The California Insurance Crisis

Published Date: 11/13/2023

California’s Insurance Crisis: Regulation, Risk, and the Fight for a Sustainable Market

California’s insurance landscape is undergoing one of its most turbulent periods in decades. Insurers are leaving, rates are soaring, and policymakers are scrambling to find a path that balances market stability with consumer protection.

In a recent Insurance Hour broadcast, host Karl Susman unpacked the complex dynamics behind what many now call the California Insurance Crisis — a situation shaped by climate risk, outdated regulations, and fierce debate over proposed reforms from Insurance Commissioner Ricardo Lara.

This is more than an industry story. It’s a defining test for how California — the world’s fifth-largest economy — adapts its risk management systems to a new era of environmental and financial volatility.

The Big Picture: Why California’s Insurance Market Is in Crisis

Over the past several years, homeowners and business owners across California have faced a harsh reality: insurance is becoming harder to find and more expensive than ever.

According to Susman, more than 87% of insurers that once offered coverage in the state have either:

• Stopped writing new policies,
• Withdrawn entirely, or
• Restricted the types of risks they’re willing to cover.

The result is a fragile marketplace defined by scarcity, limited competition, and skyrocketing premiums. Those who still manage to secure coverage often pay significantly more — not because of greed or negligence, but because the economics of insuring California’s climate-driven risks no longer add up.

The root cause? A perfect storm of catastrophic wildfire losses, regulatory rigidity, and economic imbalance between risk exposure and rate approval.

A Quick History Lesson: Proposition 103 and the Framework of Control

To understand the current crisis, it helps to look back to 1988, when California voters passed Proposition 103.

This landmark legislation reshaped the state’s insurance system in three major ways:

1. It required prior approval from the Department of Insurance (DOI) for any rate changes — meaning insurers couldn’t raise premiums without state authorization.
2. It made the Insurance Commissioner an elected position, ensuring accountability to voters rather than political appointment.
3. It strengthened consumer protection, ensuring that policyholders had a voice in the rate-setting process.

For decades, Proposition 103 served its purpose well. It curbed excessive rate hikes and made California’s regulatory model one of the most consumer-friendly in the nation.

But as Susman notes, the world has changed. Wildfires, inflation, construction costs, and climate volatility have transformed the risk profile of the state — yet the mechanisms for pricing that risk remain largely frozen in time.

Enter Ricardo Lara’s “Sustainable Insurance Strategy”

Recognizing the strain on the market, California Insurance Commissioner Ricardo Lara has introduced what he calls a Sustainable Insurance Strategy, designed to attract insurers back to high-risk zones and reintroduce competition.

At its core, the plan proposes a quid pro quo:

• Insurers would agree to write more policies in fire-prone or high-risk areas.
• In return, they would gain greater flexibility in how they set rates, particularly by factoring in forward-looking climate risk models and reinsurance costs.

This marks a significant shift from the strict backward-looking pricing rules under Proposition 103, which only allow insurers to base rates on historical losses — not projected future risks.

Lara’s argument is that you can’t stabilize a modern insurance market using 1980s tools. To keep insurers in California, he says, they must be able to price risk realistically — even if that means higher premiums for some homeowners.

The Backlash: Lawmakers and Watchdogs Push Back

However, not everyone is convinced. A coalition of 32 Democratic members of California’s congressional delegation, led by Representatives John Garamendi (a former state insurance commissioner himself) and Zoe Lofgren, have raised red flags about Lara’s reforms.

Their central concern: the proposed flexibility could undermine the consumer protections that have defined California’s system for decades.

In their view, Lara’s reforms risk eroding the very foundation established by Proposition 103 — which placed rate oversight in the public’s hands and prevented insurers from overcharging during volatile times.

Consumer Watchdog, the advocacy group instrumental in drafting Proposition 103, echoes this concern. The organization argues that while the “sustainable” strategy sounds well-intentioned, it could create loopholes that weaken regulatory control and invite excessive rate hikes.

In short, critics fear that loosening the rules might invite abuse and shift the financial burden of climate risk disproportionately onto consumers.

The Balancing Act: Innovation vs. Protection

Susman summarizes the issue succinctly:

“It’s a classic case of policy reform balancing on a tightrope — straddling the need for innovation and the imperative to preserve hard-earned consumer protections.”

This is the heart of the debate. On one side, California desperately needs a functioning, competitive insurance market. On the other, it must preserve affordability and accountability for the millions of residents who depend on coverage to protect their homes and livelihoods.

Without reform, insurers will continue to leave — and those who remain will charge more. But with too much deregulation, the door opens to unrestrained rate hikes and diminished oversight.

Finding equilibrium between these forces is the challenge of the decade for California regulators.

The Economics of Risk: Why Insurers Are Leaving

It’s easy to villainize insurance companies for pulling out of California, but the economics tell a more complex story.

Wildfires have inflicted tens of billions of dollars in insured losses over the past decade, often wiping out years of underwriting profit in a single season. Add to that:

• Rising construction and labor costs,
• Increasing reinsurance premiums (the cost insurers pay to insure their own risk), and
• Strict state controls that limit how quickly rates can adjust to reflect reality.

When companies can’t price risk accurately or recover costs, they’re effectively operating at a loss. Over time, that’s unsustainable — so they withdraw.

As Susman explains, this dynamic has left the remaining insurers in a dominant position, allowing them to charge premium prices for limited availability. The result? A market defined by scarcity rather than competition.

The Consequences for Consumers

For California homeowners, the ripple effects are already evident:

• Policy non-renewals have become common in wildfire-prone regions.
• Many are being pushed into the FAIR Plan, the state’s high-risk insurance pool, which offers basic fire coverage but at higher costs and with fewer benefits.
• New home sales in some areas are being delayed or canceled because buyers can’t secure insurance — affecting real estate and mortgage markets statewide.

The crisis is no longer theoretical. It’s affecting affordability, mobility, and financial stability for millions of Californians.

What’s Next: Toward a “New Normal”

Susman argues that part of the solution lies in accepting reality:

“We are living in a state where catastrophic losses happen and will continue to happen. With that acceptance, we can see that rates will be higher than they were a decade ago. This is just math — not an opinion, not political, just math.”

In other words, California must adjust its expectations. Risk-based pricing is unavoidable in a state where climate events are intensifying. But within that acceptance, there’s room for smarter regulation — one that invites competition without abandoning consumer safeguards.

The path forward likely includes:

• Modernizing rate models to incorporate climate forecasting and reinsurance costs,
• Streamlining rate approval processes to allow faster adaptation to changing risk, and
• Investing in fire mitigation and prevention efforts to reduce long-term exposure.

The challenge is to implement these reforms without dismantling the protections that have made California’s insurance system one of the most transparent in the nation.

Final Thoughts: Competition as the Path to Stability

In his closing remarks, Susman reminds listeners of a basic economic truth:

“What we need is a vibrant, competitive insurance environment where insurance companies are eager to write coverage and will compete for business. It is only with this competition that we can expect to see more availability — and lower rates will naturally follow.”

That principle — competition breeds affordability — is the compass California must follow.

But competition won’t come from wishful thinking. It requires a regulatory framework that balances the legitimate business needs of insurers with the moral and political responsibility to protect consumers.

The California Insurance Crisis isn’t just a story about policies and premiums — it’s a case study in how a modern economy adapts to environmental and economic upheaval. The decisions made in Sacramento today will shape not only the future of California’s insurance market but also how other states confront the growing intersection of climate change and financial risk.