California’s insurance crisis is expected to get even worse after the devastating forest fires breaking out in the stateand experts say a decades-old law plays a big role in why insurance companies have fled the state in recent years.

In 1988, California voters approved Proposition 103, which gave the state’s Department of Insurance the power to approve rates or even revoke them. Thus, insurance companies that want to raise rates must go through a regulatory process that can take months or even years, hampering their ability to properly adjust rates to cover their losses and assess risk.

Plumes of smoke from a brush fire in Pacific Palisades, California, January 7, 2025. (David Swanson/AFP via Getty Images/Getty Images)

“Prop. 103 is essentially price controls,” said Steven Greenhut, western regional director of the R Street Institute in Sacramento, California. “It favors the ability of insurance companies to adjust rates to meet the market.”

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Greenhut said FOX business in an interview that because of this long-term process, insurance companies began to withdraw from California after the previous attack of wildfires that caused great destruction in the state a few years ago years because carriers could not quickly adjust rates.

A sign is posted in front of a State Farm insurance office on Jan. 3, 2024, in Berkeley, California. State Farm announced last year that it would suspend 72,000 insurance policies in the Golden State. (Justin Sullivan/Getty Images/Getty Images)

In 2023, Greenhut wrote an op-ed warning that California’s insurance regulations would lead to the insurance crisis the state is seeing now. But when major insurers like State Farm began pulling out, he said, some elected officials blamed climate change.

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Greenhut believes climate change could be affecting some of the catastrophic events, but argues that doesn’t change what he sees as the nature of the problem: that California’s regulatory system impedes the ability of insurance companies to set rates where they should be, and this reduces competition over time.

Senator Ricardo Lara joined union groups gathered for a rally in Wilmington on Wednesday, October 3, 2018. Lara is the commissioner of the state Department of Insurance and has proposed reforms to address the crisis of California insurance. (Brittany Murray/Digital First Media/Long Beach Press-Telegram via Getty Images/Getty Images)

California Insurance Commissioner Ricardo Lara recently began allowing rate increases and reforms enacted in an effort to keep insurers in the Golden State, and Gov. Gavin Newsom has also acknowledged the need for more competition in the state.

California’s Democratic governor, Gavin Newsom (Jason Armond/Los Angeles Times via Getty Images/Getty Images)

But in California, an initiative can’t be changed if it doesn’t go to the polls. And, so far, there hasn’t been enough political incentive for Prop 103 to be voted on again by the people.

In the meantime, California has tried other solutions, including creating the FAIR Plan, its state-run insurer of last resort that offers inexpensive, no-nonsense policies. But as the number of policies under the FAIR Plan has soared beyond what it was designed to support, there has been public talk of concern that it could go bankrupt, according to Greenhut.

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“It’s a real disaster in the making,” he said. “Now we have these big wildfires in Southern California, which are horrible. And we’ll have to wait and see the outcome, but it’s another big problem.”