California’s Insurance Market Has Collapsed — Is Prop 103 to Blame?
Published Date: 07/06/2025
California’s Insurance Market Has Collapsed — Is Proposition 103 to Blame?
California’s insurance market, once one of the most competitive and innovative in the country, is now in crisis. Homeowners are struggling to find coverage, major carriers are pausing or canceling policies, and regulators are scrambling to patch a system that many experts say has stopped working altogether.
At the heart of the debate lies a single, decades-old law: Proposition 103, the 1988 voter initiative that transformed California’s insurance landscape. The law, which promised lower premiums and stronger consumer protections, now stands accused of creating a regulatory bottleneck that has driven insurers out of the state and left millions exposed.
At a recent policy forum hosted by the Independent Institute, the Washington International Insurance Agents Association (WIAA), and the International Center for Law & Economics (ICLE), a panel of industry experts — Karl Susman, Christian Fores, Lars Powell, and Sam Sorich — tackled the question head-on: Is Proposition 103 to blame for California’s insurance collapse?
Their collective answer was clear: the crisis didn’t happen overnight, but Prop 103’s outdated framework has turned what should have been a market correction into a full-blown breakdown.
1. What Proposition 103 Was Supposed to Do
When voters approved Proposition 103 in 1988, California’s auto insurance rates were soaring, and public trust in insurers was low. The initiative — authored by consumer advocate Harvey Rosenfield — promised reform by:
- Requiring the California Department of Insurance (CDI) to approve all rate changes before they took effect,
- Allowing public “interveners” to challenge rate filings,
- Making the Insurance Commissioner an elected position, and
- Mandating an initial 20% rate rollback across multiple lines of insurance.
The idea was to protect consumers from excessive premiums and ensure transparency. For a time, it worked — at least on paper. But as the industry evolved and risk models became more complex, Prop 103’s rigid approval process turned into a regulatory bottleneck that many experts now view as the single largest obstacle to a functioning insurance market.
2. From Protection to Paralysis
As Christian Fores, President of the WIAA, explained, Prop 103’s well-intentioned structure has become paralyzing in practice.
“The problem isn’t that the law was bad in 1988,” he said. “It’s that we’re still using a 1988 solution for a 2025 problem.”
Under current rules, insurers must obtain state approval for every rate change — a process that can take months or even years. During that time, carriers cannot adjust for inflation, rising rebuilding costs, or the skyrocketing price of reinsurance.
Fores emphasized the effect this has on both insurers and agents:
“Insurers can’t price risk accurately, brokers can’t find coverage, and consumers are left in the middle wondering why their home is suddenly uninsurable.”
This regulatory gridlock, he said, has left many carriers with one choice: stop writing new business or exit the state entirely.
3. Lars Powell: The Data Behind the Disaster
Economist Lars Powell, Director of the Center for Risk and Insurance Research at the University of Alabama, has studied insurance systems across the U.S. His conclusion: California’s crisis is not the result of wildfires or climate change alone — it’s the product of regulatory failure.
Powell pointed to his research comparing insurer profits and losses from 1991 to 2018. Over 25 years, insurers earned modest profits in California. Then came 2017 and 2018 — two catastrophic wildfire years that erased decades of earnings and plunged the market into the red.
“In just two years, insurers lost more than they had made in the previous 25,” Powell said. “And they weren’t allowed to adjust their rates to reflect that risk.”
Because Proposition 103 forbids the use of forward-looking catastrophe models and limits how reinsurance costs can be incorporated into pricing, insurers are effectively basing 2025 rates on 1990s data.
Powell offered a vivid analogy:
“It’s like telling a meteorologist they can only predict tomorrow’s weather by looking at what it was 10 years ago. That’s not science — that’s denial.”
He argued that Prop 103’s “command-and-control” model has replaced sound actuarial judgment with political gatekeeping, distorting the very mechanism that keeps insurance solvent.
4. Karl Susman: When Regulation Becomes Punishment
Longtime broker and insurance expert Karl Susman, host of The Insurance Hour and a frequent commentator on California’s insurance issues, has seen the effects of this system firsthand.
“It’s not that companies don’t want to do business here,” Susman said. “They literally can’t afford to.”
According to Susman, the combination of rate suppression, litigation, and bureaucratic delays has created a hostile environment where doing business in California has become financially irrational.
“You can’t price risk accurately. You can’t get approvals in time. You can’t even factor in what your reinsurance costs will be. And while you wait, every month you’re losing money.”
He also took aim at the public intervener process, a unique feature of Prop 103 that allows third-party consumer groups to challenge rate filings — and collect legal fees from insurers when successful.
“It was supposed to give consumers a voice,” Susman said. “But now it’s one organization acting like a shadow regulator, slowing everything down and getting paid to do it.”
5. Sam Sorich: When Oversight Overreaches
Former President of the Association of California Insurance Companies (ACIC) and a respected industry veteran, Sam Sorich reminded attendees that Proposition 103 was never intended to govern an insurance market as large and complex as California’s has become.
“We’ve gone from a market of paper files and actuarial tables to one powered by satellite data and predictive analytics,” Sorich noted. “Yet we’re still running the system as if none of that exists.”
He described the law as a “handcuff on innovation.” New insurers are reluctant to enter California because they can’t get approval to use modern underwriting tools like wildfire scoring models, drone imagery, or AI-based risk segmentation.
“You can’t build a competitive market if new players can’t get in,” he said. “And you can’t retain existing ones if they can’t adjust to risk.”
6. A Market in Retreat
The result of these compounding pressures is visible across California:
- State Farm, Allstate, and Farmers have all scaled back or paused new homeowners’ policies.
- The California FAIR Plan, originally a temporary safety net, has ballooned into the state’s de facto primary insurer, now covering more than 350,000 properties.
- Premiums are climbing rapidly in some areas while coverage availability collapses in others.
As Fores summarized:
“We now have a market where affordability and availability don’t exist together. You can get insurance, or you can afford insurance — but not both.”
7. A System That Favors Politics Over Policy
All four speakers agreed that the underlying flaw in California’s system is politicization. Because the Insurance Commissioner is elected, decisions about rates and filings are often influenced by political pressure rather than actuarial necessity.
Susman pointed out that California’s Sustainable Insurance Strategy — Commissioner Ricardo Lara’s new plan to modernize rate filings and reintroduce catastrophe modeling — is a step in the right direction but remains constrained by Prop 103’s language.
“The Commissioner wants to fix this,” Susman said, “but until Prop 103 changes, his hands are tied.”
Powell echoed that sentiment:
“You can’t regulate your way out of a market failure that regulation caused.”
8. The Case for Reform
So what would reform look like? The panelists outlined a set of pragmatic steps that could help California rebuild its insurance infrastructure without abandoning consumer protections:
- Allow Catastrophe Modeling.
Permit insurers to use forward-looking climate and wildfire models in pricing risk. - Include Reinsurance Costs.
Recognize California-specific reinsurance expenses in rate filings. - Streamline Rate Approvals.
Impose firm timelines for CDI responses — and eliminate forced waivers of the “deemer” clause that prevents indefinite delays. - Reform the Intervener Process.
Maintain public participation but limit fee recovery to legitimate, value-added challenges. - Encourage Competition.
Simplify entry for new insurers using approved technology and risk segmentation tools. - Reassess the FAIR Plan’s Role.
Gradually depopulate the Plan to restore it to its original purpose as a temporary backstop, not a permanent solution.
9. Lessons from Other States
Powell noted that other disaster-prone states have managed similar challenges without paralyzing their markets.
Florida, for instance, after years of instability, passed sweeping reforms in 2023 to curb litigation abuse and speed rate approvals. Louisiana implemented solvency-based pricing reforms to attract new carriers after Hurricane Ida.
“The difference is that those states made hard choices,” Powell said. “California has avoided them — and the bill is now coming due.”
10. The Path Forward: Modernization or Decline
The speakers agreed that California stands at a crossroads. Without meaningful reform, the exodus of insurers will continue, forcing more homeowners onto the FAIR Plan and driving premiums ever higher.
“This is a man-made crisis,” Susman concluded. “And that means it can be fixed — but only if we’re willing to modernize.”
In the end, Proposition 103 may remain a symbol of California’s consumer-protection ethos. But as the market unravels, it’s becoming equally symbolic of what happens when regulation fails to evolve with reality.
If California can’t adapt — if it continues to let 1988 rules govern a 2025 economy — then the collapse we’re seeing today won’t be a temporary disruption. It will be the new normal.
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