BLUE STATE BLUES: California Incinerated Its Insurance Market.

Other disaster-prone states, such as Florida, have major insurance problems, but the causes vary. In California, the cause is tied to our prior-approval system of insurance regulation. Wildfires exacerbate that problem. Climate change might intensify the wildfires. But the issue is California makes it inordinately difficult for insurers to price their policies accordingly. Price controls always lead to shortages. Instead of risking their financial health, insurers quietly leave.

Our controls came in 1988 when voters approved Proposition 103. It made the insurance commissioner an elected official. Elected officials have a political incentive not to raise rates for obvious reasons. It instituted a prior-approval system (similar systems exist in 12 states), whereby the commissioner must approve any rate increases. It created a Byzantine rate-review process that’s costly and time-consuming. It gave consumer attorneys (“intervenors”) standing to oppose rate hikes. It even rolled back rates.

The state can enact reforms within the Prop. 103 framework (mainly through expediting the rate-review process and allowing use of those catastrophe models), but it won’t have a healthy insurance market until it ditches price controls. To make matters worse, the state’s FAIR (Fair Access to Insurance Requirements) Plan is in deep trouble, as increasing numbers of property owners rely on this bare-bones state-created insurer of last resort. If that fails, what exactly will people do?

Leave.