At the heart of the crisis is Proposition 103, a voter-approved law enacted in 1988. While praised for protecting consumers from unjustified price hikes, the measure has unintentionally stifled the ability of insurance companies to remain competitive. Under Prop 103, insurers must calculate rates primarily using historical data—overlooking forward-looking catastrophe modeling that accounts for evolving risks.
For example, companies are barred from factoring in the rising cost of reinsurance, which insurers purchase to mitigate their exposure to large-scale claims. Reinsurance prices have surged due to inflation and the increasing frequency of wildfire-related losses. Yet, California remains the only state where these costs cannot legally influence premium rates, creating a significant financial strain.
Policy delays compound the problem further. Rate increase approvals frequently take upwards of a year, leaving insurers unable to respond to market conditions in real time. Consequently, insurers like State Farm, Allstate, and Farmers have ceased offering new policies in the state, citing an inability to keep pace with the rising costs of doing business.
