If you ask Californians about the biggest challenges facing the state’s struggling insurance marketplace, they’re likely to point to growing wildfire risks or a lack of affordable home-insurance policies. Those are obvious threats, but there’s a bigger one: The leading candidate for insurance commissioner in the November election, Jane Kim, wants to impose a socialistic public-insurance scheme that could trigger another exodus of insurers from California.
This is no small matter. Although the job of insurance commissioner sounds bureaucratic, it is an extremely powerful position. In approving 1988’s Proposition 103, voters turned the post into an elected position and gave the commissioner the power to approve and roll back insurance rates. As we’ve documented on this Editorial Board, that “prior approval” system of price controls slowly but surely limited competition in our market.
A full-fledged crisis ensued in 2023 after major insurers reduced and even stopped their underwriting following years of severe wildfires led to massive losses. California homeowners have since struggled to find insurance – and prices of available policies have soared. Many homeowners became dependent on the overburdened, state-created insurer of last resort, the FAIR (Fair Access to Insurance Requirements) Plan.
Current Commissioner Ricardo Lara has done yeoman’s work stabilizing the market by implementing technical, but critical, reforms called the Sustainable Insurance Strategy. They bolstered the FAIR Plan’s financial health, sped up the rate-review process and made it easier for insurers to price policies to reflect their risk. A number of insurers have responded by increasing underwriting, but California’s homeowners’ market isn’t out of the woods.
Kim faces off against Sen. Ben Allen, D-Santa Monica. Allen vows to build on Lara’s reforms and restore competition. Kim, previously a San Francisco supervisor and director of the Working Families Party, has promised “Disaster Insurance for All” – “a public program which guarantees coverage to all homeowners,” she explained in a column for this newspaper.
The main problem in California’s market has been the decades-long disconnect between pricing and risk. In any functioning market, private companies set prices as conditions demand. Competition keeps the lid on higher prices as companies compete for customers. The state’s regulatory-imposed disruptions have led to shortages, as insurers flee rather than compete for more business. State-run systems are always inefficient and offer poor customer service.
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Check out the endless problems in the National Flood Insurance Program, which faces debt and claims-handling problems, and subsidizes homeowners to build and rebuild in flood-prone areas. A state-run system as Kim proposes would make taxpayers responsible for losses. By contrast, any collapse in the FAIR Plan, which had faced insolvency fears prior to a recent assessment, would be paid for by insurance companies rather than the general public.
Furthermore, Kim’s bashing of insurance companies and fixation on the overall industry’s supposedly excess profits suggest that she does not understand how insurance markets or the free-market economy operates. As such, we would expect her to use the commissioner’s formidable powers to oppose needed rate changes and once again encourage insurance companies to exit our market. If you think insurance is expensive now, just wait until the state manages its own program.
We understand why California voters might not pay attention to this boring-sounding downticket race, but doing so this election could ignite a major disaster.