How Prop 103 Broke California’s Insurance Market | Kristian Fors Exposes the Crisis

Published Date: 07/06/2025

How Proposition 103 Broke California’s Insurance Market — and What Can Be Done to Fix It

In 1988, California voters passed Proposition 103, a sweeping ballot initiative intended to make insurance more affordable and transparent. At the time, it sounded like a consumer victory — a 20% rollback in auto insurance rates and stronger oversight of insurers. But 36 years later, the law has become the centerpiece of a growing crisis that’s left homeowners scrambling for coverage, major insurers fleeing the state, and policymakers wondering how to undo decades of regulatory gridlock.

In a recent policy presentation, Kristian Fors, research fellow at the Independent Institute, outlined how Proposition 103 has “wrecked an entire industry.” His detailed breakdown helps explain why insurers are leaving California — and what must change if the market is to recover.

1. A System Meant to Protect Consumers Now Limits Them

Proposition 103 was introduced with good intentions. It aimed to protect Californians from arbitrary rate hikes by requiring insurance companies to obtain state approval before increasing premiums. It also created new consumer intervention rights, allowing advocacy groups to challenge rate filings and even receive reimbursement for legal costs if successful.

But Fors argues that these mechanisms, while designed for accountability, have morphed into structural barriers that paralyze the market.

Under the law:

• Any rate increase over 6.9% automatically triggers a public hearing — a process so lengthy and costly that insurers often avoid filing for larger, necessary adjustments.
• Even smaller filings face months-long delays, with approval times averaging 160 days for non-contested filings and 337 days for contested ones.
• Insurers cannot submit new filings while one is still pending, meaning that in inflationary environments, their rates quickly become obsolete.

The result: California insurers are legally capped at raising rates slower than real-world costs rise.

“When companies are forced to wait months just to raise rates by 6.9%, they fall hopelessly behind inflation, wildfire risk, and construction costs,” Fors said. “Over time, the difference between reality and regulation becomes impossible to close.”

2. The Data: A Market in Freefall

The evidence Fors presented is stark:

• Between 2012 and 2021, California’s average underwriting profit was –13%, compared to a +1% national average.
• The Fair Plan, California’s insurer of last resort, has seen its policy count more than double since 2020.
• Seven of the top ten major insurers in California have either paused or restricted new business.

Meanwhile, State Farm General, the state’s largest homeowner insurer, saw its policyholder surplus collapse from $4 billion in 2016 to $1 billion today.

This is not just a profitability issue — it’s a solvency concern. Insurers can’t continue underwriting risk when their reserves are shrinking.

3. How Regulation Drives Insurers Out

Fors describes Proposition 103’s effects not as a straight line, but as “a river flowing into an ocean” — where multiple regulatory currents interact to create turbulence.

The major pain points include:

• Rate suppression: Insurers can’t charge actuarially sound rates — those that reflect the true cost of risk plus a fair return. The International Center for Law and Economics ranks California as having the worst regulatory rate suppression in the nation.
• Hearing aversion: To avoid triggering public hearings, companies file multiple small increases (6.9% at a time), compounding administrative costs. One insurer reportedly filed six separate rate hikes in just 23 months.
• Delay as leverage: Regulators routinely ask insurers to waive the 60-day “deemer” clause — which should automatically approve unchallenged rates — under threat of public hearing. This gives the Department of Insurance the ability to delay rate filings indefinitely.

It’s no wonder, Fors argued, that insurers have simply stopped trying. “The Department has turned delay into a weapon,” he said. “And insurers can’t survive in a system where their hands are tied while costs explode.”

4. The Fair Plan: A Symptom of Systemic Breakdown

When private insurers pull out, homeowners turn to the California FAIR Plan, a state-mandated pool designed to serve as an insurer of last resort.

But as Fors points out, the Fair Plan is now overwhelmed — its losses are growing, and it’s spreading that burden back to the same insurers that left.

“According to California law,” he explained, “licensed insurers are responsible for FAIR Plan losses. That means when the FAIR Plan loses money, the costs are passed back to companies — and eventually to consumers.”

In 2023 alone, FAIR Plan losses triggered a $1 billion assessment on participating insurers. These costs, coupled with the Plan’s higher premiums (often $4,000–$5,000 per year for limited wildfire-only coverage), are cascading through the market.

The FAIR Plan, Fors warned, “isn’t solving the problem — it’s redistributing it.”

5. Wildfire Risk and the Irony of Regulation

California’s wildfire risk has exploded over the last two decades:

• Nine of the ten largest wildfires in state history have occurred since 2017.
• The average annual wildfire loss doubled from $400 million (1999–2008) to over $1 billion (2009–2018).

Yet, under Proposition 103, insurers were long barred from using forward-looking catastrophe models to price wildfire exposure — even though such models are the industry standard everywhere else.

“It’s ironic,” Fors noted, “that a state priding itself on being forward-looking when it comes to climate change has one of the most regressive approaches to catastrophe modeling in the nation.”

The same goes for reinsurance costs — the “insurance for insurance companies” that helps spread catastrophic losses. Until recently, California didn’t allow insurers to factor reinsurance expenses into their pricing.

This creates a distorted market where risk is rising, but rates can’t reflect it — leaving insurers no option but to exit.

6. Why Voters Didn’t See It Coming

How did a law meant to regulate auto insurance end up destabilizing the entire homeowners market? Fors says it comes down to voter misunderstanding and political opportunism.

When Proposition 103 appeared on the 1988 ballot, its campaign centered almost entirely on auto insurance, promising an immediate 20% rollback in rates. Homeowners and commercial lines were barely discussed.

“It was sold as a car insurance reform,” Fors explained. “Voters never imagined it would restrict property insurers decades later.”

The measure passed by just 51%, and the narrow margin reflected widespread confusion. Most voters believed they were voting to “keep big government out” of insurance — not to install a permanent layer of rate regulation that would make coverage harder to get.

7. The Consumer Watchdog Loophole

Another controversial outcome of Proposition 103 is the “intervener” provision, which allows consumer advocacy groups to challenge rate filings — and get reimbursed for their expenses.

While this was intended to empower citizens, it’s also created what Fors calls “a boutique legal industry.”

A 2024 Los Angeles Times report revealed that Consumer Watchdog, the nonprofit founded by Prop 103’s author Harvey Rosenfield, collected over $11 million in intervention fees in the decade prior.

Fors sees this as an inherent conflict of interest:

“The law created a self-perpetuating system — where those who designed the rules now make a living navigating them.”

8. The Behavioral Side: When Rates Don’t Reflect Risk

Insurance pricing isn’t just about company solvency — it also affects consumer behavior.

Fors cited evidence that inadequate rates discourage mitigation. When homeowners in high-risk areas don’t pay premiums reflecting the real cost of wildfire exposure, they have little incentive to harden their properties.

“If you underprice risk,” he said, “you underprice responsibility.”

In a true market system, insurers would compete to reward safer behavior — offering discounts for fireproof roofing, defensible space, or retrofitted structures. But under rate suppression, those incentives vanish, because insurers are already losing money on every policy they write.

9. The Path to Reform

Fors didn’t mince words: “The prior approval system must be abolished.”

He argues that insurers should be allowed to set rates in line with risk, using the same forward-looking models employed worldwide. This doesn’t mean eliminating oversight — it means modernizing it.

However, there’s a legal catch. Proposition 103 explicitly states that it cannot be amended except to further its original purpose. That means the only way to repeal or revise it is through another ballot initiative.

Fors’s recommendations include:

• Repealing Prop 103 through voter initiative, restoring open competition in rate-setting.
• Allowing catastrophe modeling and reinsurance costs in rate calculations.
• Implementing dynamic pricing systems that can adapt quickly to inflation and risk.
• Creating market-based incentives for property hardening and loss prevention.

“Insurance companies are not charities,” Fors reminded. “If you take away the profit motive, they’ll take away their presence. And that’s exactly what’s happened.”

10. Lessons from Economics: The Invisible Hand of Incentives

Fors closed his presentation by quoting Adam Smith:

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.”

The same principle, he argued, applies to insurance. Regulation that ignores economic reality cannot sustain a functioning market. When profit is outlawed, availability collapses — and consumers are left with fewer options and higher costs.

California’s experience with Proposition 103 is a case study in how good intentions can create systemic failure. As Fors put it:

“We don’t live in a world without risk. We live in a world where regulation decides whether risk is managed or magnified.”

Final Thoughts

California’s insurance crisis didn’t happen overnight. It’s the result of decades of compounding decisions rooted in outdated assumptions about markets, risk, and consumer protection.

Proposition 103 began as a populist reform. Today, it stands as a cautionary tale of regulatory overreach and economic distortion.

If the state wants to rebuild its insurance ecosystem — and restore affordability and choice — reform won’t just be necessary. It will be unavoidable.