California’s Prop 103: Weighing the Impact on the Insurance Market
In the insurance world, Florida and California often face unique challenges that disrupt their markets. While Florida’s issues have historically stemmed from extensive litigation, California’s market faces the lasting effects of Proposition 103, a ballot initiative passed in 1988.
For 36 years, this law has significantly constrained insurers operating in the state. Many have become wary of doing business in California, choosing to limit their offerings or avoid the market altogether. However, Florida’s insurance market is showing signs of recovery, thanks to recent tort reforms that are bringing stability. The establishment of eleven new insurers is a testament to this improvement.
By contrast, California’s insurance market remains constrained by Proposition 103. This proposition introduced an elected insurance commissioner, rate rollbacks for personal lines, prior rate approval, and prohibitions on using reinsurance costs and forward-looking models in the rate-making process. One lesser-known feature of Prop 103 is the role of “intervenors.”
The Role of Intervenors
What exactly is an intervenor? If a California insurer seeks a rate increase exceeding 6.9 percent, a hearing may be held. At this hearing, “intervenors,” typically consumer advocates, challenge the insurer’s rate change requests. The insurance company is then responsible for paying the intervenor’s fees, which can amount to millions, as per Cal. Ins. Code § 1861.10. From 2003 to 2023, insurers paid $23.1 million to intervenors.
The bulk of these fees went to Consumer Watchdog, formerly called the Foundation for Taxpayer and Consumer Rights. Other intervenors include the Consumer Federation of California, Consumers’ Union, Southern Christian Leadership Conference, the Greenlining Institute, and United Policyholders.
Consumer Watchdog alone received $18.4 million from insurers during that timeframe, while other intervenors collectively collected $4.7 million. In about half of those 20 years, Consumer Watchdog was the only intervenor. Allstate, Farmers, State Farm, and Mercury have faced the highest intervenor bills.
In 2017, State Farm encountered over $1.9 million in fees related to one intervention. If this was legal work billed at a California lodestar rate of $400 per hour, the attorney would have worked for 2.5 years solely on that intervention. In a 2023 petition to challenge a rate increase at Farmers Insurance, Consumer Watchdog detailed that its intervention budget included $595 per hour for its senior staff attorney, $350 per hour for its staff attorney, $695 for work done by Harvey Rosenfield of Counsel, and 200 hours at $915 per hour for a consulting actuary, nearing $400,000. It is worth noting that Rosenfield was the author of Prop 103.
Damage Caused by Intervenors
Proposition 103 has artificially lowered rates, essentially decoupling rates from risk. The ratemaking process assesses potential losses to calculate loss costs. When policies are issued in high-risk areas with artificially low premiums that are not adequate for the risk, this sends a misleading message to homeowners. California law mandates that insurance rates should not be inadequate. This has led to California having lower insurance rates than the national average, even though the state faces unique perils like mudslides, wildfires, earthquakes, floods, and riots.
Compared to the national average of $2,258 for annual homeowners’ insurance premiums for $300,000 in dwelling coverage, California’s average is just $1,250. This positions California among the nine most affordable markets for homeowners’ insurance, despite its elevated risk profile.
Jerry Theodorou, Director of the Finance, Insurance and Trade Policy Program, The R Street Institute.
Here’s how premiums stack up across the country, highlighting California’s position:
(Source: Bankrate)
The provided data suggest that Proposition 103, including the interference of intervenors, has hindered insurance companies from pricing their products at risk-adjusted rates. This is akin to price control, which opposes free-market principles, where supply and demand dictate prices rather than government mandates.
In a price-controlled economic environment, the price signals that would usually encourage consumers to manage risk and incentivize risk-adjusted premiums are absent. In today’s regulatory environment, now may be an apt time to reassess the legacy of Proposition 103, potentially leading to a more balanced market that benefits both insurance buyers and providers. “Today’s regulation-cutting environment” is a quote taken from the original article.
Written By Jerry Theodorou, The R Street Blog The R Street Blog on Insurance Journal presents the viewpoints of the free market think tank R Street Institute in Washington, D.C. Jerry Theodorou is the director of the Finance, Insurance and Trade Policy Program. He develops and advances effective free market public policy solutions to complex issues where federal and state governments have intervened. Prior to R Street, Theodorou was a Director of insurance research at Conning in Hartford, Conn.
