Free up markets to solve California’s home insurance crisis

A recent administrative law judge’s decision paved the way for State Farm to significantly increase homeowners insurance rates in California—the state’s first-ever emergency rate hike—and that might not be such a bad thing in the long run. 

California is notorious for its burdensome regulations and difficult business climate, and its treatment of the insurance industry is no different. The state earned a D+ grade (ranked 44th among the states) in the R Street Institute’s 2024 Insurance Regulation Report Card, including placing dead last in the Underwriting Freedom category.

The root of the problem goes back nearly 50 years. In 1979, the California Supreme Court found in its Royal Globe Insurance Co. v. Superior Court ruling that a person injured due to negligence could sue not only the other party but also that other party’s insurance company. As a result, auto liability claims exploded and, not surprisingly, the costly litigation and increased settlements resulted in a substantial increase in auto insurance premiums.

In an attempt to combat the auto insurance cost increases, California voters narrowly passed Proposition 103, with just 51 percent of the vote, in 1988. The measure mandated a 20 percent rate cut and required future rate increases to first be approved by the insurance commissioner. California is one of just six states to maintain such a “prior approval” requirement. Prop. 103 also provided that “public intervenors” could file objections to proposed rate increases on behalf of consumers (and recover fees from the applicant insurance company for their efforts).

But, as is invariably the case when government intervenes in markets and imposes price controls, the cure was worse than the disease. Losses have increased substantially in recent years, particularly due to a number of severe wildfires and significant increases in residential construction costs, yet the state has prevented rates from rising enough to reflect actual risk, prompting numerous insurers—even some of the largest insurers in the state, such as State Farm, Allstate, Farmers, AIG and USAA—to cease or limit writing new policies, or refuse to renew existing policies, in California.

In many areas, it has been difficult, if not impossible, to obtain home insurance on the regular private market, prompting many to resort to California’s Fair Access to Insurance Requirements (FAIR) Plan, an insurer of last resort that offers less coverage and higher premiums than other plans. Now that plan is becoming overwhelmed and is in dire financial straits.

Then there is the inevitable bureaucratic inefficiency. Delays in rate increase decisions are substantial and have risen markedly in recent years. The average approval time for homeowners insurance filings increased from a little over 100 days in 2012 to about a year in 2023. 

As a newly released report from the Independent Institute observes, “When regulations restrict the consideration of relevant information, some risk classes end up subsidizing others, distorting prices and creating inefficiencies and perverse incentives in the insurance market.” By keeping rates artificially low and encouraging insurers to insure more properties in high-risk areas, California is only setting itself up for repeated disasters and more tragic losses. 

Californians might be surprised to learn that homeowners insurance rates in the Golden State are actually less than the national average. Given that just about everything else is more expensive in California, this offers additional evidence that the state has suppressed home insurance rates well below free market rates.

If California is really so concerned with affordability for homeowners, it should start by getting rid of all the laws and regulations that restrict housing supply, drive up prices, and push people to move into high-risk areas on the periphery of development (i.e., the wildland-urban interface) in the first place. These include restrictive zoning laws, prevailing wage (union pay scale) laws, affordable housing mandates, California Environmental Quality Act abuses and excessive environmental and building code regulations.

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To truly fix the mess that all this regulation and government intervention has created, California must eliminate rate approval requirements and repeal Proposition 103, which would require another ballot measure. By restoring a free and competitive market, insurers would have the confidence to start writing policies again, and price signals and risk models would more accurately tell us where we should build—and where we should not.

No one likes paying more for insurance, especially in a state that already demands such a high cost of living, but many Californians are coming to realize that higher-priced insurance is better than a broken system with no insurance at all.

Adam B. Summers is a columnist, economist, and public policy analyst, and a former editorial writer for the Orange County Register / Southern California News Group.

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