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California’s insurance crisis did not happen overnight. It is the result of decades of rigid regulation colliding with modern catastrophe risk, climate change, and global reinsurance pressures. In a detailed Insurance Hour interview, Karl Susman sat down with R.J. Lehmann, Editor-in-Chief of the International Center for Law and Economics (ICLE), to unpack how Proposition 103, the intervener system, and regulatory gridlock reshaped one of the largest insurance markets in the world.
Their conversation revealed how well-intentioned consumer protections from the 1980s now strain under 2020s realities—and why meaningful reform has become both urgent and politically difficult.
R.J. Lehmann’s Background and Regulatory Perspective
R.J. Lehmann brings decades of experience in insurance journalism and policy analysis. His career spans work with AM Best, the R Street Institute, and now ICLE. Over the years, he has studied insurance regulation in all 50 states.
Across those rankings, California consistently appears near the bottom. According to Lehmann, the state’s combination of strict price controls, procedural delays, and regulatory red tape makes it one of the least flexible insurance markets in the country—especially when compared with states facing similar catastrophe risks.
Proposition 103: Origins and Expanding Reach
Proposition 103 was passed by California voters in 1988 during a period of public anger over rising auto insurance rates. The measure fundamentally rewrote how property and casualty insurance is regulated in the state.
It mandated three major changes:
- Prior approval for all property and casualty insurance rates
- Mandatory rate rollbacks
- The creation of an elected Insurance Commissioner
- A formal system allowing third parties—called interveners—to challenge insurer rate filings and be compensated for doing so
While the law was initially aimed at stabilizing auto insurance pricing, over time it expanded into homeowners and commercial property coverage.
Critically, it was written decades before wildfire megafires, climate-driven catastrophe modeling, and global reinsurance markets became central to underwriting.
Lehmann emphasized that wildfire exposure and reinsurance pricing were never contemplated when the law was drafted—yet today they dominate insurance economics.
The Intervener System and Its Controversy
The intervener system was designed to give the public a voice in the rate-approval process. In theory, it allows outside groups to participate in regulatory hearings and challenge insurer filings in the public interest.
In practice, the system is now dominated by a single organization—Consumer Watchdog—which receives approximately 85–90 percent of all intervener compensation. These interveners are paid by the very insurers whose rates they challenge, sometimes earning millions of dollars per year.
Critics, including Lehmann, argue that this structure rewards obstruction rather than consumer benefit. Boilerplate objections can delay rate approvals for years, even when the objections do not materially change the outcome. The result is a regulatory bottleneck that prevents insurers from adjusting pricing to reflect real-world risk.
How Regulation Has Driven Market Fallout
California’s regulatory framework prohibits insurers from using forward-looking catastrophe models, reinsurance costs, or climate-adjusted projections when setting rates. Instead, pricing is anchored to historical losses—data that no longer reflects present-day wildfire behavior.
This disconnect has driven major carriers to pull back dramatically. Companies such as State Farm, Allstate, Farmers, and USAA have stopped writing new homeowners’ policies or sharply reduced their exposure in the state.
As private capacity disappears, more homeowners are being forced into the California FAIR Plan, the state’s insurer of last resort. Today, the FAIR Plan covers roughly 10–20 percent of the market—far beyond what it was designed to sustain, raising concerns about systemic risk.
Regulator Pushback and the Fight Over Reform
Insurance Commissioner Ricardo Lara and Governor Gavin Newsom now openly acknowledge that California is facing an insurance availability crisis.
Their administration is attempting to modernize how Proposition 103 is interpreted—without formally rewriting the law—to allow:
- Limited use of catastrophe models
- Consideration of reinsurance costs
- Greater flexibility for insurers willing to write in high-risk areas
These efforts have drawn strong opposition from Consumer Watchdog, which has accused regulators of being “industry-bought.” As of mid-2024, the Department of Insurance took the rare step of pausing Consumer Watchdog’s intervener accreditation while demanding financial transparency about compensation practices.
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Short-Term Relief vs. Long-Term Structural Reform
In the short term, regulators may be able to create limited relief through reinterpretation of existing authority under Proposition 103. This could allow some pricing flexibility without triggering a statewide ballot initiative.
Long-term reform, however, would almost certainly require voter approval. Lehmann warned that such reform is politically difficult in California’s climate of deep distrust toward insurers—even as availability continues to shrink.
Without meaningful flexibility, he cautioned that California risks a full-scale insurance market collapse marked by mass FAIR Plan dependence and vanishing private competition.
How California Compares to Other States
When measured against peer catastrophe states such as Florida or North Carolina, California stands out as uniquely restrictive. Other states allow forward-looking modeling and faster pricing adjustments, enabling insurers to remain in high-risk markets—albeit at higher premiums.
Lehmann also criticized federal reinsurance proposals, including ideas floated by Congressman Adam Schiff, as “beach-house bailouts.” These plans would shift risk to taxpayers rather than solving the structural distortions inside state regulation.
What Must Change to Restore Stability
Lehmann identified several reforms as essential to restoring balance in California’s insurance system:
- Transparent oversight of the intervener system and compensation practices
- Authorization of catastrophe modeling and reinsurance cost recognition
- Rate flexibility that reflects modern wildfire risk
- Strong but realistic consumer protections aligned with market sustainability
Without these changes, he warned, political optics could continue to outweigh economic reality—further accelerating market retreat.
Final Takeaways on Proposition 103 and Market Risk
Proposition 103 was born of 1980s consumer frustration, but its rigid framework has not kept pace with climate-era risk. What once protected drivers from sudden auto-rate spikes now constrains insurers facing billion-dollar wildfire seasons.
The dominance of Consumer Watchdog within the intervener system, combined with pricing rules disconnected from modern risk data, has become a central barrier to reform. Regulatory modernization—especially around catastrophe modeling and reinsurance pricing—now appears unavoidable if California hopes to restore competition and protect long-term access to insurance.
As Lehmann cautioned, without structural flexibility, the state is not merely facing a market downturn—it is flirting with functional insurance unavailability across vast regions of California.
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