California Property Study Guide

You cannot understand California property insurance without understanding one ballot measure. Proposition 103, passed in 1988, made the Insurance Commissioner an elected officer and subjected every property and casualty rate to that Commissioner’s prior approval. Nearly everything distinctive about this exam’s property section flows from it — how rates are set, what may be used to price a policy, and why the residual market matters so much here.

Proposition 103 and prior approval

California is a prior approval state, and the strictest one. An insurer may not use a new property or casualty rate until the Commissioner approves it (Ins. Code § 1861.05). Two mechanisms sit inside that rule and the exam tests them separately.

The first is the clock: a rate application is deemed approved 60 days after public notice, unless a hearing is requested and granted. The second is the threshold: a rate increase above 7% for personal lines, or above 15% for commercial, triggers a mandatory hearing regardless.

What may price a policy — and what may not

Proposition 103 does something no other state does: it fixes the automobile rating factors by statute, in descending order of importance (§ 1861.02). They are (1) the driver’s safety record, (2) annual miles driven, and (3) years of driving experience. Anything else is permitted only as an optional factor the Commissioner has adopted.

The consequence is one of the most reliably tested facts in California property and casualty: credit-based insurance scoring is not a permitted auto rating factor here. In most of the country it is routine. In California it is barred.

The residual market and the catastrophe mechanism

California’s dominant perils are wildfire and earthquake, with flood excluded from homeowners forms and handled through the NFIP, plus post-wildfire mudslide and debris flow. Two public mechanisms answer to that risk profile.

The California FAIR Plan Association (§ 10091 et seq.) is the insurer of last resort, providing basic property and fire coverage to those who cannot obtain it in the standard market. The California Earthquake Authority (CEA) (§ 10089.5 et seq.), established in 1996, is a publicly managed, privately funded provider of residential earthquake insurance. Note the distinction the exam draws: the FAIR Plan is a residual market pool; the CEA is a catastrophe mechanism, and it is not a windstorm pool of the kind Gulf Coast states run.

Surplus lines — the admitted market comes first

When a risk cannot be placed with an admitted insurer, California allows placement in the surplus lines market — but only through a separate California surplus line broker licence (§ 1760 et seq.), and only after a diligent search of the admitted market (§ 1763). The diligent-effort requirement is not a formality; it is the condition on which the whole placement rests, and the documentation of it is what a regulator asks for first.