In the wake of the Los Angeles wildfires, a controversial insurance law dating back more than 35 years is getting attention, and some are optimistic the spotlight might lead to some long-awaited changes.
It’s not new that researchers, policy experts and insurance insiders are blaming the law, known as Proposition 103, for the complicated insurance environment in California. As recently as December, State Insurance Commissioner Ricardo Lara began enforcing new regulations to expand insurance coverage under Prop 103.
But the wildfires that ravaged parts of greater Los Angeles this year have shown that stakes are high in the debate, and this has increased pressure to reform the law.
“I’ve been working on this issue for years, multiple decades at this point,” said Ian Adams, executive director of nonprofit, nonpartisan research center the International Center for Law & Economics, in an interview. “This is the first time I’ve ever seen the political will on a bipartisan basis in [the state capital of] Sacramento and the interest nationally for there to be serious consideration of and initiative to reform.”
Exclusive Homes.com and CoStar data found that together the two largest fires, the Palisades fire and the Eaton fire, destroyed roughly 11,000 homes valued at about $29.7 billion. The cost of those losses is already creating challenges for insurers, and that’s even after a number of those companies have already pulled out of at-risk California markets.
Insurer Allstate, for example, said this month it expects to pay about $1.1 billion in claims related to the wildfires. California’s largest insurer State Farm filed for an emergency rate hike, citing the cost of fire-related claims and coverage. All told, about $4.2 billion in insurance claims related to the Eaton and Palisades fires had been paid as of Jan. 30, according to data from California’s insurance commissioner.
Still, advocates of the law, including Consumer Watchdog, the nonprofit that originally drafted the legislation, argue that it’s succeeded in saving Californians money while also preserving insurance company profits.
"Our regulatory system has kept rates lower than they otherwise would have been," said Carmen Balber, executive director of Consumer Watchdog, in an interview. "It's saving consumers far, far more than the small amount it costs."
Decades-old regulation
Prop 103, the regulation at the heart of the debate, dates to 1988.
That’s when the law passed and established an elected insurance commissioner responsible for reviewing and approving, or rejecting, insurers’ requests for rate hikes in the state. It also created a system for the public to participate in the insurance market through consumer representatives known as “intervenors.”
For example, State Farm must seek permission from the state commissioner before it can raise rates in response to last month’s blazes.
Ultimately, Prop 103 sought to “protect consumers from arbitrary insurance rates and practices, to encourage a competitive marketplace and to ensure that insurance is fair, available and affordable for all Californians,” according to the commissioner.
The law is “a historical accident," said Adams of the International Center for Law & Economics.
“Over the last 10 years, it has artificially suppressed rates in such a way that California’s property insurance market – now that it is having these shocks associated with fires – is fundamentally unstable,” he said. “There is too large of a [difference] between risk and the prices that have been approved for California insurance products.”
But data from Consumer Watchdog shows that during the same period, the home insurance industry in California has actually been more profitable than in the rest of the country, even as homeowners have saved money on coverage costs. For example, while home insurers nationwide have profited 2.9% from homeowners insurance transactions, insurers in California have yielded a 3.6% profit.
Moreover, insurers have received approval for rate increases over the past two years, according to the data. Balber said in a statement that existing regulations, including Prop 103, ensured those hikes were “justified.”
"In California, the home insurance industry has been more profitable over the last 20 years than the national average," Balber said in an interview. "The proof is in the pudding in that the insurance industry has the money to pay its bills for all these fires and that's because they have been banking policyholder premiums to prepare."
National attention
The law has made its way up to the federal government, too. At a U.S. House Judiciary Committee hearing this month, several witnesses, including policy experts and researchers, argued that California’s legislation surrounding insurance rates is not only to blame for the fires but has worsened the aftermath as residents struggle to get coverage and insurers struggle to provide it.
Rep. Scott Fitzgerald, a Republican from Wisconsin, and some witnesses argued that it is the legislation itself that has put California residents in their current situation. That is, he said, they're underinsured and have few options as wildfires become more frequent and destructive.
The law “has led to decades of stagnant insurance premiums as [the commissioner’s] obvious political incentives to oppose rate hikes,” Fitzgerald said during the hearing, “and has caused insurers to pause issuing new policies or leave the state entirely.”
Steven Greenhut, resident senior fellow and Western region director of thinktank R Street Institute, testified that processes in place for insurers in California are too complicated.
“It can take many months for insurers to wade through the process of hearings, rate reviews and opposition to such hikes by consumer-attorney ‘intervenors’ who earn large fees for their efforts,” he said in a written statement submitted before he testified. “This process is so cumbersome that it reduces competition, leading to too few insurers.”
Despite the national attention, Balber described the hearing as "pointless," and said the future of the law and California's regulatory environment relies more on the decisions of the state's insurance commissioner, especially as insurers request rate hikes following the fires.
"We hope he does the right thing and requires [State Farm] to go to a hearing and justify what they want," she said. "But if he [commissioner Lara] doesn't, it would essentially be rate hike now, prove it later, which is exactly the opposite of what the law requires."