How Proposition 103 Reshaped California’s Insurance Market

Published Date: 06/11/2024

When Californians passed Proposition 103 in 1988, they believed they were voting for lower insurance rates and tighter control over an industry perceived as out of control. More than 35 years later, that same law is now widely blamed for slowing approvals, driving insurers out of California, and leaving homeowners scrambling for coverage.



To understand how a consumer protection law became a major factor in today’s insurance crisis, it’s necessary to return to the economic and political environment that created it — and trace how its unintended consequences unfolded over time.

The 1980s Environment That Gave Birth to Proposition 103

The early 1980s were marked by rapid cultural and economic change. Personal computers were entering mainstream use, cable television was expanding, and deregulation dominated public policy under “Reaganomics.” Oversight was rolled back across industries, including banking, aviation, and insurance.

Within the insurance industry, this deregulated environment led to rapidly rising premiums, especially for auto insurance. At the same time, insurance companies reported record profits. The disconnect between increasing consumer costs and strong industry earnings triggered widespread public anger.

Repeated attempts by lawmakers in Sacramento to rein in the industry failed due to political gridlock and lobbying pressure. With legislative solutions stalled, consumer activists turned directly to the voters.

The Birth and Promises of Proposition 103

In 1987, a consumer advocacy organization drafted Proposition 103 as a ballot initiative aimed squarely at what it portrayed as unchecked insurance industry greed. The measure promised sweeping reform, including:

• A mandatory 20% rollback of insurance rates
• A two-year freeze on rate increases
• State approval for all future rate changes
• Creation of an elected Insurance Commissioner
• Bans on discriminatory auto insurance pricing
• Public participation and intervention in rate hearings

The proposal was framed as an easy choice: lower rates and more accountability. In November 1988, voters approved Proposition 103 by a narrow margin of just over 51%.

California’s insurance system changed overnight.

The Mandatory 20% Rate Cut and Its Immediate Impact

The most dramatic and immediate provision of Proposition 103 was the across-the-board 20% rate rollback applied to all property and casualty insurance lines, not just auto coverage. Insurers were also prohibited from raising rates for two years.

As insurance expert Karl Susman has explained, this amounted to government-mandated price control on a private product.

The consequences were immediate:

• Significant financial losses for insurers
• An exodus of carriers from the California market
• Reduced competition across multiple insurance lines
• Massive administrative disruption as companies were forced to refile pricing and policy structures

Even carriers that remained in California absorbed heavy short-term losses and became subject to an entirely new regulatory regime.

The Creation of an Elected Insurance Commissioner

Before 1988, California’s Insurance Commissioner was appointed by the governor. Proposition 103 transformed the position into an elected office, placing enormous regulatory authority directly in the hands of voters.

The goal was accountability. In practice, the position became deeply politicized. Every commissioner since the first elected official in 1991 has been forced to balance actuarial realities against public pressure to suppress rate increases.

Long-term market stability increasingly became entangled with short-term political survival.

The Intervener System and the Growth of Bureaucratic Delay

Another cornerstone of Proposition 103 was the introduction of the public “intervener” process. This allowed individuals and advocacy groups to challenge insurance rate filings during public hearings.

While intended to increase transparency, the system became highly concentrated. Over time, the organization that helped draft Proposition 103 came to dominate the intervention process, filing the majority of challenges and receiving millions of dollars in reimbursed legal and consulting fees paid by insurers.

Because insurers are required to cover the cost of these interventions, delays and expenses multiplied. What was designed as public oversight gradually evolved into one of the slowest insurance approval systems in the United States.

Proposition 103 Was Amended — But Never Truly Modernized

Although often portrayed as untouchable, Proposition 103 has been amended several times since 1988.

Early Amendments and the “Good Driver” Discount

The first major amendment introduced the “Good Driver” discount, guaranteeing lower rates to drivers with clean records. However, the three-year lookback window unintentionally discouraged long-term accountability by effectively resetting driving history after short periods.

Public Notice and Hearing Requirements

Additional amendments clarified public notice periods and intervention rights but also preserved the lengthy approval process that remains in place today.

Despite these changes, the basic administrative framework of Proposition 103 has remained rooted in a pre-digital, pre-climate-crisis era.

The Precedent of Voter-Controlled Pricing

Beyond its technical rules, Proposition 103 established a powerful precedent: direct voter control over private-sector pricing. While consumer oversight is essential, embedding price regulation into a political process created long-term structural rigidity.

Over time, that rigidity made it increasingly difficult for insurers to adapt to:

• Rapid construction-cost inflation
• Escalating wildfire losses
• Expanding global reinsurance costs

As Susman has noted, allowing pricing to be shaped through political mechanisms rather than economic ones introduced permanent friction into the system.

How Proposition 103 Shapes Today’s Insurance Crisis

In the modern era, every rate or underwriting change in California must pass through the Department of Insurance, often with public intervention. In theory, the law requires decisions within approximately 180 days. In practice, approvals can take years.

That regulatory lag has collided with fast-moving realities:

• Catastrophic wildfire events
• Inflation-driven rebuilding costs
• Exploding global reinsurance prices

Rather than wait indefinitely for approvals that may leave them underpriced, many insurers have chosen to restrict or halt new business in California altogether. Major carriers including State Farm, Allstate, and Farmers have all reduced exposure.

The result is a shrinking competitive marketplace with higher premiums and fewer coverage options.

The Push to Reform Proposition 103 Without Repealing It

Today, Governor Gavin Newsom and Insurance Commissioner Ricardo Lara are attempting to modernize the system through the Sustainable Insurance Strategy. Rather than repealing Proposition 103, the goal is to fix its most damaging structural flaws while preserving its consumer protections.

Key reform proposals include:

• Enforcing strict deadlines for rate reviews
• Allowing forward-looking catastrophe modeling
• Permitting inclusion of reinsurance costs in pricing
• Rewarding property-level wildfire mitigation
• Streamlining documentation and approval procedures

Newsom’s recent trailer bill is designed to force the Department of Insurance to adhere to review timelines that already exist in law but have rarely been enforced.

What History Teaches About the Current Debate

Proposition 103 succeeded in lowering premiums and strengthening oversight in its early years. California still benefits from strong consumer protections and relatively low auto insurance rates compared to many states.

However, the same framework that once stabilized the market has become increasingly incompatible with today’s climate-driven risk environment. What was revolutionary in 1988 is now struggling to function in a world of megafires, inflation, and global reinsurance volatility.

California’s Crossroads Moving Forward

California now faces a defining choice:

• Maintain the current system and continue losing private insurers
• Or modernize Proposition 103 to restore balance between oversight and market functionality

The reforms advanced by Commissioner Lara and Governor Newsom represent an attempt at modernization rather than deregulation — preserving the spirit of consumer protection while updating the mechanics to match today’s risks.

As Karl Susman put it, Proposition 103 was written when Apple II computers were cutting-edge and MTV was brand new. The risks California faces today simply didn’t exist in that world.

Final Thoughts on Proposition 103’s Legacy

Proposition 103 emerged from public outrage and succeeded in reshaping an industry that had little oversight. It demonstrated the power of voter-driven regulation and embedded transparency into California’s insurance system.

But decades later, the law’s rigid administrative structure is now one of the primary contributors to the state’s insurance crisis. The challenge ahead is not whether to abandon its consumer protections — but how to evolve them for a very different economic and climate reality.

The values behind Proposition 103 may still be valid. Its process is what must finally change.

Because what worked in 1988 cannot govern California forever.