Price controls on California home insurance scrutinized after Los Angeles fires

In keeping with the law, insurers are required to run proposals for rate increases by the California Department of Insurance, a process which often takes months and ends with rejection. Another factor that has affected prices centers on catastrophic modeling, which was not permitted under Prop. 103. A few weeks before the Los Angeles fires, California became the last state in the nation to allow insurers to utilize the software that predicts the probability of loss and quantifies the potential financial impact of future extreme events, such as fires.

Insurers argue that due to the intense regulatory environment, premiums haven’t been organically allowed to match historic inflation and costly disasters, forcing their exit from the state and leading to the crisis. 

Critics blame insurers for the coverage crisis, saying they are greedy corporations only looking to increase profit margins. They argue price controls are necessary to keep insurers from raising premiums to what they view as unfair levels. 

Dr. Gary Wolfram, the director of economics at Hillsdale College, told the Washington Examiner that in a free market system operating on competitive principles, price controls would be unnecessary. 

“We don’t have to worry about companies raising the price at high levels, unless there’s no competition unless the government is restricting the number of people that can come in, which, in a sense, they’re sort of doing by their regulations,” he said. “So this argument that, ‘well, if we just let them raise their price, if the government somehow lets them raise their price to where they can cover their losses, then we’ll be stuck with these insurance companies just charging whatever rate they want’—-they can’t charge whatever rate they want, because some, some other competitor insurance company will step in,” he concluded. 

Between 2020 and 2022, insurers refused to renew nearly three million homeowner policies, including over 530,000 in Los Angeles County, according to the California Department of Insurance. In 2022, Allstate stopped writing new home and condo policies because“the cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher costs for repairing homes, and higher reinsurance premiums.” In May 2023, State Farm announced it would no longer accept new business and personal property and casualty applications due to “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market.” 

Wolfram said price controls were well-meaning but had brought disastrous unintended consequences. 

“I think what happens is that people don’t think through the whole procedure, and all they do is they see the price go up, and then they want the government to keep the price from going up,” he said. “Well, it can do that, but it’s going to have these unintended consequences. And I think that’s why you get laws the way they are is because people see, but they don’t observe, they don’t think through,” Wolfram said. 

One resident who has a home in the Los Angeles area, Dr. Houman Hemmati, told the Washington Examiner his own experience with the insurance industry. He was recently looking at homes that were “incredibly underpriced for what they are” and suspected it was because they lay in fire hazard zones.

 “I called to see if I can get insurance. You can’t get a mortgage without insurance….insurance brokers told me that they had a tough time finding anyone who would insure…in one case, it was 20,000 a month, and in another case, it was 40,000 a month, which is more than the mortgage,” he continued. “It shows you that there are people who had to reduce the price of their home or been unable to sell because potential buyers couldn’t get a mortgage.”

As insurers fled and premiums swelled, residents flocked to the FAIR Plan, a privately funded though state-run program intended to be an insurance program of “last resort” for people unable to afford high insurance premiums or incapable of finding an insurer willing to finance a high-risk property at a loss. The number of residential FAIR Plan policies more than doubled in 2019 to about 408,000 as of June 2024. Under reforms instituted by Lara, insurance companies are required to pay the FAIR plan $1 billion after the program ran out of funding due to the Los Angeles fires. The move additionally drives up premiums for homeowners, as insurers are allowed to collect half of the $1 billion from their policyholders under recent reforms also set in place by Lara. 

During an interview with the Washington Examiner, Dr. Burke Christensen, an adjunct professor of insurance at Utah State University, agreed that for elected officials such as Lara, there’s a fine political balancing act between giving consumers what they want and keeping insurance companies in the state.

“The consumers are always going to want lower premiums, and the insurance companies are always going to want to have premiums high enough to cover their reserving requirements and have enough money left over to be sure,” he said. 

But Wolfram argued that long-term, price controls only make matters worse.

“Logically, if you set the price which is below equilibrium, then there’s going to be more people wanting it, and there’s going to be less people supplying it, so you’re going to create a shortage whenever you do that,” he said.

The Los Angeles fires turned the crisis into a nightmare as State Farm asked Lara for permission to raise insurance premiums by an average of 22%. The move came as State Farm bailed out the FAIR plan to the tune of $400 million and has forecasted it will spend a total of over 2.3 billion to cover claims due to the fires. State Farm argued it needed the massive hike because it had been financially depleted after paying out more than $1 billion in losses to Los Angeles residents and previously suffering $5 billion in losses due to price controls. 

 “It looks like they’re being mean to Californians, but the reality is, they can’t afford to sell coverage there, not at the rates that are being allowed to be charged,” Dr. Brenda Powell Wells, the risk management and insurance program director for East Carolina University, told the Washington Examiner.

Others, including Doug Heller, the director of insurance for the nonprofit group Consumer Federation of America, have argued that State Farm should have already had the funds stored up for the crisis.  “You don’t pay for the last disaster with the next premium. [Insurers] already collected premiums for this,” he told USA Today.

Lara rejected the emergency request on Feb. 15, saying it had not provided necessary proof. 

Wolfram argued that even if State Farm had “tripled their insurance rates,” competitive practices would have kicked in giving consumers more options. “Why wouldn’t Prudential, or somebody else, then come in and offer insurance at a lower rate?” he questioned. 

In September 2023, Lara launched the Sustainable Insurance Strategy, marking the biggest overhaul to how the state regulates the insurance industry since Prop. 103. The regulation approving catastrophe modeling was finalized in December 2024, just weeks before the fires sparked. Other reforms include enabling reinsurance as a ratemaking factor, which means insurers are allowed to make arrangements with other insurers to distribute risks and capital. The reinsurance reforms have already saved State Farm hundreds of millions after California became the last state in the nation to adopt the policy.

Lara’s relaxed regulations are aimed at bringing insurers back to the state, incentivizing them to service high-risk areas and take some of the burden off of the FAIR program. Insurers must take on high-risk customers and take on more of the costs for the FAIR plan when it runs out of funding, per the new regulations. Policyholders also shoulder more of the costs of the Fair Plan under Lara’s reforms. 

​​Consumer Watchdog has warned that loosening regulations would essentially allow insurers to price gouge. 

“This plan could drive the price of home insurance up by 40%,” the organization said. “Tellingly the commissioner did not do a cost impact analysis of his plan on consumers. That’s because this plan is of the insurance industry, by the insurance industry, and for the industry.”

Wells conceded, “It’s easy for people to look at it and say, ‘Oh, the insurance companies are just price gouging, or they want to make more profit.” 

“But the reality is, they’re upside down. They’re not able to charge what we call an actuarially fair premium that covers the losses and allows the insurance company to make some profit,” the professor added. “It’s hard to explain that to your consumer sometimes, because all they want to do is protect their home and go about their daily lives.”

Hemmati suggested that if the state had different policies on water reserves and dry brush clearance, price controls would be unnecessary because premiums would go down in response to the decreased risk of fires. 

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“Insurance premiums simply mirror the level of risk, and if the level of risk goes down over time, you’re going to see the premiums go down,” he said. 

“The state has failed at fire prevention and fire management, which has then resulted in large-scale catastrophes that could have been prevented or managed as a smaller scale catastrophe,” he added. “I think the state will at some point recognize that they need to do more to actually prevent catastrophic wildfires and be prepared for other disastrous events like l earthquakes and floods so that  the insurance premiums don’t have to be so high.”