California’s Regulatory Restrictions Contribute to Risk Crisis

California’s regulatory restrictions to fair, actuarially sound insurance pricing and underwriting, coupled with the need for more mitigation and resilience efforts in the state, are putting financial pressure on insurers and contributing to limited availability of property insurance in high-risk markets, according to the Insurance Information Institute’s (Triple-I) latest Issues Brief.

Trends and Insights: California’s Risk Crisis, examines this changing risk environment and the impact of Proposition 103 – a three-decades-old measure that has made it hard for insurers to profitably write coverage in the state. In a dynamically evolving risk environment that includes earthquakes, drought, wildfire, landslides, and, in recent years, flooding due to “atmospheric rivers,” Proposition 103 and its regulatory implementation have prevented insurers from using the most current data and advanced modeling technologies. Instead, they have required insurers to price coverage based on historical data alone.

“Much has changed in the world since 1988 when Proposition 103 came into effect, and it's well over time to evolve California’s insurance regulatory system,” said Sean Kevelighan, CEO of the Triple-I. “While the recently proposed changes by the California Department of Insurance are a move in the right direction, it is becoming increasingly critical to quickly bring market stability into one of the largest state economies,” he added. “Insurance is a key driver to economic stability and growth, but it needs to function in ways that allow insurance to be accurately priced. Insurance prices are the effect rather than the cause of risk.”

The Issues Brief noted that Proposition 103 also has impeded premium rate changes by allowing consumer advocacy groups to intervene in the rate-approval process. This makes it hard to respond quickly to changing market conditions, resulting in approval delays and rates that don’t accurately reflect current (let alone future) risk. It also drives up legal and administrative costs. This has led, in some cases, to insurers deciding to limit or reduce their business in the state. With fewer private insurance options, more Californians are resorting to the California FAIR Plan, the state’s insurer of last resort, which offers less coverage for a higher premium.

In September 2023, California Insurance Commissioner Ricardo Lara announced a Sustainable Insurance Strategy for the state that includes allowing insurers to use forward-looking risk models that prioritize wildfire safety and mitigation and include reinsurance costs in their premium pricing. In exchange, insurers must cover homeowners in wildfire-prone parts of the state at 85% of their statewide coverage.

Public discourse often frames the risk crisis as an “insurance crisis” – conflating cause with effect, Triple-I’s Issues Brief noted. Legislators, spurred by calls from their constituents for lower insurance premiums, often propose measures that would tend to worsen the problem because these proposals generally fail to reflect the importance of accurately valuing risk when pricing coverage. California’s Proposition 103 and the federal National Flood Insurance Program before its Risk Rating 2.0 reforms are just two examples, according to Triple-I.

About the Insurance Information Institute

With more than 50 insurance company members — including regional, super-regional, national, and global carriers — the Insurance Information Institute (Triple-I) is the #1 online source for insurance information in the U.S. The organization’s website, blog and social media channels offer a wealth of data-driven research studies, white papers, videos, articles, infographics and other resources solely dedicated to explaining insurance and enhancing knowledge.

Unlike other sources, Triple-I’s sole focus is creating and disseminating information to empower consumers. It neither lobbies nor sells insurance. Triple-I offers objective, fact-based information about insurance – information that is rooted in economic and actuarial soundness. Triple-I is affiliated with The Institutes Risk and Insurance Knowledge Group.

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"While the recently proposed changes by the California Department of Insurance are a move in the right direction, it is becoming increasingly critical to quickly bring market stability into one of the largest state economies." @III_SeanK