Much has been made of the so-called California comeback, and it’s certainly true that the state’s economy is beginning to show signs of life. But in some ways, California’s insurance market is further from excellence than it has ever been.
A new study compiled by my colleagues at the R Street Institute offers a comprehensive and comparative analysis of insurance markets in all 50 states and finds, for the first time, that California ranks dead last. Californians have become victims of the very regulatory apparatus established to protect them.
The brief explanation for the Golden State’s dismal performance is simple: The market, bound up by countless legal and regulatory threads, is imprisoned and unduly politicized. It is a bad place to do business.
California grants insurers very little freedom in underwriting – the process by which they evaluate whether a customer is eligible for their product based upon the nature of the customer’s risk. For property and casualty insurance (such as home and auto), the state regulates according to the dictates of the 26-year-old Proposition 103, which mandates certain rating factors, prohibits others and includes a de facto ban on any factor not contemplated when the proposition was passed.
In practice, Proposition 103 prevents insurers from offering time-sensitive rate adjustments that allow consumers to realize the benefits of competition. This out-of-date and clumsy initiative also inhibits companies from creating and offering new insurance products, as is necessary for transportation network companies such as Uber and Lyft.
Compounding the harms associated with its unresponsiveness, the California insurance market is vulnerable to political manipulation. The state insurance commissioner is an elected office. This is problematic because insurance is a highly technical field in which optimal market outcomes do not always correlate with political empire-building or contrived political rhetoric. Winning elections clouds regulatory judgment over an industry that demands consistent and predictable oversight to flourish.
The same problems of political caprice also arise because the insurance market is subject to the initiative process. Asking voters to judge insurance issues virtually guarantees a mismatch between political impulse and sound policy.
In spite of coming last among the states, California does have areas of success that it can build upon. For one, the state’s anti-fraud measures are comparatively efficient and successful. Those efforts lower costs to policyholders by millions of dollars. Further, California also does a good job of spending the fees and assessments that it collects from insurers on its regulatory mission, as opposed to other state programs.
Improving California’s insurance market will mean increasing the freedom of insurers to respond to consumer demand. To do so, the state will need to consciously modernize its regulations to both increase underwriting flexibility and reduce political manipulation.
Reform will not arrive overnight, but with the start of a new legislative session it could come sooner rather than later. Instead of moving further away into mediocrity, the insurance market must “come back,” too.
Ian Adams is director of the Sacramento office of the R Street Institute, a nonprofit, nonpartisan public policy research organization headquartered in Washington, D.C.