Another voice: California needs to improve its insurance regulatory practices

At universities across the nation, there is a classic refrain of the underachiever: “D’s get degrees!” There are students who are content to stagger onward, seemingly oblivious to the cost of their behavior. So it is with the nation’s perpetual underachiever in the insurance regulatory space – California.

Saddled as it is by the hangover effects of the particularly regrettable binge of 1980s electoral populism known as Proposition 103, the Golden State only manages a D grade on the R Street Institute’s 2017 Insurance Regulation Report Card. Though no worse than last year’s grade, that D is only good enough to rank California 46th among the 50 states. Even grading on a generous curve, California is underperforming.

Particular demerits stem from, among other things, the state’s highly politicized regulatory environment. The elected insurance commissioner’s office makes what should be dry and bureaucratic decisions the subject of hot-button political debate, and in recent years has tended to promote uncommonly hostile relationships between the California Department of Insurance and the industry it is charged with overseeing. A penchant for “desk drawer rules” and informal regulatory guidance enforced by autocratic rule also drag the state down.

Yet the issue most in need of improvement in California is its severely limited underwriting freedom and rate-setting flexibility. A direct result of Proposition 103 is that insurers have little ability to design and price insurance products in California. As a result, residents neither see the newest and most innovative offerings, nor do they enjoy product prices indicative of the level of risk they actually present.

In effect, California’s system creates cross-subsidies for all of the lines subject to Proposition 103. For some, this is a “win” in the form of suppressed rates. For many others, particularly for those who are a lower risk to cover, it is a clear loss.

What’s stopping the Golden State from falling further in the rankings is the strength offered by the raw size of its market. At just shy of 40 million residents, it is by far the largest state in the nation. In 2016 alone, $315.3 billion in total premiums were collected in the state. Naturally, plenty of firms are willing to bear the headache of dealing with the state’s regulatory climate to gain access to those consumers.

While California certainly has room for improvement, it also has room to fall further.

Very early results from 2018 do not point to better results on the horizon. In the wake of devastating wildfires throughout the state, the Department of Insurance has responded by offering a series of legislative proposals that would further limit the ability of insurers to achieve rate adequacy by preventing nonrenewals in high-risk areas, compelling firms to offer mitigation discounts, and seeking to evaluate — and even rubber stamp — the very science of climate change itself via pre-approval of catastrophe models.

If that legislation passes and becomes law, some insurers will almost assuredly leave the state. At that point, this underperforming D student will have ceased to muddle by, and will instead be failing the state’s consumers. That’ll be a well-earned F.