ICLE White Paper Highlights Role of Prop 103 in California’s Collapsing Insurance Market
PORTLAND, Ore. (Sept. 27, 2023) – As California leaders move to take emergency action to stabilize its rapidly collapsing market for property insurance, a new International Center for Law & Economics (ICLE) white paper examines the role that the state’s 35-year-old Proposition 103 has played in leaving the state unable to keep pace with national trends and product innovations.
Written by ICLE Academic Affiliate Lars Powell, Editor-in-Chief R.J. Lehmann, and Executive Director Ian Adams, “Rethinking Prop 103’s Approach to Insurance Regulation” outlines how the Prop 103 rating system is slow, imprecise, inflexible, and unpredictable, and details the questionable value provided by the state’s unique rate-intervenor system.
The authors argue that these factors have played a key role in the ongoing collapse of the property-insurance market, highlighted in recent months by decisions from insurers representing 63% of the state’s homeowners market to either cease or severely limit writing new policies in California.
“Prop 103’s suppression of property-insurance rates in the private market has contributed to an availability crisis and the shunting of policyholders into the surplus-lines market and the California FAIR Plan, both of which will inevitably have to raise rates accordingly to be able to meet their obligations,” the authors write.
“Prop 103 has created an insurance market that struggles to work efficiently even in the best of times and is virtually impossible to sustain in periods of acute stress,” they add.
The paper concludes with administrative and legislative recommendations for reform, including allowing insurers to use catastrophe models and account for the cost of reinsurance in their rate filings; broadening the availability of telematics in auto insurance; fast-tracking noncontroversial filings; refocusing rate proceedings; and requiring intervenors to publicly account for their substantive contributions to the ratemaking process.