t the state’s only insurance problem. In 2018 Gov. Jerry Brown signed a law banning insurance cancellations and nonrenewals in wildfire-affected areas for a year after the fires—and Mr. Lara continues to force the already overstressed FAIR Plan to offer additional coverage. Such edicts further burden an overextended backup insurance fund.
Lawmakers often talk about the need to help consumers and businesses in California’s many disaster-prone areas to secure affordable coverage, yet those same lawmakers impose edicts that impair the ability of insurance markets to do so. As a result, insurance may soon join droughts, fires, floods, infrastructure, traffic congestion, homelessness and crime among California’s many crises.
Mr. Greenhut is a resident senior fellow for the R Street Institute. This piece is adapted from City Journal’s special issue “Can California Be Golden Again?”
Flooding near downtown Sacramento, Calif., Jan. 11.
PHOTO: FRED GREAVES/REUTERS
Appeared in the March 18, 2023, print edition as 'Insurance Companies Are Quietly Fleeing California'.
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