L&E Blog: The International Center for Law & Economics

Prop 103’s Author Isn’t the Final Word on What Prop 103 Says

By | May 31, 2023

It’s been 35 years since Californians voted by a narrow majority to pass Proposition 103, completely overhauling how the nation’s largest state regulates the business of insurance.

That’s an awfully long time. So long, it seems, that even the man who wrote Prop 103 appears to have forgotten what it actually says.

The author in question is Harvey Rosenfield, whose organization—then-known as the Foundation for Taxpayer and Consumer Rights, and now as Consumer Watchdog—led the fight for Prop 103 in 1988.

Responding to the news that State Farm General Insurance Co. would cease accepting new applications for homeowners and business property policies in the state, Rosenfield fired off a missive demanding that California Insurance Commissioner Ricardo Lara “must use Prop 103 authority to reverse State Farm’s pullback.” As Rosenfield put it:

Under Proposition 103, insurance companies can’t just stop selling insurance to consumers in order to make more money for themselves – they have to open their books and get the Insurance Commissioner’s approval. Commissioner Lara has the power to order State Farm to obey the law and reverse its decision.

Alas, no, nothing in Prop 103 gives Lara or any other California official that power.

The Consumer Watchdog statement goes on to note that State Farm had requested rate increases, and it is certainly true that Prop 103 prohibits the company from implementing those increases without approval from the California Department of Insurance. It is also true that the law grants the commissioner authority to limit or delay an insurance company’s plan to nonrenew existing customers.

But neither of those questions are at issue here. State Farm hasn’t threatened to implement unapproved rates and it’s not announcing any new nonrenewals. It simply isn’t taking on any new business. Prop 103’s prior-approval system grants the regulator (and intervenors like Consumer Watchdog) enormous discretion over the terms of coverage that an insurer chooses to write, but not over coverage that it chooses not to write.

Later in his piece, Rosenfield implies that Lara has the power to order State Farm to continue writing new business because, he claims, Section 1861.11 of the California Insurance Code grants the commissioner “emergency authority under Proposition 103 to force insurance companies doing business in California to sell insurance to those who need it anywhere in the state when there is a shortage.”

But that’s deeply misleading. Here’s what Section 1861.11 actually says:

In the event that the commissioner finds that (a) insurers have substantially withdrawn from any insurance market covered by this article, including insurance described by Section 660, and (b) a market assistance plan would not be sufficient to make insurance available, the commissioner shall establish a joint underwriting authority in the manner set forth by Section 11891, without the prior creation of a market assistance plan.

So, it’s not that the law would allow Lara to order State Farm to keep writing new business, but that the commissioner could potentially create a JUA to alleviate a coverage shortage, which would be accomplished by allocating business to the market at large. As it happens, there’s no need to create a new JUA for homeowners coverage in California, because the California FAIR Plan already exists to serve that purpose.

Unlike Rosenfield, Commissioner Lara appears to understand that Prop 103 does not grant him the power to “legally control a company’s business decision” and, moreover, that the “factors driving State Farm’s decision are beyond our control – climate change challenges, higher reinsurance costs affecting the entire insurance industry, and global inflation.”

But what is somewhat within his power—and even moreso, within the power of the California State Legislature—is to clarify that Prop 103’s intent was to allow insurers to price coverage based on risk, and to modernize the law to reflect that. That could go a long way toward limiting how many more insurers choose to exit the market.

For example, while both Lara and State Farm itself cite the rising cost of reinsurance as driving the company’s decision, California already allows insurers in lines of business like earthquake and medical malpractice—but not in homeowners—to reflect the cost of reinsurance in their rate filings.

Earthquake insurers likewise are permitted to use catastrophe models in their expected loss-cost estimates, while homeowners insurers are only permitted to reflect past claims experience. But we know that climate change means that future losses will be significantly worse than past losses. This leaves us with the reality that the official position of the State of California is to ignore, or even deny, the projections of climate science.

Amending Prop 103 is no easy task, thanks to requirements that any changes must pass by super-majorities and also that they must “further the intent” of the original ballot initiative. But if nothing else, let’s be careful not to read its plain text to be more onerous than it already is.

Topics California

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