California’s Coming Insurance Crisis

STEVEN GREENHUT, CNSNews

The words “California” and “crisis” seem to go together, as the state bounds from one intractable problem to another. The recent spate of flood-level storms in Northern California focused attention on its ailing levees. As an “atmospheric river” pummeled the low-lying Sacramento region, a nearly endless parade of trucks carrying rubble raced to shore up an aged system.

It would never dawn on the state’s brain trust to invest in infrastructure improvements before near-catastrophic failures stressed levees to the breaking point. Nor would it dawn on it to invest in water infrastructure. Shortly before the storms, which brought nearly as much rain in three weeks as California had experienced in a year, the state was already facing another weather-related crisis: a mega-drought that mandated water rationing. Such a problem had long been predicted, yet the state hasn’t moved until recently with any particular urgency to approve new desalination plants or improve infrastructure.

Last summer, as California’s electrical grid was overstressed, the state’s independent system operators warned residents not to charge their electric vehicles—during the same week that state officials boasted about the California Air Resources Board’s latest regulations, phasing out internal-combustion vehicles by 2035. That’s the most California thing ever.

It’s not hard to see a connection between these crises. Despite last year’s $97.5 billion budget surplus, lawmakers “invested” in new social programs and higher pay and benefits for government employees. Only rarely do they prioritize the nuts and bolts of governance—infrastructure investments, revamping the tax system, or dealing with pension liabilities, say. Now, as the state budget looks at a $23 billion deficit, California confronts a new challenge: a serious crisis in the insurance industry is looming, largely unnoticed by state officials.

The recent floods and wildfire season not only have battered the state’s infrastructure; they have also saddled insurance firms with as much as $1.5 billion in losses. Insurance markets could weather these blows, but the government-controlled insurance system won’t let them. Thus, insurance companies are pulling out of the state or reducing their underwriting, leaving many homeowners dependent on the bare-bones insurer of last resort: the state-created (though funded by insurers) Fair Access to Insurance Requirements Plan. As Jerry Theodorou, an R Street Institute insurance expert, observed in the Orange County Register, the number of FAIR Plan policies has increased 240 percent since 2017.

Car insurers are backing away, too, Theodorou notes, as losses increased 25 percent in one year, while premiums rose only 4.5 percent. That statistic offers insight into the problem. In 1988, California voters approved a ballot measure backed by consumer groups (read: tort lawyers) that turned the insurance commissioner into a rate-setting czar. The California Department of Insurance gives a simple description of the measure: “Proposition 103 . . . requires the ‘prior approval’ of California’s Department of Insurance before insurance companies can implement property and casualty insurance rates. The ballot measure also required each insurer to ‘roll back’ its rates 20 percent. Prior to Proposition 103, automobile, property and casualty insurance rates were set by insurance companies without approval by the Insurance Commissioner.”

Thanks to Republicans’ long-running weakness in statewide races, the current commissioner, progressive Democrat Ricardo Lara, won reelection by 20 percentage points, despite controversies involving paid living expenses and campaign contributions from those whom he regulates. But the real problem isn’t Lara; it’s the powers vested in his office. Since Prop. 103’s passage, California has endured similar problems with all insurance commissioners, including Republican ones. Elected commissioners have every incentive to oppose rate hikes. Insurers are reluctant to propose any rate changes because doing so would trigger an administrative process in which “intervenors” (consumer groups that get reimbursed to advocate for the public in the rate process) rack up legal fees.

I covered one recent example in The American Spectator. In 2016, State Farm General Insurance, which provides fire insurance to 20 percent of the state’s homeowners, proposed raising rates by 6.9 percent. The insurance commissioner at the time, Dave Jones, instead ordered the company to slash rates by 7 percent and retroactively to rebate consumers $100 million. Small wonder that insurers avoid this process and instead quietly pull back from the market.

The Department of Insurance uses a formula to determine rates based partly on a company’s revenues. In State Farm’s case, the department, along with a group called Consumer Watchdog, calculated what the firm’s premiums should be, based on an out-of-state group of State Farm–affiliated companies. Though a state appeals court rejected this method in a harshly worded ruling, a San Diego County court nevertheless awarded Consumer Watchdog $2.2 million in legal fees for its far-fetched opposition. So the insurer had to pay out millions of dollars to a public-interest group just to raise its premiums.

Such cases explain why California insurers can’t charge rates that reflect their actual risks. They also show why there’s so little competition in the state’s insurance industry. Over the long run, competition keeps rates low. Insurance commissioners can certainly hold rates down by edict, but the result is a contracting market. Homeowners then have little choice but to buy inadequate policies in a government-run marketplace.

Prop. 103 isn’t the state’s only insurance problem. In 2018, then-governor Jerry Brown signed a law banning insurance cancellations and nonrenewals in wildfire-affected areas for a year after the fires—and Lara continues to force the already overstressed FAIR Plan to offer additional coverage. Such edicts further burden an overextended backup insurance fund.

Insurance is an exceedingly important product. Lawmakers often talk about the need to help consumers and businesses in the state’s many disaster-prone areas to secure affordable coverage, yet those same lawmakers impose government edicts that impair the ability of insurance markets to do just that. As a result, insurance may soon join droughts, fires, floods, infrastructure, traffic congestion, homelessness, and crime among California’s many crises.