Unique to California is a stringent regulatory framework governed by Proposition 103, a landmark law passed in 1988. While its goal was to protect consumers by capping insurance rate hikes, it has inadvertently created barriers for insurers trying to operate sustainably in a changing market. Under Prop 103, companies must justify rate increases using historical risk data from the past 20 years, preventing them from accounting for future uncertainties like escalating wildfire intensity or climate-related risks. Additionally, insurers cannot include the cost of reinsurance—the coverage they purchase to offset major losses—when calculating premiums, even as reinsurance prices rise globally.
The result? A disconnect between the state’s insurance rates and its growing risk profile. Companies like Farmers, State Farm, and Allstate have cited this lack of flexibility as a key reason for limiting their California operations. Rate approvals under this system are often delayed for a year or more, leaving insurers unable to adjust quickly enough to remain solvent.
