How To Fix California’s Self-Inflicted Homeowner’s Insurance Crisis
According to a recent news story, California’s raging home insurance woes are a result of climate change. That’s certainly true if the climate we’re talking about is the state’s regulatory climate. Like many of California’s problems, the insurance crisis is a self-inflicted wound—in this case, one suffered when residents and regulators turned a once-competitive market for insurance into a command economy in which insurers are increasingly unwilling to operate. Fortunately, the market for home insurance can be improved if Californians are willing to address their (regulatory) climate problems.
A Self-Inflicted Insurance Crisis
“Just months after fires devastated parts of Los Angeles, one of the leading home insurers in California, State Farm, is temporarily raising rates 17 percent,” The New York Times‘ David Gelles wrote May 15. He cited this rate hike, which follows on an even larger one last year, as “just the latest example of the indirect but increasingly costly ways that climate change is affecting the American economy.”
But the “insurance crisis” that Gelles points to in California and sees “spreading across the country” isn’t just the result of temperature fluctuations or shifts in humidity. It’s a foreseeable outcome of state residents voting themselves discounts at the expense of insurance companies, and of politicians catering to the public’s desire to pay what they want rather than market rates.
“This insurance market crisis is downstream of California’s cumbersome, voter-approved insurance regulations that limit the ability of insurers to raise rates to cope with increased wildfire risks,” Reason‘s Christian Britschgi noted in February after the Los Angeles wildfires made a bad situation even worse.
In 1988, Californians passed Proposition 103 which, according to the state’s summary of the measure, “required that every insurer reduce its rates to at least 20% less than the rates that were in effect on November 8, 1987 unless such rollback would lead to a company’s insolvency.” The California Supreme Court modified this to allow for what state officials considered “a fair rate of return,” but there are more voters paying premiums than working for
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