ICLE on Insurance Regulation in California

An ICLE white paper on California’s Prop 103 system of insurance regulation was cited by National Review in a story about the state’s insurance market. You can read the full piece here.

Proposition 103 is responsible for a lot of California’s insurance regulatory regime. Lars Powell, R. J. Lehmann, and Ian Adams wrote a paper about Prop 103 for the International Center for Law and Economics (ICLE) in 2023. They trace the proposition’s origins to a 1979 California supreme court case that allowed third parties to bring legal action against insurance companies. That decision was a bonanza for trial lawyers, and the proliferation of lawsuits against California insurance companies forced them to raise rates significantly in the 1980s.

…Perhaps the craziest part of Prop 103 is that it included a provision that makes it extremely hard to amend. Any change to Prop 103 must be approved by a two-thirds majority in both houses of the California Legislature and must “further its purposes,” which is subject to judicial review. “Much has changed in the world, and in California’s insurance industry, since the passage of Prop 103, but the lion’s share of the law remains as it was in 1988,” the ICLE paper says.

One of those things that has improved since 1988 is statistical modeling of wildfire risk. Because that technology basically did not exist in 1988, it is not included in California’s insurance regulatory regime. California’s insurance authorities have in the past few years begun to incorporate some aspects of wildfire catastrophe modeling, but it is still not allowed to be used as justification for rate-hike requests. “This has essentially meant that California—a state that has long prided itself as being on the leading edge when it comes to its response to climate change—is effectively telling insurers to ignore the science,” the paper says.

…“Oh, those greedy insurance companies are made of money, they can eat the losses,” some might think. The ICLE paper shows that from 1991 to 2016, California homeowners insurers made total cumulative profits of $10.2 billion. But in 2017 and 2018, they lost a total of $20 billion from wildfires. If an entire industry can lose twice as much money in two years as it made in total the 25 years prior, that’s not going to be sustainable.