SACRAMENTO, Calif. — The American Spectator might not be at the top of Gov. Gavin Newsom’s reading list, but had it been, he would have known that California’s teetering insurance system was just one particularly bad wildfire away from disaster. Sure, he knew that insurers were fleeing the state in the face of its absurd price-control system that doesn’t allow them to price policies to reflect their actual risk, but that knowledge didn’t spur him to make the matter a priority. In September 2023, I wrote the following on these pages after lawmakers decided to punt on insurance reform rather than take on their anti-corporate allies: Newsom said the legislative deal “unfortunately fell through and, I say unfortunately, because time is of the essence.” Yet timing wasn’t essential enough for the Legislature, which does have the knack for punting on the state’s truly pressing problems (homelessness, pension debt, failing public schools, etc.) It’s unclear what Insurance Commissioner Ricardo Lara, who has been chastened for his inaction by some media sources, plans to do about a crisis that he continues to blame on climate change, inflation and everything other than the state’s price controls and inefficient rate-approval system. Well, over a year later, Lara finally implemented some reasonable reforms that allow insurers to use forward-looking catastrophe models in determining rates rather than relying primarily on past claims. That should have been a no-brainer many years ago for our climate-change-obsessed policymakers. If the future climate is warming, then insurance companies ought to be able to include such warming — and its fire-related risks because of dryness and drought — in their rate making. The reforms also let insurers factor rising reinsurance rates into their policy charges. Reinsurance is the insurance that insurance companies buy, which protects their financial reserves and lets them write additional policies. Everyone in Sacramento agrees that the state needs more underwriting. But Lara unveiled the belated reforms and then, lo and behold, this tragic wildfire swept across Los Angeles, causing perhaps $150 billion in damage. As Newsweek reports, “The wildfires ravaging Southern California for over seven days could exacerbate the ongoing property insurance sector crisis in the state, leading to further premium hikes and coverage cuts from major companies, according to experts.” That’s a rather understated take on the size of the disaster. Basically, the commissioner’s long-awaited reforms will be incinerated along with the 12,000 or so structures that vanished in the fires. And Lara couldn’t help himself from falling back on his progressive instincts, as he issued an edict forbidding insurers from cancelling or not renewing policies in the Los Angeles-area neighborhoods most affected by the fires. Forcing companies to provide such coverage will only cause them to cut back elsewhere — and high-tail it out of state as soon as the moratorium is lifted. I understand the instinct here, but such rules are at the root of California’s insurance crisis. Insurers are in business to write policies, so if the state has to force them to do so, it suggests a deeper problem. In my April 2021 American Spectator column, I likewise offered warnings about a coming crisis: There are some obvious steps that policymakers can take beyond blathering about the need to rejigger the Earth’s climate. California could step up its inadequate forest-thinning activities and incentivize electrical utilities to better deal with fire-sparking transmission lines. From an insurance standpoint, the state needs to allow a competitive marketplace.  If insurers were free to price their policies to reflect their risk, they would be more apt to write them in riskier areas — and competition would eventually reduce the cost of premiums. Over that time, Newsom has A) promised to boost forest-thinning efforts, but only oversaw the clearing of a small portion of the promised amount; B) talked about the need for more water supplies, but his Coastal Commission appointees rejected an Orange County desalination plant; C) done little to tackle the transmission-line issue; D) done little beyond Lara’s latest minor reforms to incentivize insurers to step up their policy writing. In the ensuing years, companies have increasingly headed for the exit doors. (READ MORE: Blame Newsom, Not Climate Change, for Los Angeles Wildfires) Other disaster-prone states, such as Florida, have major insurance problems, but the causes vary. In California, the cause is tied to our prior-approval system of insurance regulation. Wildfires exacerbate that problem. Climate change might intensify the wildfires. But the issue is California makes it inordinately difficult for insurers to price their policies accordingly. Price controls always lead to shortages. Instead of risking their financial health, insurers quietly leave. Our controls came in 1988 when voters approved Proposition 103. It made the insurance commissioner an elected official. Elected officials have a political incentive not to raise rates for obvious reasons. It instituted a prior-approval system (similar systems exist in 12 states), whereby the commissioner must approve any rate increases. It created a Byzantine rate-review process that’s costly and time-consuming. It gave consumer attorneys (“intervenors”) standing to oppose rate hikes. It even rolled back rates. The state can enact reforms within the Prop. 103 framework (mainly through expediting the rate-review process and allowing use of those catastrophe models), but it won’t have a healthy insurance market until it ditches price controls. To make matters worse, the state’s FAIR (Fair Access to Insurance Requirements) Plan is in deep trouble, as increasing numbers of property owners rely on this bare-bones state-created insurer of last resort. If that fails, what exactly will people do? Regarding Lara’s moratorium, I quote from letter insurance industry trade groups sent to legislators when they were considering a bill that would have forbidden insurers from cancelling or non-renewing policies in high-risk wildfire areas (along with another regulatory bill):  The combination of inadequate rates and unmanageable risk would present significant solvency issues for California insurers. The undersigned trade associations oppose both AB 1439 and AB 1522 because they would impose immense risks that threaten the ability of homeowner’s insurers to continue to function in California. That was in 2021 following years of losses spurred by wildfires less devastating than the current one. One final note: Perhaps Newsom and the Legislature might put on hold their performative emergency efforts to stand up against Big Oil and the incoming Trump administration and, you know, actually tackle a problem that threatens our economic future. Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org. READ MORE: A Tale of Two Democrat Cities Facebook Ends Dubious Fact-Checking. Biden Objects. The post California Incinerated Its Insurance Market appeared first on The American Spectator | USA News and Politics.