California's insurance market is in free fall. Following the catastrophic Altadena and Pacific Palisades fires and a string of other climate-driven disasters, families and businesses are finding themselves underinsured, uninsured, or entangled in endless disputes with their carriers over smoke damage, contents coverage, and basic claims processing. The California FAIR Plan Association (FAIR Plan), once a "last resort" backstop, is rapidly becoming the default option, even though its coverage limits and terms are deeply inadequate for the realities of California's housing stock, commercial markets, and wildfire risks.
This is not merely a consumer-protection problem. It is systematic economic and security issue with implications far beyond individual households. California is the nation's economic engine and home to critical defense industries. For defense contractors, infrastructure providers, and energy companies operating in California, the insurance crisis is not an abstract regulatory battle. It is a direct threat to operational continuity, property security, and financial sustainability.
At the heart of this dysfunction lies Proposition 103, the 1988 ballot initiative that imposed prior-approval rate regulation, mandated rollbacks, politicized the role of insurance commissioner, and imposed rate-setting formulas that may have seemed consumer-friendly at the time but are fundamentally unsuited to the 21st century risk environment. Today, as wildfires burn hotter, utilities and municipalities face mounting liabilities, and insurers face skyrocketing reinsurance costs, Proposition 103's rigid controls are choking the market. Indeed, since 2022, seven of California top twelve insurers have limited new home insurance policies or withdrawn renewals.[i] Others are teetering on the edge.
Repealing Prop 103 is not simply about deregulation. It is about restoring vitality to California's insurance market, protecting residents from under-insurance, safeguarding businesses, and ensuring that California remains an economically viable and strategically secure state.
The Anatomy of Market Collapse
To understand why repeal is urgent, one must first grasp that compounding forces that have hollowed out California's insurance system.
Wildfire Intensification and Claims Explosion
California's wildfires are no longer seasonal inconveniences; they are catastrophic events with intensity and frequency far exceeding historical norms. Smoke damage alone has generated billions in claims, many of which remain unpaid. Insurers cannot price for this risk under Prop 103's formulas, leaving them with no rational basis to stay in the market.[ii]
Regulatory Handcuffs
Proposition 103 requires insurers to seek prior approval before raising rates, and the approval process can impose significant delays and constraints. For example, regulatory observers note that California ranks worst in the nation in terms of rate-suppression for both home and auto insurance under the prior-approval regime.[iii] With reinsurance markets repricing annually and climate models shifting in real time, such delays are fatal.
The FAIR Plan as De Facto Market
Once designed as a safety net, the FAIR Plan is now the fastest-growing insurer in the state. Its policies have doubled in four years in certain fire-prone zones.[iv] But with condo-HOAs capped at $20 million in commercial coverage- far below replacement costs on many cases- whole communities are structurally underinsured. In fact, the FAIR Plan's residential coverage limit is $3 million, and the commercial per-location limit has been set at $20 million under recent expansion. The FAIR Plan also limits loss-of-use, other peril coverages and is designed as last resort only.[v]
Investor Flight and Capital Drain
Insurers do not operate in isolation; they are tied to global capital markets. Prop 103's artificially suppressed premiums, combined with unlimited liability exposures, have made California a toxic risk pool. Investors are fleeing, leaving the state unable to attract the capital reserves required for large-scale catastrophe coverage.[vi]
Proposition 103: A Relic of Another Era
When voters passed Prop 103 in 1988, they sought to punish insurers for perceived price-gouging in the auto market and to rein in rising costs. The measure rolled back rates by 20%, required prior approval of rates, and made the insurance commissioner an elected position.
For a time, Prop 103 seemed to work. Auto premiums fell. Consumers felt empowered. But the world has changed dramatically since 1988. Then, California's greatest insurance challenges were car accidents on congested freeways. Today, they are megafires, climate volatility, and systemic risks to billion-dollar utility grids. What worked in the late 20th century is now crippling in the 21st.
The rigidity of Proposition 103 prevents insurers from aligning premiums with actual risk. It discourages investment in loss-prevention partnerships (such as funding community brush clearance or resilient infrastructure) because insurers know they cannot recoup those costs through pricing.[vii] It also injects political theatre into every discussion of rate adequacy, ensuring that short term considerations override long-term market stability.
The Defense and Business Case for Repeal
Why should defense-oriented and business readers care? Because insurance is not just a consumer product; it is a cornerstone of operational resilience.
Defense Industry Footprint in California
California is home to massive aerospace and defense assets- Northrop Grumman in Palmdale, naval installations in San Diego, and major R&D centers across Silicon Valley. These facilities require robust property and business-interruption coverage. If carriers retreat and the FAIR Plan becomes the only option, coverage gaps will jeopardize critical supply chains and national security operations.
Infrastructure and Utilities
California's electrical grid, water systems, and transportation networks underpin not only civilian life but also military readiness. Utilities already face existential risk from wildfire liability, If insurance remains constrained, infrastructure resilience will collapse further, leaving bases, defense contractors, and communities exposed.
Economic Multiplier Effects
Insurance is a lubricant of capital. Without it, mortgage markets freeze, construction halts, and a business cannot invest. For industries tied to defense procurement, where long-term facility stability is essential, an unstable insurance market is an existential threat.
National Security Implications
California is not just another state, it the world's fifth largest economy. A systematic insurance failure here is not localized, it reverberates through supply chains, federal budgets, and global markets. If insurers cannot operate in California, it signals to capital markets that climate risk in the U.S. is uninsurable, undermining America's economic and strategic credibility.[viii]
What Repeal Would Achieve
- Repealing Prop 103 would not mean abandoning consumer protections. California could and should design a modern regulatory framework that balances risk-based pricing with transparency and accountability. But repeal would immediately unlock several critical benefits:
- Market re-entry of private carriers: Without the artificial rate caps and hearing delays, insurers could price risk appropriately and return to the market. That competition would drive innovation in coverage models and mitigation incentives.
- Investment in Resilience; Carriers freed from Prop 103's shackles could partner with municipalities on risk reduction- funding brush clearance, hardening infrastructure, and deploying community-scale fire prevention. Today, they have no incentive because they cannot price those costs into premiums.
Lessons from Wildfires
The Altadena/ Palisades Fire are a microcosm of the crisis. Families discovered they were underinsured; condo HOAs learned that FAIR Plan limits left them tens of millions short; survivors found themselves mired in inventory lists and receipt disputes even as their lives lay in ashes. A recent ABC 7 analysis found that in 2023 the non-renewal rate in zip code 91001 (Altadena) was 7.5%, and in zip code 90272 (Pacific Palisades) was 8.3%.[ix]
The final version of California's SB 495, also known as the "Eliminate 'The List' Act," requires insurance companies to pay policyholders up to 60% of their contents coverage limits, capped at $350,000, for a total loss of their home declared emergency without first requiring a detailed inventory list. The provisions of the bill will take effect in January 2026.[x] Although this new law serves as a Band-Aid, but not a solution. It does not solve the fundamental issue that insurers cannot sustainably operate under Prop 103.
Addressing the Critics
Efforts to repeal Prop 103 will face fierce opposition, Consumer advocates will argue that it protects households from "price-gouging" and holds insurers accountable. This argument ignores the reality that there is no consumer protection when insurers refuse to write policies at all. A guaranteed but inadequate FAIR Plan policy is not protection, but a trapdoor.
Critics also claim California's premiums remain cheaper than most U.S. postal codes when measured against home-values. That may be true in static terms, but it is irrelevant when the volatility of losses is rising exponentially. A market cannot function on yesterday's metrics when tomorrow's risks are reams of magnitude greater.
Finally, some will argue that climate risk is too high for private insurers regardless of regulation. This ignores the experience of other high-risk states- Florida with hurricanes, Oklahoma with tornadoes- where insurers still operate, albeit at higher prices, because rate-setting aligns with risk. California is unique in artificially suppressing premiums below actuarial reality.
Policy Path Forward
Repealing Proposition 103 would open the door to a new regulatory framework that could include:
- Dynamic Risk-Based Pricing: Allowing insurers to adjust rates annually in response to reinsurance and climate-model shifts.
- Resilience Credits: Offering premium reductions for homeowners and municipalities that meet hardened- building and infrastructure standards.
- Catastrophe Bond Expansion: Encouraging insurers to securitize wildfire (and other catastrophe) risk, spreading it globally instead of concentrating it locally.
- Municipal Accountability: Structuring policies that account for failures of public infrastructure, incentivizing cities to maintain water-pressure, hydrants, and electrical safety systems.
- Transparency and Oversight: Maintaining consumer trust through clear disclosure of rate rationales, claims performance, and solvency standards.
Conclusion: Security Demands Reform
California stands at a crossroads. The state can cling to a relic of the 1980s, preserving the illusion of consumer protection while driving insurers out and leaving families under-insured. Or it can embrace reality, repeal Prop 103, and build a modern insurance market that reflects 21st-century risks and opportunities. The stakes could not be higher. Insurance is not a luxury good; it is the bedrock of resilience, economic vitality, and security. A state without a functioning insurance market is a state vulnerable not only to natural disasters but to economic collapse and national security erosion.
Repealing Prop 103 will not be easy. It will require political courage, industry engagement, and public education. But the alternative, continued market retreat, FAIR Plan dependency, and systematic under insurance is untenable. California prides itself on being a leader. It must lead again by acknowledging failure, repealing Prop 103, and building the resilient insurance framework its people, businesses, and national-security demands.
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[i] Fors, Kristian. Why California Homeowner's Insurance Market Collapsed- And How to Fix It. Independent Institute. (May 12, 2025). https://www.independent.org/article/2025/05/12/why-californias-homeowners-insurance-market-collapsed-and-how-to-fix-it/.
[ii] R&I Editorial Team. Wildfires Break Seasonal Patterns as LA Fires to Cost Insurers a Record $40 Billion. Risk & Insurance. (July 25, 2025). https://riskandinsurance.com/wildfires-break-seasonal-patterns-as-la-fires-to-cost-insurers-a-record-40-billion/.
[iii] Fors, Kristian. Why California Homeowner's Insurance Market Collapsed- And How to Fix It. Independent Institute. (May 12, 2025). https://www.independent.org/article/2025/05/12/why-californias-homeowners-insurance-market-collapsed-and-how-to-fix-it/.
[iv] Rahim, Saqib. Insurers Flee Wildfire-Prone California Despite State Assistance. E&E News by Politico. (October 28, 2025). https://www.eenews.net/articles/insurers-flee-wildfire-prone-california-despite-state-assistance/#:~:text=Other%20states%20%E2%80%94%20including%20Florida%2C%20Louisiana,the%20level%20two%20years%20ago.
[v] Press Release: Commissioner Lara Approved Major FAIR Plan Expansion to Help HOAs, Builders, Farmers, and Businesses Access Insurance Coverage. California Department of Insurance. (March 28, 2025). https://www.insurance.ca.gov/0400-news/0100-press-releases/2025/release028-2025.cfm.
[vi] Powell, Lawrence, Lehmann, R.J., and Adams, Ian. Rethinking Prop 103's Approach to Insurance Regulation. International Center for Law & Economics. (November 6, 2023). https://laweconcenter.org/resources/rethinking-prop-103s-approach-to-insurance-regulation/.
[vii] Id.
[viii] Fors, Kristian. Why California Homeowner's Insurance Market Collapsed- And How to Fix It. Independent Institute. (May 12, 2025). https://www.independent.org/article/2025/05/12/why-californias-homeowners-insurance-market-collapsed-and-how-to-fix-it/.
[ix] Ozebek, Kevin. Fire Ravaged LA Area Faced High Non-Renewal Rates for Home, Fire Insurance Before Disaster Struck. ABC7 Eyewitness News. (February 6, 2025). https://abc7.com/post/dropped-home-insurance-southern-california-zip-codes-have-highest-renewal-rates/15874380/.
[x] California Senate Bill 495 text. https://legiscan.com/CA/text/SB495/id/3262166.
