CA State-Backed Insurer Warned FAIR Was "One Major Event Away From Insolvency" - And, Well, Here We Are

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Many homeowners in the state have turned to an insurance program called the Fair Access to Insurance Requirements (FAIR) Plan. Created for people who can’t find insurance through the market and run by insurance companies under the commissioner’s oversight, FAIR Plan policies are often more expensive and provide less coverage than traditional plans. As private insurers fled California, the program swelled over 60 percent in the last year. It now has $450 billion in liabilities, though it only has about $385 million in funds to handle them. The outstanding balance, thanks to (Ed. - State Insurance Commissioner Ricardo) Lara’s recent deals with the industry, can now be passed on to homeowners.

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The FAIR Plan’s vast liabilities are “a big gamble,” Victoria Roach, president of California’s insurer of last resort, told the state legislature last spring. The program, she warned, was just one major event away from insolvency. “Are these wildfires that disaster?” asked Ben Keys, an economist and professor of real estate and finance at the Wharton School at the University of Pennsylvania. As L.A. continued to burn, the FAIR Plan had an estimated $5.85 billion worth of policies in the Pacific Palisades neighborhood decimated by the fires — an area that plan administrators considered among its top five exposures to wildfire risk anywhere in the state. Preliminary estimates of the insurance losses total over $10 billion — although Keys expects the total to be far higher.

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In 2024, Lara made a big change to how the FAIR plan covered its vast liabilities. Previously, if a massive wildfire depleted the program’s funds, it could force private insurance companies operating in the state to cover the gap. But last July, Lara announced that in the “extremely unlikely event” this occurred, insurance companies could shift most of the costs to consumers — a tactic states like Florida and Louisiana have also turned to as their insurer-of-last-resort programs swell. Now, California insurers are allowed to charge half of the first billion dollars of any residential damages they’re asked to pay to policyholders — along with unlimited losses beyond that. With over 12,000 structures destroyed by L.A.’s fires so far, that “extremely unlikely event” is looming. The last time the FAIR Plan assessed insurers was after a 1994 earthquake that rocked L.A. — and almost all the insurers that provided earthquake coverage subsequently left the state.

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“For the first time in history, we are requiring insurance companies to expand where people need help the most,” Lara said in a December 2024 statement. “With our changing climate, we can no longer look to the past.” But the regulation’s fine print shows insurers actually have the option to increase their coverage by as little as 5 percent — and even that requirement can be excused if the companies claim they are unable to meet the condition after two years. Advocacy groups say the catastrophe models are expected to increase rates for many property owners, but the state’s Department of Insurance itself failed to conduct a cost analysis.

California has hired just one person to oversee the accuracy of the new climate catastrophe models. Florida, in comparison, has a multidisciplinary team of experts to review catastrophe models and compare them to a public version developed by the state. “Administering the FAIR plan properly” would be just one reason for California to develop a more robust analysis, “rather than simply relying on not publicly transparent private-vendor modeling,” says Madison Condon, a professor of law at Boston University who researches climate risk in financial institutions.

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https://www.levernews.com/we-will-all-be-paying-for-l-a-s-wildfires/