Deregulation Rather than Fossil Fuel Controls Needed to Fix California Insurance Market

Politicians and commentators often attribute the insurance crisis to climate change, especially to the extent that it is increasing wildfire risks. The preferred policy response under this diagnosis is faster migration away from fossil fuels.

While debating climate science is beyond my scope here, it is worth noting that climate change is a long-term trend rather than a new development. Indeed, none of the last four wildfire seasons have approached either the 4.3 million acres burned in 2020 nor the 24,226 structures damaged or destroyed in 2018. So, climate and wildfires cannot be the primary driver of the recent insurance company exodus.

Further, California cannot solve the climate problem on its own because the state accounted for less than 0.8 percent of 2022 global emissions. In the unlikely event that California could completely wean itself from fossil fuels and flatulent cattle, emissions will continue at 99.2 percent of their previous levels, with increasing emissions from China quickly overwhelming savings from California and other states.

The insurance crisis has more complex causes. For example, the cost of repairing or replacing damaged buildings in California has been increasing rapidly. The California Construction Cost Index, published by the state’s Department of General Services. rose 13.4% in 2021, 9.3% in 2022, and 9.4% in 2023.

In a free market, one might expect insurers to compensate for increased payouts by raising premiums. But California’s insurance rate regulations hinder this adjustment. Insurance companies “admitted” to the California insurance market must obtain approval for proposed rate hikes from the state’s Department of Insurance.

Although premium regulation is not unique to California, our state has an unusual adversarial process. In accordance with Proposition 103 (1988), a third-party intervenor can contest rate increases and insurers must pay their expenses. Between 2013 and 2023, intervenors collected a total of $10.5 million from California insurance companies whose proposed rate hikes they were contesting. Intervenor attorneys bill insurers hourly rates exceeding $300 with Consumer Watchdog founder Harvey Rosenfield billing $695 per hour. Rosenfield just happens to be the architect of Proposition 103.

Although Consumer Watchdog claims to have saved California insurance customers $5.51 billion in 2022 and 2023 alone, their estimates fail to take into account the likelihood that customers would shop around for policies and thus often avoid the full rate hike insurers had requested. Their savings estimate must also be adjusted downward by the coverage losses triggered by their interventions. If no admitted insurer will cover a property, the owner may have to go uninsured or use an out-of-state “surplus lines” provider whose rates are often far higher.

Another alternative is for customers to join the California FAIR Plan, a form of state-mandated last resort insurance. In the three years ended September 2024, the FAIR Plan’s exposure has risen from $202 billion to $485 billion. But the plan receives no state aid and must be fully backed by admitted insurers, raising their risk of staying in California.

While the Department of Insurance and the Hoover Commission are suggesting tweaks to the California insurance regulatory framework, deregulation is a simpler answer. Hundreds of insurers could then freely compete for Californians’ business, with third parties informing consumers about each company’s financial status and claims-handling behavior. And there would be an added bonus: by eliminating the Department of Insurance, the state could reduce its 3 percent tax on insurance premiums, part of which funds the department, providing an immediate savings for consumers.