Towards the conclusion of the previous year, California implemented urgent new insurance regulations that allowed insurers greater flexibility in increasing premiums, while simultaneously mandating them to provide coverage for regions susceptible to wildfires within the state.

The expectation was that this agreement, involving increased premiums and expanded coverage, would address the issue of insurers abandoning the state, thereby ensuring that homeowners would have private options available to safeguard their properties against future disasters.

The reality is that these reforms might be too little and come too late. Now, the still-burning Palisades and Eaton fires (estimated to have caused $150 billion in damages) seem to be pushing politicians back into their old, bad habits of bullying insurers into doing business in California.

This past Friday, California's elected insurance commissioner, Ricardo Lara, issued a moratorium on insurance companies canceling or not renewing policies in areas affected by the Palisades and Eaton fires.

"Lara stated, 'I am exercising my authority to impose a moratorium, which will stop insurance companies from canceling or refusing to renew policies in areas affected by wildfires. This is to ensure that individuals do not have to endure the additional burden of securing new insurance during this devastating time.'"

California Governor Gavin Newsom praised the ban on non-renewal through social media platforms.

California is taking measures to stop insurance companies from canceling or failing to renew home insurance for victims of the LA wildfires in designated zip codes for the upcoming year.

Whether homeowners have suffered a loss or not, we're alleviating the stress of finding new insurance during these times. pic.twitter.com/ABr9oQlct3

— Governor Newsom (@CAgovernor) January 10, 2025

California officials have relied on the strategy of compelling insurers to renew policies for several years now.

In 2018, the California Legislature passed S.B. 824. Written by Lara (then a state senator), the bill forbade insurance companies from canceling or not renewing policies for one year in ZIP codes that had been affected by wildfires.

As of November 2022, nearly 2.4 million policies were in ZIP codes covered by non-renewal moratoriums, according to a September 2023 report by the International Center for Law and Economics (ICLE).

That law was passed in the wake of the 2017 and 2018 wildfires that had caused some $20 billion in damages—a figure high enough to wipe out a quarter century of insurance industry profits in the state.

According to ICLE, the rate of non-renewals by insurers rose by 36 percent in the years after the fires of 2017 and 2018. During this same timeframe, FAIR, the state's last-resort insurer, saw a staggering 225 percent increase in the number of policies it issued.

Between 2019 and 2021, non-renewal rates more than doubled in the ten counties most affected by wildfire risk, according to California's Department of Insurance.

However, compelling insurers to renew their policies did not significantly tackle the main concern for these companies regarding their operations in California: long-standing, voter-endorsed restrictions on their capacity to increase premiums in response to the escalating risk of wildfires.

Under Proposition 103, passed in 1988, California's insurers have been prohibited from passing the costs of reinsurance (insurance on insurance) onto consumers. They've also been required to use past averages of wildfire damages when pricing wildfire risk into premiums on new policies.

The issue at hand is that reinsurance rates, which fall outside the regulations of Proposition 103, have been increasing due to the heightened risk of wildfires. According to the ICLE report, the accumulation of wildfire losses in recent years, coupled with the escalating threat of future incidents, indicates that calculating premiums based on historical averages of wildfire losses is "entirely insufficient" to address the risks faced by insurers.

This all came to a head in 2023 when the state's two largest home insurers, State Farm and Farmers, said they'd stop issuing new policies in California. (State Farm also canceled some 1,600 policies in Pacific Palisades, one of the communities that has been nearly wiped out by the recent fires.)

According to Ray Lehmann, a co-author of the ICLE report, California was "very close to a situation about a year ago where nearly all the major carriers were ready to exit the state."

To complicate things further, Proposition 103 imposes significant barriers to reforming insurance regulations. Any amendments to the proposition demand a two-thirds majority in the Legislature, followed by a required approval from voters through a referendum.

By 2023, the insurance crisis was severe enough to encourage Newsom to take unilateral emergency action. In September of that year, he issued an executive order directing Lara to craft regulations that would stabilize the state's insurance market.

In turn, Lara produced the Sustainable Insurance Strategy.

These changes would permit insurance companies to transfer the expenses associated with reinsurance to their customers. Additionally, it allowed them to utilize "catastrophe models" to forecast potential wildfire threats for determining premium rates. In return for the opportunity to impose elevated premiums, Lara established regulations mandating that insurers' market presence in regions susceptible to wildfires should closely reflect their overall market presence within the state.

Lehmann comments, "This is a positive move forward. Overall, the insurance commissioner has been fairly accommodating, permitting rate hikes for companies that wish to maintain their operations in California, as much as possible."

Lara's Sustainable Insurance Strategy was officially implemented on December 30. Just over a week later, fires erupted in the Los Angeles area.

Consumer advocates, who have traditionally challenged any attempted changes to Prop. 103, will likely sue over the Sustainable Insurance Strategy. The president of Consumer Watchdog, a driving force behind the passage of Prop. 103, called Lara's reforms "the worst type of power grab" in comments to the Los Angeles Times.

Should legal challenges arise and succeed, insurance companies would be compelled to maintain policies in regions recently ravaged by the fires in the Los Angeles area, lacking the ability to increase premiums to mitigate their risk exposure.

To make matters worse, insurers and policyholders alike are likely going to be on the hook for a bailout of the state's FAIR plan. According to Politico, the insurer of last resort is exposed to $6 billion in losses in Pacific Palisades alone and covers $10.5 billion worth of property in areas under mandatory evacuation orders.

The FAIR plan is funded by assessments levied on private insurance companies. If the plan lacks sufficient reserves to cover claims—something that is likely the case after the recent fire—it will seek to generate more funds through further assessments on these insurers. Consequently, these expenses may ultimately be transferred to policyholders.

The FAIR plan now encompasses a modest 4 percent portion of California's insurance market. However, this marks an increase from its previous 1.5 percent share prior to 2019.

Should an average home insurance policyholder face a significant assessment imposed to fund a FAIR plan bailout, it is probable that any political support they previously had for comprehensive reform initiatives—which permit insurers to increase premiums further—will be severely eroded.

Considering the procedural challenges associated with amending Prop. 103, it seems unlikely that anyone will be inclined to address the matter following the latest fires.

"It's not something that's been put forward yet. Who would even suggest it? Who has the political bravery to tackle that issue?" remarks Matthew Lewis, the communications director for California YIMBY, an organization advocating for housing reform.

The insurance crisis that California appeared to be overcoming has flared up once more.