California's Insurance Regulation Fixes Came Too Little, Too Late
Decades-old, voter-approved restrictions on insurers raising premiums have created a regulatory disaster to match the natural one.
At the end of last year, California issued emergency new insurance regulations giving insurers more freedom to raise premiums while also requiring them to extend coverage to wildfire-prone areas of the state.
The hope was that this compromise of higher premiums and more coverage would set right the crisis of insurers fleeing the state and leaving homeowners with no private options for financially protecting their homes from the next disaster.
The reality is that these reforms might be too little and come too late. Now, the still-burning Palisades and Eaton fires (estimated to have caused $150 billion in damages) seem to be pushing politicians back into their old, bad habits of bullying insurers into doing business in California.
This past Friday, California's elected insurance commissioner, Ricardo Lara, issued a moratorium on insurance companies canceling or not renewing policies in areas affected by the Palisades and Eaton fires.
"I am using my moratorium powers to prevent insurance companies from canceling or non-renewing policies in wildfire-impacted areas, so people don't face the added stress of finding new insurance during this horrific event," said Lara.
California Gov. Gavin Newsom touted the non-renewal ban on social media.
California is preventing insurance companies from canceling or not renewing home coverage for LA wildfire victims in affected zip codes over the next year.
Whether homeowners have suffered a loss or not, we're alleviating the stress of finding new insurance during these times. pic.twitter.com/ABr9oQlct3
— Governor Newsom (@CAgovernor) January 10, 2025
Forcing insurers to renew policies has been California officials' go-to policy for the past several years.
In 2018, the California Legislature passed S.B. 824. Written by Lara (then a state senator), the bill forbade insurance companies from canceling or not renewing policies for one year in ZIP codes that had been affected by wildfires.
As of November 2022, nearly 2.4 million policies were in ZIP codes covered by non-renewal moratoriums, according to a September 2023 report by the International Center for Law and Economics (ICLE).
That law was passed in the wake of the 2017 and 2018 wildfires that had caused some $20 billion in damages—a figure high enough to wipe out a quarter century of insurance industry profits in the state.
Insurers' non-renewal rates increased 36 percent in the years following the 2017 and 2018 fires, according to ICLE. Over the same period, the number of policies written by FAIR, the state's insurer of last resort, increased by 225 percent.
Between 2019 and 2021, non-renewal rates more than doubled in the ten counties most affected by wildfire risk, according to California's Department of Insurance.
But forcing insurers to renew policies did little to address the companies' primary reason for wanting to limit their California business: decades-old, voter-approved limits on insurers' ability to raise premiums to reflect rising wildfire risk.
Under Proposition 103, passed in 1988, California's insurers have been prohibited from passing the costs of reinsurance (insurance on insurance) onto consumers. They've also been required to use past averages of wildfire damages when pricing wildfire risk into premiums on new policies.
The trouble is that reinsurance rates (which are not regulated under Prop. 103) have been rising to account for increased wildfire risk. The concentration of wildfire losses in recent years and the rising risk of future wildfire losses means that basing premiums on past averages of wildfire losses is "wholly inadequate" to cover insurers' risks, says the ICLE report.
This all came to a head in 2023 when the state's two largest home insurers, State Farm and Farmers, said they'd stop issuing new policies in California. (State Farm also canceled some 1,600 policies in Pacific Palisades, one of the communities that has been nearly wiped out by the recent fires.)
California was "really on the precipice about a year ago of basically all the major carriers just pulling out of the state," says Ray Lehmann, one of the co-authors of the ICLE report.
To make matters worse, Prop. 103 makes it incredibly difficult to make reforms to insurance regulations. Amendments to the proposition require two-thirds approval in the Legislature. The voters must then approve the reforms in a referendum.
By 2023, the insurance crisis was severe enough to encourage Newsom to take unilateral emergency action. In September of that year, he issued an executive order directing Lara to craft regulations that would stabilize the state's insurance market.
In turn, Lara produced the Sustainable Insurance Strategy.
These reforms would allow insurers to pass on the costs of reinsurance to consumers. It also enabled them to use "catastrophe models" that predict future wildfire risk to set premiums. In exchange for the ability to charge higher premiums, Lara issued rules requiring insurers' market share in wildfire-prone areas to approximate their market share in the state as a whole.
"It's a step in the right direction," says Lehmann. "Broadly speaking, the insurance commissioner, to the extent that he can, has been reasonable at allowing rate increases for companies that want to continue to do business in California."
Lara's Sustainable Insurance Strategy officially went into effect on December 30. The Los Angeles area fires broke out a little over a week later.
Consumer advocates, who have traditionally challenged any attempted changes to Prop. 103, will likely sue over the Sustainable Insurance Strategy. The president of Consumer Watchdog, a driving force behind the passage of Prop. 103, called Lara's reforms "the worst type of power grab" in comments to the Los Angeles Times.
If court challenges are filed, and if they prove successful, insurers would be forced to retain policies in areas that were just devastated by the Los Angeles-area fires, without the flexibility to charge higher premiums to offset their risk.
To make matters worse, insurers and policyholders alike are likely going to be on the hook for a bailout of the state's FAIR plan. According to Politico, the insurer of last resort is exposed to $6 billion in losses in Pacific Palisades alone and covers $10.5 billion worth of property in areas under mandatory evacuation orders.
The FAIR plan is capitalized through assessments on private insurers. If it doesn't have enough reserves to pay out claims (which after this most recent fire, it almost certainly doesn't), it will raise additional funds through assessments on those same insurers. Those costs could then be passed on to policyholders.
The FAIR plan covers a relatively small 4 percent slice of California's insurance market. Nevertheless, that's an increase from its 1.5 percent share before 2019.
If your average home insurance policyholder sees a huge assessment levied on them to cover a FAIR plan bailout, it will likely diminish whatever political goodwill they might have extended to comprehensive reform efforts allowing insurers to raise premiums even more.
Given the procedural hurdles for reforming Prop. 103, the odds are that no one will want to touch the issue in the wake of the most recent fires.
"It's not been proposed. Who's going to propose it? Who's got the political courage to take that on?" says Matthew Lewis, communications director for California YIMBY, a housing advocacy group.
The insurance crisis that California seemed to be digging itself out of is inflamed once again.
