Bill Clerico, founder and managing partner for Convective Capital, said California’s 1988 insurance law has imposed rigid price controls and backward-looking rate-setting that prevent accurate risk pricing, driving major insurers out and creating coverage gaps.
The issue is significant as the state’s insurance market faces severe strain from regulatory overreach and wildfire risks. Insurers have reduced coverage or exited entirely, leading to premiums doubling or tripling for many homeowners at renewal to offset losses and inflation. The state’s FAIR Plan, a last-resort option for those unable to secure private insurance, has seen a 146% increase in policies since 2022, highlighting the depth of the crisis. This situation threatens affordable housing and financial security across California, according to LAist.
“California passed a law in 1988 to keep insurance companies from overcharging homeowners. It worked so well that the insurance companies left, and now 670,000 homeowners can’t get coverage at all,” said Clerico. “Prop 103 did 3 things that made it impossible to price wildfire risk. First, it required insurers to set rates based on the last 20 years of historical losses — no forward-looking models allowed.“
“As Michael Wara put it, it’s like driving using only the rearview mirror,” Clerico added. “Second, California was the only state in the country that barred insurers from factoring in the cost of reinsurance — the insurance that insurance companies buy. Reinsurers reprice annually based on real climate data. California told insurers to ignore it. Third, any rate increase over 6.9% triggered a public intervenor process that could take years and cost insurers millions in fees. So most companies just filed 6.9% every year — far less than the actual growth in wildfire risk. Until they stopped filing and started leaving,” according to his statement on X.
Clerico addressed these challenges by outlining how Proposition 103’s restrictions on forward modeling, reinsurance costs, and rate hikes have forced insurers to exit the market. He noted recent reforms allowing catastrophe models but deemed them insufficient as carriers continue dropping policies. The thread highlights what he described as an urgent need for flexible pricing to incentivize risk mitigation and market participation according to his post on X.
Proposition 103’s prior-approval system has kept rates artificially low, contributing to California’s $15 billion homeowners market shortfall of $1.35 trillion to $2 trillion in wildfire coverage gaps. Insurers cite inability to adjust for rising risks as a reason for non-renewals and increased reliance on the FAIR Plan. While reforms aim to incorporate catastrophe modeling into rate-setting processes, experts warn that an additional $8-10 billion in annual premium infusions may be needed for balance according to McKinsey & Company.
Clerico founded Convective Capital as a venture firm backing technologies aimed at preventing and mitigating wildfires; he also chairs the American Firetech Initiative and organizes Red Sky Summit for wildfire policy advocacy according to Convective Capital.