California has the 15th-lowest auto insurance rates in the U.S., but drivers have seen significant premium hikes in 2023. After a more than two-year freeze on rate hikes due to the COVID-19 pandemic, the California Department of Insurance (CDI) approved increases for six of the state’s largest auto insurers over the past year.

Proposition 103, the primary legislation regulating California’s insurance industry, requires approval from the CDI for rate increases. As a result, the average monthly cost of car insurance in California is $150, significantly less than the national average of $143, according to Insurify data.

Insurers say California premiums haven’t kept up with rising costs. Post-pandemic inflation hit a high in June 2022, at 9.1%, but dropped to 3.7% in September 2023, according to the Bureau of Labor Statistics (BLS) consumer price index (CPI). The cost of motor vehicle maintenance and repair is up 10.2% year over year from last September.

“Prop 103 kept rates artificially low for a lot of years in California,” says Janet Ruiz, director of strategic communications at the Insurance Information Institute (Triple-I). “[Insurance companies] have to collect adequate premiums to pay the claims.”

Major auto insurers request 6.9% hikes to avoid challenges

Under Prop 103, if an insurer seeks a premium increase of 7% or more, consumer advocates can become “intervenors” and challenge the proposed rates.

Intervenors have the right to recover costs, expenses, and attorney’s fees incurred during the rate filing from insurers, making the process costly for companies. Insurance companies often request rate increases of 6.9% to avoid lengthy public hearings.

Six major California auto insurers requested 6.9% increases between the end of 2022 and 2023 that will increase average annual premiums by up to $167, according to Consumer Watchdog:

• Allstate, effective December 2022, $167 average premium increase

• GEICO, effective January 2023, $125 average premium increase

• Mercury, effective March 2023, $80 per vehicle average premium increase

• Auto Club of Southern California, effective April 2023, $140 average premium increase

• State Farm, effective May 2023, $71 average premium increase

• Farmers, effective December 2023, $98 average premium increase

Some smaller insurance companies received approvals for higher increases. The usage-based auto insurer Root received a 62.4% increase, and Incline National Insurance Company got a 28.7% increase on non-standard auto policies.

Inflation is the main factor behind premium spikes, says Triple-I

California’s home insurance market is also in crisis, driven largely by state-specific factors. Earthquakes threaten foundations, floods ruin flooring, and wildfire damage leads to costly claims in a state where the median home value is 134% higher than the national average, according to U.S. Census data.

The main reason behind rising car insurance rates is more straightforward, says Ruiz.

“Wildfires do affect cars that have comprehensive coverage. So, if your car got burnt in a wildfire and you have comprehensive [...] those costs are reflected,” she says. “But that’s not really what we look at as much on the auto side. What we’re seeing now in auto [insurance], across the U.S., are the effects of inflation.”

COVID-19 driving habits influence rate hikes post-lockdown

An increase in severe post-lockdown accidents is another factor influencing rates, says Ruiz.

“We saw really bad driving behavior develop during COVID. There were fewer people on the roads, and people started speeding and driving recklessly, and that has continued post-COVID with more drivers on the road.”

California traffic fatalities surged 22% between 2019 and 2022, according to The Road Information Program (TRIP). Fatal and serious crashes in the state resulted in $166 billion in economic and quality-of-life costs last year, reveals a 2023 report from the transportation nonprofit.

Prop 103 restricts insurers from considering certain risk factors when determining rates. Insurers can’t base rates primarily on ZIP code but can consider annual mileage, years of driving experience, and driving record, including any accidents or violations.

“One of the issues we see is not being able to use telematics as a rate-making factor,” says Ruiz. “Telematics actually gives consumers the opportunity to have their rates based more on their driving habits rather than a class of people their age or with their experience. [...] So, it would be to consumers’ benefit to use telematics.”

What's next for car insurance in California

In an attempt to stabilize the state’s flailing property insurance industry, Governor Gavin Newsom and Insurance Commissioner Ricardo Lara announced insurers would be able to factor climate change into risk models as long as they agree to write more policies for homeowners in higher-risk areas.

Auto insurance could be affected by similar compromises in the future as Gov. Newsom and the CDI try to prevent insurers from leaving the state.