R.J. Lehmann - California’s Insurance Crisis: Prop 103, Wildfires, and the Future of Regulation

🎙️ Episode Overview

Karl Susman interviews R.J. Lehmann, Editor-in-Chief at the International Center for Law and Economics (ICLE), about California’s insurance crisis, the origins and impact of Proposition 103, and the controversial intervener system that shapes insurance regulation in the state.

🔍 Key Topics & Insights

1. Background & Expertise

Lehmann’s long career spans journalism, policy, and think tank work (AM Best, R Street Institute, ICLE).
He’s studied all 50 states’ insurance regulation, consistently ranking California near the bottom due to excessive red tape and price controls.

2. Proposition 103 — Then vs. Now

Passed in 1988 amid public backlash over high auto insurance rates.
Mandated:
Rate rollbacks and prior approval for all P&C lines.
Creation of an elected Insurance Commissioner.
A process allowing “interveners” (third parties) to challenge insurer rate filings — and get paid for doing so.
Originally focused on auto, but over time expanded to property insurance, even though wildfire and reinsurance costs weren’t envisioned at the time.

3. The Intervener System

Designed for public oversight but now dominated by Consumer Watchdog, which receives ~85–90% of all intervener compensation.
Interveners are paid by insurers whose rates they challenge — sometimes millions per year.
Critics argue this creates “interveners for profit,” incentivizing obstruction and boilerplate filings that delay rate approvals for years.

4. Market Fallout

California’s rigid system bans insurers from using forward-looking catastrophe models, reinsurance costs, or climate-adjusted projections when setting rates.
Result: Major carriers (State Farm, Allstate, Farmers, USAA) have stopped writing new business or cut back heavily.
The FAIR Plan (state-backed insurer of last resort) now covers 10–20% of policies — an unsustainable level.

5. Regulator Pushback

Commissioner Ricardo Lara and Gov. Newsom acknowledge a crisis; trying to modernize Prop 103 interpretations to allow cat models and reinsurance costs.
Consumer Watchdog opposes reforms and has attacked regulators as “industry-bought.”
As of mid-2024, the DOI has even paused Consumer Watchdog’s intervener accreditation, demanding financial transparency.

6. Future Outlook

Short term: Regulatory reinterpretations (within Prop 103) could offer relief.
Long term: Real reform would require voter-approved changes — politically difficult.
Lehmann warns that without flexibility, California risks a full insurance market collapse.
Suggests mitigation, transparent intervener oversight, and realistic pricing as critical steps.

7. Wider Context

Compared to other states (e.g., Florida, North Carolina), California’s market is among the most overregulated and least responsive to catastrophic risk trends.
Lehmann calls federal reinsurance proposals (e.g., Adam Schiff’s idea) a “beach-house bailout” — shifting risk to taxpayers instead of solving structural issues.

💡 Takeaways

Prop 103’s 1980s logic doesn’t fit 2020s risk realities.
Consumer Watchdog’s dominance and anti-market mechanisms are key barriers to reform.
Regulatory modernization (cat models, reinsurance costs, rate flexibility) is essential to restore competition and consumer access.