After helping drive major insurers to flee the state, red tape from California’s liberal insurance regulators is poised to hamper rebuilding Los Angeles-areas communities in the wake of devastating wildfires.
The Los Angeles wildfires had burned over 40,000 acres of land mass as of Monday, destroying over 10,000 structures and forcing more than 100,000 to flee their homes. When the fire is finally contained, many Californians will be unable to rebuild the homes they lost, as a flood of home insurers have exited the state in recent years due largely to extensive government regulation, leaving many Golden State residents stuck with government-backed insurance of last resort, or, worse, no insurance whatsoever.
State Farm announced it would drop homeownership insurance coverage for tens of thousands of Californians in 2023, with the Pacific Palisades — one of the areas hardest hit by the wildfires — experiencing more policy non-renewals from State Farm than anywhere in California. The reason for the widespread scrapping of home insurance policies, according to E.J. Antoni, a research fellow at the Heritage Foundation’s Grover M. Hermann Center for the Federal Budget, was “overregulation.”
“Overregulation was a major contributor that forced many homeowners to ‘go naked’ according to industry lingo, meaning roll the dice with no insurance,” Antoni told the Daily Caller News Foundation. “It’s going to be very scary when we find out how many folks lost their homes with no insurance and won’t be able to afford to rebuild.”
EATON FIRE: Additional footage from today #California | #Altadena | #CaliforniaWildfires pic.twitter.com/FNUBvJMkm0
— Hailey Grace Gomez (@haileyggomez) January 9, 2025
California’s Proposition 103 requires insurers get approval from the state before setting property insurance rates, which resulted in a norm of rate increases being capped at 7%. The regulation made it difficult for insurers to adapt to changing market conditions, and ultimately helped force many out of the state entirely, according to Andrew Siffert, senior vice president at global insurance broker BMS Group.
“Proposition 103 requires insurers to get approval from CDI [the California Department of Insurance] for any rate increases, which can be a lengthy process,” Siffert told the DCNF. “Over time, this regulation has not kept up with the cost of doing business in California, and has made it difficult for insurers to adjust premiums to reflect the increasing risks and costs associated with natural catastrophes like wildfires. As a result, insurers have taken their products and capital to other states where they can maintain their profit margins.”
Like State Farm, Allstate announced it had stopped writing new California home insurance policies in 2023, returning only once the state abandoned its traditional 7% cap and approved Allstate’s request to increase homeowner’s insurance premiums by an average of 34% in August.
One hell of a gimmick the left in California has. They mismanage tax dollars, don’t take care of the forests, and force insurance companies like State Farm out of the state all while making their voters cry climate change.
— CommonSense (@DAngryAmerican) January 8, 2025
Proposition 103 also bars insurers from using a client’s credit score to determine their rate.
“Another form of overregulation involves restrictions on underwriting practices,” Peter Earle, senior economist at the American Institute for Economic Research, told the DCNF. “California prohibits insurers from using certain risk-based factors, such as credit scores or other predictive analytics, which are commonly used in other states to assess risk more accurately. This limits insurers’ ability to differentiate between low- and high-risk policyholders, forcing them to spread costs unevenly.”
Moreover, Proposition 103 forces computer models used to calculate rates be made public. Companies often want to keep their modeling technology private, which results in insurers using outdated models to make calculations, Mark Sektnan, vice president for state government regulations at the American Property Casualty Insurance Association, told E&E News in May 2023.
“It’s a little bit like driving your car using the rearview mirror when your windshield is right there in front of you,” Sektnan said.
PALISADES FIRE: Got up near Bel-Air Bay Club — homes gone, one was going up in flames and saw people who lived in the area try to asses the damage to where they lived. Felt like a scene out of a horror film @DailyCaller #PalisadesFire | #CaliforniaWildfires pic.twitter.com/zCLbl8wwHk
— Hailey Grace Gomez (@haileyggomez) January 10, 2025
The dearth of Californian insurers could be a serious impediment to rebuilding the state following the wildfires, with AccuWeather estimating the natural disaster had caused more than $250 billion in losses as of Monday.
“The paucity of insurers in California will significantly hinder the rebuilding process once the wildfires are stopped,” Earle told the DCNF. “Insurance coverage is a critical component of appraising damage and providing the financial resources necessary to rebuild homes, businesses, and infrastructure. With fewer insurers in the market, home- and businessowners have undoubtedly struggled to obtain coverage, and could now face higher premiums and reduced policy options than they would in other US states.”
With the state’s lack of private insurance, many Californians have been forced to turn to the FAIR Plan — state-backed insurance used as a last resort for homeowners unable to obtain coverage on the private market.
FAIR has seen a 164% increase in demand since 2019, with its exposures ballooning to $458 billion as of last September, up from $153 billion four years prior. The state-backed insurance program has just $377 million available to pay claims and $5.9 billion in exposures in the Palisades alone, meaning it could soon face insolvency.
In addition to Proposition 103, the California Environmental Quality Act (CEQA) — a state law requiring extensive environmental reviews of building projects — could also obstruct California’s recovery effort, with a study from law firm Holland & Knight published in 2018 finding the policy targeted housing projects and aggravated supply shortages.
“CEQA is one of the well-recognized culprits in California’s housing supply and affordability crisis,” Jennifer Hernandez, the head of Holland & Knight’s West Coast Land Use and Environmental Group, wrote in a press release announcing the study. “The need to update CEQA litigation rules to end non-environmental abuse of this important California law is stronger than ever.”
Democratic California Gov. Gavin Newsom issued an executive order Sunday suspending CEQA for developments destroyed in the fires, but Republican California Rep. Jay Obernolte told the DCNF much of the policy’s damage has already been done, as the legislation has inflamed “California’s ongoing housing crisis,” and thus made it more difficult for displaced Californians to find shelter.
“The ongoing fires in Los Angeles have further exacerbated California’s ongoing housing crisis, and CEQA is a significant contributing factor,” Obernolte told the DCNF. “By stalling building efforts and driving up costs, this regulation will hinder the ability of Angelenos to rebuild after this devastating disaster and will continue to thwart families’ ability to secure affordable housing. It is time for our state to reform CEQA to address the housing shortage effectively and prioritize the needs of our constituents.”
High housing costs have contributed to a large migration outflow from California, with more than 690,000 people leaving the Golden State between 2022 and 2023 alone.
The median rent in California is roughly $2,800, according to Zillow data updated Monday, 40% higher than the national average. Rent in the Pacific Palisades is even higher, at just over $2,900, according to online rental marketplace Apartments.com.
Zack Roday, spokesman for conservative watchdog Public Labor Unions Accountability Committee, echoed Obernolte’s sentiment on Newsom’s CEQA rollback: “Newsom wants credit for waiving CEQA requirements? Mr. French Laundry likes to think he’s an emperor, but it should not take a historic disaster and failure in progressive governance for him to realize what Californians have been saying for years.”
Newsom’s office and the California Department of Insurance did not respond to requests for comment.
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