California fires: Insurance companies flee the state over a decades-old law

The insurance crisis in California is expected to get worse after the devastating disaster Forest fires raging in the stateExperts say a decades-old law plays a significant role in why insurers 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 or even reverse rates. So, Insurance companies Companies that want to raise interest rates must go through a regulatory process that can take months or even years, hindering their ability to adjust interest rates appropriately to cover their losses and assess risks.

“Prop 103 is essentially price controls,” said Stephen Greenhut, western region director of the R Street Institute in Sacramento. “It puts the kabosh on the ability of insurers to adjust rates to meet the market.”

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Greenhut said Fox Business In an interview, he said that because of this long-drawn process, insurance companies began pulling out of California after a previous bout of wildfires that caused widespread devastation in the state a few years ago because insurance companies were not able to adjust rates quickly.

In 2023, Greenhut wrote an op-ed warning that California’s insurance regulations would lead to the insurance crisis the state is now experiencing. But when major insurance companies like State Farm began to pull out, some elected officials blamed climate change.

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Greenhut believes climate change could affect some catastrophic events, but he argues that it does not change what he sees as the nature of the problem — that California’s regulatory system hinders the ability of insurers to set rates where they need to be, and that reduces competition over time.

California Insurance Commissioner Ricardo Lara recently began allowing rate increases Planned repairs In an effort to keep insurance companies in the Golden State, Governor Gavin Newsom also acknowledged the need for more competition in the state.

But in California, no initiative can be changed unless it goes to the ballot box. So far, there has not been enough political incentive to get Proposition 103 back to a vote by the people.

Meanwhile, California has tried other solutions, such as creating the FAIR Plan, an insurance company created by the state as a last resort that provides expensive basic insurance policies. But as the number of FAIR Plan policies has risen beyond what they were designed to support, there has been some public talk about concerns it might go bankrupt, according to Greenhut.

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“It’s a real disaster in the making,” he said. “Now we have big wildfires in Southern California, and they’re horrific. We’ll have to wait and see the outcome, but it’s another big problem.”