Robert Sterling highlights a pivotal moment in California’s insurance history when voters passed Proposition 103 in 1988, a law that has since made operations for insurance companies in the state exceedingly challenging. This legislation requires insurance companies to seek government permission from an elected commissioner before they can raise rates, an approach Sterling suggests might distort market dynamics.
Sterling points out that under Proposition 103, actuaries, who are crucial for ensuring insurance policies are priced to avoid insolvency, face significant hurdles. They are confined to using historical data for pricing, ignoring advanced statistical models that could adapt to changes like increased heat, dryness, or windiness in Southern California. This outdated methodology fails to reflect the evolving risk landscape accurately.
Another unique aspect Sterling discusses is the prohibition on insurers passing reinsurance costs to consumers. Reinsurance, which he likens to ‘big boy insurance policies’ for insurance companies, protects them from the financial impact of large-scale disasters. In California, insurers must bear these costs themselves, which Sterling describes as eating a ‘big whopping shit sandwich’ during crises. This has led major insurers like State Farm, Allstate, USAA, Travelers, and Nationwide to reduce coverage or, in State Farm’s case, exit areas like Pacific Palisades entirely.
The vacuum left by these companies has been filled by the FAIR Plan, California’s insurer of last resort. Sterling notes that in Pacific Palisades, 1,400 out of 9,000 homes now rely on this government-run entity, which has only $200 million in reserves against a potential liability of six billion dollars in that neighborhood alone.
Sterling’s critique extends to the practical failures during crises, such as the recent wildfires where fire hydrants ran dry, compounding the insurance crisis. The complexity and what Sterling calls the ‘batshit insane policy’ of Proposition 103 has broad implications, affecting the insurance industry’s viability and leaving homeowners at risk.
As we contemplate these systemic issues, Sterling’s insights provide a sobering view of how Proposition 103 has created a precarious situation, where the safety net of insurance is weakening, leaving many Californians vulnerable.
Basically, California voters passed a law in 1988 called Proposition 103, which made it way harder for insurance companies to operate in the state without getting their asses kicked. On top of requiring insurance companies to get government permission from an elected commissioner… pic.twitter.com/pK1eLtQ9QV
— Robert Sterling (@RobertMSterling) January 10, 2025
Sources:
https://sins.senate.ca.gov/sites/sins.senate.ca.gov/files/2023_proposition_103_fact_sheet.pdf
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