For those curious about why a company would exit certain markets altogether, as has been the case with State Farm exiting California’s homeowners’ insurance market in 2023, followed shortly by the exit of Allstate – a new whitepaper from the International Center for Law & Economics takes an in-depth look at California’s Proposition 103, which they say makes the ratemaking process there unpredictable at best.
“California voters passed Proposition 103 in 1988. Since that time, California’s insurance market has struggled to keep pace with national trends and product innovations,” they write. “This paper outlines how the Prop 103 rating system is slow, imprecise and inflexible relative to other jurisdictions; examines the ways in which the ratemaking system has been rendered unpredictable; and details the form, function, and questionable value proposition of the rate intervenor system. In doing so, the paper demonstrates that 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.”
Entitled Rethinking Prop 103’s Approach to Insurance Regulation, the report provides a history of how Prop 103 came to pass politically. The report’s authors also discuss how rate increases are now subject to prior approval from an insurance commissioner – who is elected – and how public hearings are mandatory for personal lines increases of more than seven per cent, and commercial lines increases of more than 15 per cent. All other increases occur only at the discretion of the California Department of Insurance (CDI).
“Notable among the law’s other provisions was Section 8(b) which rendered Prop 103’s text extraordinarily difficult to amend,” they add. “Much has changed in the world and California’s insurance industry since the passage of Prop 103, but the lion’s share of the law remains as it was in 1988.”
Reviewing more recent history, they say non renewals of California residential-property policies grew by 36 per cent, while the number of new policies written by the state’s residual market FAIR Plan (California Fair Access to Insurance Requirements Plan) surged by 225 per cent in 2019.
In addition to the rate setting constraints that are political in nature, the law also blocks insurers from considering climate change in setting premiums. “The most obvious problem with rate regulation is that it restricts the availability of insurance,” they write. “Insurers naturally respond to rate regulation by tightening their underwriting criteria, forcing some consumers to have to turn to the higher priced residual market for coverage. In extreme cases, rate suppression can lead some insurers to exit the market altogether.”
The law also does not permit the use of credit-based insurance scores in underwriting. It similarly restricts how insurers can fully use telematic technologies. Intervenors like Consumer Watchdog have also sought to block rate increases as low as four per cent. In one case, the long-time intervenor also argued that pulling out of a market altogether is also a ratemaking action which should be reviewed by the CDI.
“The intervenor process has proven both costly and time-consuming. According to CDI data, since 2003 intervenors have been paid $23,267,698.72 or just over $1-million annually, for successfully challenging 177 filings,” they write. “While a slow regulatory system limits the efficiency of insurance markets, a system that suppresses rates will also inhibit deployment of capital, ultimately reducing the number of insurers who choose to participate.”