Will California insurance reforms be enough to stop insurers from leaving?
Losses from the Los Angeles fires threatened to deepen a crisis that has already left hundreds of thousands of Californians struggling to find and keep affordable homeowners insurance.
A major concern out of the destruction is not just the people without insurance, but the fear other homeowners will lose coverage after the devastation.
California Insurance Commissioner Ricardo Lara said new regulations will keep homeowners insured. Some of the new efforts give insurance companies more leeway in raising rates, while allowing them to use computer modeling to forecast risk and to incorporate their own “reinsurance” costs from backup providers in setting future premiums.
While insurance analysts are optimistic about the changes, it isn’t clear if it is enough to stop the exodus of insurers from California.
Q: Will California insurance reforms be enough to stop insurers from leaving?
Economists
James Hamilton, UC San Diego
NO: Major insurance companies like State Farm and Allstate had already stopped issuing new policies in California prior to the recent fires, and the losses from these fires are going to be enormous. Proposition 103, which regulates insurance in California, was based on the false premise that rates could be chosen by bureaucrats in Sacramento rather than determined by the actual costs of doing business here. The only solution is to repeal Proposition 103.
Norm Miller, University of San Diego
NO: Insurance company stocks with California exposure are down from 5% to 20%, implying several billion in lost value, less than the billions of fire related losses, but significant. If the state adds too many rules, it could backfire, and the insurers simply stay away. The recent plan is akin to requiring all insurance companies accept pre-existing conditions for new medical patients, and the only way to avoid accepting higher risk is to stay totally out of the state.
David Ely, San Diego State University
YES: Building reinsurance costs and a model-based estimate of the catastrophe risk they face into premiums, the reforms address some key concerns of insurance companies. A faster review of proposed rate changes and the size of the California market are additional reasons to stay. Following these reforms, insurance companies are less likely to exit the California market in the near term, at least until they can evaluate the impact of the regulatory changes.
Caroline Freund, UC San Diego School of Global Policy and Strategy
YES: Allowing insurers more leeway in setting prices makes sense. Econ 101 shows that a firm’s supply increases with its price. The best way to stop insurers from leaving is to allow them to incorporate risk into prices. Risk-based pricing of insurance incentivizes homeowners to demand better construction and avoid the most fire prone areas. In contrast, government subsidies or bailouts encourage overbuilding in risky areas. It is time to build back better.
Kelly Cunningham, San Diego Institute for Economic Research
NO: California’s excessive housing costs and regulations cannot be legislated into profitability by the insurance commissioner without the insurance industry being able to accurately assess risks and project real rebuilding costs. Failure to prepare, prevent and put out the fires, combined with hyper-regulation and epidemic of insurance fraud, continue destroying the insurance industry in California. The state’s “FAIR” unfair insurance plan of last resort is underfunded and soon to be insolvent when claims start coming in.
Ray Major, economist
NO: The frequency, ferociousness, cost and extent of the California fires will cause insurers to pull out of the state even with the recent insurance reforms. The current situation highlights the decades of government mismanagement. Without policy changes like clearing backcountry brush, creating fire breaks, and insisting existing reservoirs be filled, building new ones, and funding fire departments through the state, California will face a continued insurance crisis.
Alan Gin, University of San Diego
NO: But it’s uncertain what else can be done. It is encouraging that Allstate and other companies indicated they would restart issuing policies in California when the insurance reforms are implemented. But there is currently a nationwide insurance crisis, as companies are also leaving out of Florida and other states. Part of it is due to increased development in dangerous areas, and part to more severe weather events. There were 27 billion-dollar climate events in 2024, second only to the 28 in 2023.
Executives
Chris Van Gorder, Scripps Health
NO: Given recent major losses and that California is one of the most regulated states – including insurance regulations capping rate increases – it’s likely more insurance companies will reduce their exposure by limiting coverage or by leaving the state. California made recent changes that might have helped, but because of the L.A. fires, it might be too little, too late. California regulators should meet with insurance companies and make regulatory changes that will encourage coverage and competition.
Jamie Moraga, Franklin Revere
NO: Insurers have and will continue to leave California, citing profitability issues and high-risk factors. Recent reforms sparked optimism, but it may not be enough given significant losses from the L.A. wildfires, which is anticipated to be in the billions. The reforms are a step forward, but more should be done to retain insurers and alleviate homeowner premium hikes, policy cancellations, and coverage denials. Sadly, L.A. wildfire victims are likely to face further hardship navigating complex insurance claims.
Haney Hong, San Diego County Taxpayers Association
NO: No, which is just so unfortunate. With more insurers leaving, we only accelerate the trends in growing inequality, poverty, and homelessness in our state that seem to be the result of decades of policy arrogance by our public leaders. We’ve overengineered our markets and our communities, and it’s time to exercise some humility and undo what’s causing insurers – and businesses and people, too, by the way – to leave the state.
Phil Blair, Manpower
YES: It is certainly a good start. We need to keep fire insurance, like car insurance, a private sector product. Insurers need to have the flexibility to adjust their rates according to their risk. Is this the time to consider mandated home fire insurance, like we do car insurance?
Gary London, London Moeder Advisors
YES: There is nothing like a disaster to achieve reform. The slow movement to insurance reform will rapidly pick up and insurers will figure out a way to stay in business in our huge state market. But rates will rise. As an aside, I do not expect many of these homeowners to rebuild. From a strictly economic perspective, the better bargain might be to sell their lots, which will be more valuable than the home.
Bob Rauch, R.A. Rauch & Associates
NO: The wildfires have already caused insurers to stop offering new policies and drop existing ones. The FAIR Plan, the last resort for insurance, might not cover all claims without tapping into private insurers, leading to higher premiums. While new regulations let insurers pass reinsurance costs to customers and use wildfire modeling to increase rates, these changes won’t be enough to keep insurers from leaving the state.
Austin Neudecker, Weave Growth
NO: Unfortunately, home insurance is about to get much more expensive for Californians. Smaller insurance companies with local concentration may become unviable and only national behemoths will survive through rate increases. Insurance companies that stay around may add exemptions, raise deductibles or change coverage in other ways to mitigate the risk of a catastrophic loss. An alternative solution is to ensure more companies enter California with sporadic geographic coverage to not concentrate risk on a few companies.
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