California’s Insurance Crisis: A Case Study in Regulatory Failure | Lars Powell’s Prop 103 Breakdown

Published Date: 07/06/2025

California’s Insurance Crisis: A Case Study in Regulatory Failure

For decades, California’s insurance market has been a battleground — not between insurers and consumers, but between economics and regulation. While natural disasters and inflation often take the blame for the state’s spiraling premiums and insurer exodus, insurance expert Lars Powell argues that the real culprit is deeper, systemic, and self-inflicted.

In his presentation, “California’s Insurance Crisis: A Case Study in Regulatory Failure,” Powell lays out a data-driven critique of Proposition 103, the 1988 voter-approved law that governs how insurers set rates in California. His verdict? Prop 103 is a well-intentioned but disastrously outdated system that has effectively crippled California’s ability to maintain a healthy insurance market.

1. The Academic Lens: Understanding Insurance Market Function

Powell, who directs the Center for Risk and Insurance Research at the University of Alabama, has spent nearly three decades studying risk systems across the United States. His goal is straightforward: to identify how insurance markets work — and why they fail.

When asked to analyze California’s system, Powell and his research team did what academics do best: they ran the numbers.

“We were approached by folks who wanted us to write a critique of Prop 103 that used data and math — not politics or emotion — to see what’s really happening,” he explained.

Their findings, later published in the University of Connecticut Insurance Law Journal, offer a sobering view of the state’s regulatory structure — one that has effectively inverted the purpose of insurance regulation, from ensuring solvency and competition to suppressing prices and delaying reform.

2. California’s Real Problem: Not the Fires, But the Framework

Contrary to popular belief, Powell doesn’t blame wildfires or climate change for California’s insurance crisis.

“These aren’t insurance problems per se,” he said. “Insurance is just where you feel the pain.”

He compared California’s current situation to what happened in Alabama, Mississippi, and Louisiana after Hurricanes Ivan and Katrina — when insurers suddenly realized they had been underpricing risk for decades.

But there’s a key difference. While the Gulf states adapted, recalibrating rates and rebuilding solvency, California refused to modernize its system.

“California’s problem,” Powell said, “is that insurance doesn’t let the insurance mechanism work here.”

The result? A 35-year-old regulatory model built for the analog age trying to manage a digital, data-driven industry.

3. A Market in the Red: The Data Doesn’t Lie

Powell presented a simple but striking chart: California homeowners’ insurance profits and losses from 1991 to 2018.

From 1991 through 2016, insurers collectively earned around $10 billion in profit — a modest return considering the exposure and population of the state. But in just two years — 2017 and 2018 — catastrophic wildfire seasons wiped out that entire quarter-century of profit, generating losses of $10 billion per year.

“After just those two years,” Powell explained, “you’ve got a 27-year total profit of negative $10 billion.”

Yet state regulators, unwilling to approve meaningful rate adjustments, insisted the system was stable — a dangerous delusion Powell likened to “the ostrich plan”:

“The idea is, let’s just ignore it and hope it goes away. Delay, deny, stretch it out, and maybe the market will fix itself. That’s never worked very well for the bird — and it’s not working for California.”

4. The Ostrich and the King: Metaphors for Mismanagement

Powell used two memorable metaphors to describe the regulatory behavior he sees in California: The Ostrich Plan and The King Canute Syndrome.

🪶 The Ostrich Plan

Under California’s “deemer provision,” rate filings are supposed to be automatically approved within 60 days if the Department of Insurance doesn’t respond. But insurers are forced to waive that provision just to submit an application — making it a “false law.”

The result: endless delay. Powell’s data showed that California had some of the longest rate review timelines in the nation, with average resolutions exceeding 400 days in some categories.

👑 The King Canute Syndrome

Powell then invoked the medieval legend of King Canute, who was said to be so powerful that his followers believed he could command the tide not to rise. When he tried — and got soaked — he proved a timeless lesson: even kings can’t control the laws of nature.

“It’s very similar to what happens when a regulator says, ‘You may not let your insurance premiums go where they need to be.’ The king got wet that day. So does every regulator who tries to demand that insurers lose money.”

His point: you can’t legislate away risk — and when regulators suppress rates below actuarially sound levels, they drive insurers out of the market.

5. Rate Suppression: The Hidden Tax on Availability

California’s system doesn’t just delay rates — it undercuts them. Powell’s research found that between 2018 and 2022, the state suppressed rate filings by an average of:

• 28% for homeowners insurance, and
• 16% for auto insurance.

In other words, if actuaries calculated that a 10% rate increase was needed to remain solvent, regulators typically approved only 7.2%.

That may sound like a win for consumers — until insurers decide they can’t afford to write policies at all.

“There’s the old joke,” Powell said, “that you lose a little bit on each transaction but make it up on volume. That doesn’t really work. You just lose an awful lot.”

6. The 1988 Problem: California Is Still Driving an Old Truck

One of Powell’s more humorous analogies drew laughter from the audience — but underscored a serious point.

He compared Proposition 103 to a 1988 Ford F-150. It still runs, but it’s outdated, inefficient, and unsafe by modern standards. Then he showed a picture of a 2025 F-150 — sleek, connected, and engineered for the current era.

“One of them gets you where you want to go a lot better and a lot more comfortably than the other,” he said. “The problem is, California’s still driving the old truck.”

Prop 103, he explained, bans the use of catastrophe models and reinsurance costs in most rate filings, leaving insurers effectively flying blind in a 21st-century risk environment.

“You can’t consider the two most accurate things in setting prices — catastrophe modeling and reinsurance — and then expect your rates to reflect reality,” he said. “That’s like banning thermometers and then wondering why people keep getting sick.”

7. The Intervener Process: Paying to Block Progress

Powell also criticized California’s public intervener process, which allows third-party consumer groups to challenge rate filings and collect legal fees when successful.

While designed to ensure accountability, the system has become a bureaucratic bottleneck. A single organization, he noted, now intervenes in nearly every major rate case, collecting millions of dollars annually in legal reimbursements.

“Let’s pay somebody to gum up the system,” Powell quipped, “and make it so you can’t charge the prices you need.”

This slows innovation and discourages insurers from even filing new products. As Powell summarized, “It’s like a traffic jam you have to pay to sit in.”

8. Segmentation and Market Efficiency: Why It Matters

At its core, insurance pricing is about segmentation — dividing policyholders into risk groups so each pays a fair premium.

“The way insurance companies compete,” Powell explained, “is by segmenting people into groups where they can charge less for low-risk customers and still make a profit. That’s how consumers get the best price possible.”

But California’s restrictions on risk variables — including location-based wildfire data and reinsurance modeling — eliminate that precision.

Without accurate segmentation, insurers can’t compete efficiently, and consumers lose access to affordable coverage.

“If you’re not allowed to use accurate predictors,” Powell said, “you never get market efficiency. Everyone pays more, or no one gets covered.”

9. Debunking the Myth of Prop 103’s “Success”

Consumer advocacy groups often cite Prop 103 as a national success story, claiming it saved Californians billions in premiums since its passage. Powell directly challenged that narrative.

He referenced a study by longtime consumer advocates J. Robert Hunter and Douglas Heller, which argued that if other states adopted Prop 103, they’d collectively save $60 billion a year.

Powell’s response was unflinching:

“Either they’re very bad at math, or they’re not very honest. I’ll let you be the judge.”

He explained that their study confused declining loss trends with regulatory success. In reality, losses dropped because of court rulings (like the Royal Globe decision) and safer driving — not Prop 103’s price controls.

“Prop 103 didn’t reduce losses — it just claimed credit for them,” he said. “It’s like taking credit for good weather.”

10. Lessons and Warnings: The Cost of Ignoring Economics

Powell’s presentation concluded with a stark warning:

California’s system is not sustainable. A regulatory model that suppresses rates, delays filings, and ignores modern data doesn’t protect consumers — it endangers them by driving insurers out and concentrating risk in a fragile state-run FAIR Plan.

“You can’t wish the tide to stop rising,” he said. “You can only prepare for it. And right now, California is standing on the beach, pretending it’s not coming.”

11. Toward a Smarter Framework

Reforming California’s insurance market doesn’t mean deregulation — it means smart regulation:

• Embrace catastrophe modeling to price risk accurately.
• Allow reinsurance costs in rate filings.
• Streamline approvals to attract new carriers.
• Reform the intervener process to prevent abuse.

These aren’t radical ideas — they’re economic necessities for a functioning insurance ecosystem.

As Powell put it, “Markets work when you let them. When you try to outthink them, they fail — every time.”

Conclusion

California’s insurance crisis didn’t happen overnight — and it won’t be fixed overnight. But until policymakers recognize that regulatory paralysis is the disease, not the cure, the state will continue to lose carriers, coverage, and credibility.

Powell’s case study doesn’t just diagnose the problem — it offers a roadmap for change: one grounded in data, discipline, and respect for market forces.

Because as every insurer, regulator, and policyholder eventually learns, you can’t regulate your way out of risk — you can only manage it.