Highlights
Devastating fires continue to rage in the greater Los Angeles area, having already destroyed thousands of homes and buildings, including some of the most expensive real estate in the country, such as beachfront property in Malibu. The sheer scale and location of these fires mean the estimated cost of damages are already on the order of tens of billions. California has long been an exemplar of the costs of progressive policymaking, but recent insurance reforms that defied that tradition may have come just in time to stabilize an unsustainable marketplace at a critical time.
California’s Economy
By many lights, California is the jewel in America’s crown, bestudded with 49 lesser diamonds. It is by far the most economically significant state in the U.S., with real GDP in 2023 of $3.3 trillion, more than 50 percent more than the second most significant state – Texas. It is the nation’s most populous state, and as the state with the 10 highest median incomes, is relatively high income given the large population. But these superlatives mask deep policy failures that squander the potential of the Golden State.
Despite high incomes, California leads the nation as the most expensive place to live in the country, which is remarkable given the relative size of the state. A recent ranking pegged California as having the 48th worst tax climate in the U.S. While there are many reasons for interstate migration, it is no surprise that high tax states like California, New Jersey, and New York have seen significant outmigration, while states with lower taxes have seen their populations swell.
California housing costs substantially outstrip national norms. From prevailing wage laws to “green energy” mandates, California imposes a regulatory regime sufficient to substantially inflate home-ownership and rental costs. A recent story identified state policy as a key contributor to Los Angeles’ distinction of having the most unaffordable housing in America.
California’s Insurance Climate
As the California housing market lays bare, market outcomes are downstream of policy choices, including in insurance markets. The state of California has the highest cost of torts – or lawsuits – in America. On average, every household in California shoulders $5,429 in costs related to litigation and compensation costs. These costs are substantial inputs to insurance premiums.
Thus, California has all the makings of an insurance disaster – highly expensive property, a costly regulatory environment, and vulnerability to natural disasters. Indeed, California has been stretching its insurance market to the point of potential “crisis.” Historically, California has imposed caps on insurance premiums, barred the inclusion of certain costs to be factored into ratemaking decisions, and precluded other prudent forms of risk management. The result should have been entirely predictable – the private insurance market has receded. In 2023, for example, the state’s largest insurer, State Farm, stopped writing new policies. Other insurers followed suit. As the private market receded, homeowners increasingly had to seek coverage through the state’s catastrophic backstop, known as the FAIR Plan. In just the last year, FAIR Plan coverage grew 61 percent to $485 billion.
California’s Timely Insurance Reforms
As detailed in a new assessment by Jerry Theodorou of R Street, California recently introduced long overdue reforms to its insurance markets. The state now permits forward-looking catastrophe models and includes reinsurance costs in premium calculations, aligning the market more closely with actual risk. These measures aim to stabilize insurance coverage while addressing inescapable risks to insuring property in the state. Indeed, one insurer that had stopped writing new policies had previously stated that it would reenter the market if such reforms were implemented.
These reforms will not right-size the insurance market overnight, nor will homeowners see their premiums tumble. It will take some time for these reforms to improve the insurance market, and that is only if they’re allowed to persist. Given California’s history, it is all too possible that policymakers will fall back to old habits and attempt to artificially shield residents from immutable risks. Nevertheless, California should be commended for moving how and when they did. For Los Angeles homeowners, this policy change came not a moment too soon.