Proposition 103: Helping or hurting California? Prop 103 and the fate of an industry

Published Date: 06/11/2024

Proposition 103: How a 1980s Reform Became California’s Most Controversial Insurance Law

When Californians passed Proposition 103 in 1988, they thought they were voting for lower insurance rates and greater accountability from an industry they believed was out of control.

More than three decades later, the same law is now being blamed for strangling California’s insurance market — slowing approvals, driving insurers out of the state, and leaving homeowners scrambling for coverage.

To understand how we got here, we have to go back to where it all started: the 1980s.

The World That Created Proposition 103

The early 1980s were a different time — neon colors, shoulder pads, and the dawn of MTV. Technology was booming with personal computers like the Apple IIe, and cable TV was transforming media.

But alongside cultural transformation came economic turbulence. Under “Reaganomics,” deregulation was the buzzword of the decade. The U.S. government rolled back oversight across multiple industries, including banking, aviation, and insurance.

This laissez-faire environment allowed the insurance industry to operate with minimal state interference. Premiums — particularly for auto insurance — began climbing rapidly.

At the same time, carriers were posting record profits. That disconnect — rising rates for consumers and rising profits for companies — created public outrage.

Lawmakers in Sacramento attempted several reforms, but gridlock and industry lobbying kept major changes off the table.

So Californians took matters into their own hands.

The Birth of Proposition 103

In 1987, a consumer advocacy group drafted Proposition 103, framing it as a rate rollback initiative and a battle against “insurance industry greed.”

The proposition promised to:

• Reduce insurance rates by at least 20% from 1987 levels.
• Freeze rates for two years (until November 1989).
• Require state approval before any insurer could raise rates.
• Elect the state’s Insurance Commissioner (previously appointed by the governor).
• Ban discriminatory practices in auto insurance pricing.
• Allow public participation through hearings and “interventions” in rate cases.

It sounded simple — and irresistible. Who wouldn’t vote for lower rates and more accountability?

The measure passed narrowly — 51.13% to 48.87% — and California’s insurance landscape changed overnight.

The 20% Mandate: A Shock to the System

The most immediate impact of Proposition 103 was its mandatory 20% rate cut across the board for property and casualty insurers.

That meant every insurer operating in California suddenly had to reduce their prices — not just for auto insurance, but for homeowners and other property lines as well — and could not raise them for two years.

As insurance expert Karl Susman explains on Insurance Hour, this was effectively a government-ordered price reduction on a private product — a precedent with far-reaching consequences.

“Imagine if the state told Toyota, ‘You have to sell your cars for $10,000 less, and you can’t raise prices for two years,’” Susman said. “That’s essentially what happened to insurers.”

The result?

• Immediate financial strain on insurers.
• Mass exodus of companies leaving California’s market.
• Reduced competition, leading to longer-term pricing distortions.

Even insurers that stayed faced logistical chaos. They had to refile their entire pricing models, seek state approval for every change, and absorb the initial financial hit.

The Rise of the Elected Insurance Commissioner

Before Prop 103, California’s Insurance Commissioner was appointed by the governor. The measure made it an elected position, putting enormous power directly in the hands of voters — and the person they choose.

This was meant to make the role more accountable to consumers. But as time went on, critics argued it politicized the office, forcing commissioners to balance sound actuarial policy against public pressure to keep rates low.

The first elected Insurance Commissioner, John Garamendi, took office in 1991, and every commissioner since has grappled with the same challenge: balancing affordability and solvency.

The “Intervener” System: Public Oversight or Costly Bureaucracy?

Another key element of Proposition 103 was the creation of the intervener process.

This allowed individuals or advocacy groups to challenge insurers’ proposed rate changes in public hearings — a noble idea intended to increase transparency.

But over time, the process became dominated by one organization — the same one that authored Proposition 103 in the first place.

According to Susman, this group has filed around 75% of all interventions since the law passed, and nearly 90% in the past five years.

“They essentially wrote themselves into the law,” Susman noted. “And they’re getting paid for every intervention they make — by the insurers, who then pass those costs to consumers.”

The intervener reimbursement system requires insurers to cover the costs of the challengers’ participation — effectively creating an incentive for frequent interventions, which slow the process further.

The result is an insurance approval process that can take months or even years — one of the slowest in the nation.

The Myth of the Untouched Law

Many Californians assume Proposition 103 has remained unchanged since 1988. But as Susman details, it has been amended several times — often to clarify or correct its unintended consequences.

1988 – Good Driver Discount Introduced

The first amendment established the “Good Driver Discount,” giving qualified drivers (licensed for at least three years with no more than one violation and no major at-fault accidents) guaranteed lower rates.

However, it also created perverse incentives. Drivers realized that after three years, even poor driving records effectively “reset.”

“Some might say Prop 103 actually made people worse drivers,” Susman observed. “If you know your record clears every three years, a speeding ticket or minor crash doesn’t seem like a big deal.”

1990 – Clarifications and Public Hearings

Two amendments in 1990 clarified good-driver definitions and established 15–30 day public notice requirements for rate hearings.

That same structure — including the right for public intervention — remains in place today.

1992 – More Refinement

By 1992, regulators were still trying to define what constituted a “good driver,” highlighting the vague and rushed nature of the original ballot measure.

The Precedent Problem

Beyond the technical provisions, Prop 103 set a dangerous philosophical precedent — allowing voters to dictate private pricing.

As Susman put it, “Once you tell a private company what they can charge, where does it stop?”

The law gave the Department of Insurance sweeping authority over the rates of private companies. While oversight is critical in consumer protection, tying prices to politics has long-term economic costs.

The Modern Fallout: Red Tape and Market Retreat

Fast-forward to the present day, and Proposition 103 is now at the heart of California’s insurance crisis.

Because every rate or policy change must go through the Department of Insurance — often with public intervention — the process drags on for months or even years.

This makes it nearly impossible for insurers to respond to fast-changing realities like:

• Inflation-driven rebuilding costs.
• Record wildfire claims.
• Rising global reinsurance expenses.

So, rather than waiting indefinitely for approvals, many insurers — including State Farm, Allstate, and Farmers — have paused new business or pulled back in the state altogether.

“The law says approvals should take 180 days,” Susman said. “But in practice, it can take three years.”

The result? A shrinking marketplace where consumers have fewer options and higher premiums.

Reforming the “Insurance Bible”

Today, California’s leaders — including Governor Gavin Newsom and Insurance Commissioner Ricardo Lara — are pushing to modernize Prop 103 through the Sustainable Insurance Strategy.

The plan seeks to keep consumer protections intact while fixing the bureaucratic gridlock.

Key proposed reforms include:

• Enforcing the 60-day review timeline for rate filings.
• Allowing forward-looking wildfire models for risk assessment.
• Permitting insurers to include reinsurance costs in rates.
• Rewarding homeowners for fire mitigation and defensible space.

Newsom’s recent “trailer bill” aims to fast-track these updates by giving the Department of Insurance firm deadlines to respond to filings.

In other words, the state isn’t repealing Proposition 103 — it’s finally trying to make it work as intended.

Lessons from History

The story of Proposition 103 is one of good intentions colliding with economic reality.

It was designed to protect consumers — and in many ways, it succeeded. California has some of the lowest auto insurance rates in the nation when adjusted for risk, and the system ensures strong regulatory oversight.

But it also locked the market into an outdated framework, unable to adapt to new threats like climate change and inflation.

The same consumer protections that made Prop 103 revolutionary in 1988 have, by 2025, become its greatest weakness.

Where We Go From Here

California now faces a crossroads.

Option one: maintain the status quo and continue losing insurers until only the state-run FAIR Plan remains viable for many homeowners.

Option two: reform Proposition 103 to restore balance between regulation and market flexibility — ensuring both consumer protection and industry sustainability.

The new reforms proposed by Commissioner Lara and Governor Newsom reflect this second path: modernizing, not dismantling, a system that’s been frozen in time since the MTV era.

“Remember,” Susman concluded, “Proposition 103 was written when Michael Jackson’s Thriller was on the radio, and we were using Apple II computers. The world has changed. Our insurance laws need to catch up.”

Final Thoughts

Proposition 103 was born in an age of deregulation and distrust — a populist response to corporate profits and political inaction. Its success proved that voters could hold powerful industries accountable.

But decades later, the pendulum may have swung too far.

For California to thrive in a new era of wildfire risk, economic volatility, and climate uncertainty, it needs insurance laws that evolve — just as the risks themselves have evolved.

The spirit of Proposition 103 — fairness, accountability, and consumer protection — must remain. But its mechanics must change.

Because what worked in 1988 won’t work forever.