California’s Last Resort Insurance Plan Sees Record New Policies in February

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The plan added 15,000 properties last month, but the director says it has too much exposure and couldn’t handle claims from a natural disaster.

California’s last resort insurer, the FAIR Plan Association, just saw a record number of new policies in February as more insurers flee the California market, leaving homeowners with one choice.

The so-called FAIR Plan provides basic coverage when other insurers aren’t available, but premiums are usually much higher. The plan now insures around 373,000 properties, adding 15,000 in February alone—the most ever—with the plan doubling in size since September 2019, officials said during a March 13 Assembly Insurance Committee meeting.

“We are one event away from a large assessment. There’s no other way to say it,” FAIR Plan President Victoria Roach told lawmakers during the meeting.

She said the FAIR Plan doesn’t have enough “money on hand” and has too much exposure to cover damages in the event of a natural disaster.

During public comments, a representative for the Personal Insurance Federation of California said if a wildfire in California cost the FAIR Plan $4 billion today, it could absorb only half of that, and private insurers would be on the hook for the remaining $2 billion. For an insurer with 20 percent of the market share, that would mean a $400 million loss, leading that insurer to forgo renewal of some policies or not take on new ones.

“In State Farm’s case, that’s what you saw when they had to pull back from the market,” the representative said.

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In January, State Farm raised rates by an average of 20 percent per homeowner for renewals, after a recent approval by the state’s Department of Insurance. Last year the state’s largest insurer announced it would stop accepting new business for casualty and property insurance but would continue to write new auto policies.

A spokesperson for the FAIR Plan told The Epoch Times that as more people purchase insurance through the plan as a last resort, property insurers in California are at risk of bearing any costs the plan can’t cover in the event of a disaster, such as another wildfire.

Flames consume a home on Triangle Road as the Oak Fire burns in Mariposa County, Calif., on July 23, 2022. (Noah Berger/AP Photo)
Flames consume a home on Triangle Road as the Oak Fire burns in Mariposa County, Calif., on July 23, 2022. (Noah Berger/AP Photo)

“Without adequate rates, expansion of coverage, plus the growing demand for the FAIR Plan, and any future catastrophic losses, could result in an assessment of all admitted property insurance carriers in the California market,” senior account executive Nathan Yañez said in an emailed statement.

He said the plan is collaborating with the state’s Department of Insurance, the Legislature, and other stakeholders to “depopulate” the plan and get residents back on private insurance policies to stabilize the market.

During the recent meeting, Ms. Roach revealed the plan currently has a surplus of $200 million and $2.5 billion in reinsurance, which is when an insurance company transfers some of its insured risks to another insurer. The practiceis currently allowed in all states but California.

She warned that if the state were to face a fire such as the 2018 Camp fire, the FAIR Plan could have over $6 billion in losses. With its current reserves, that means California property insurers could be on the hook to split a $3.3 billion assessment.

“I’m concerned that we’re one bad fire season away from complete insolvency,” Assemblyman Jim Wood said in response to Ms. Roach’s comments. Wood is a Democrat from Ukiah, northwest of Sacramento.

California Insurance Commissioner Ricardo Lara announced new rules for the industry in a September 2023 press release, to be implemented by the end of 2024, which require insurers to write at least 85 percent of their policies in high-wildfire-risk communities, as part of what the state is calling its California Sustainable Insurance Strategy, which aims to expand insurance options in the state.

The strategy also offers discounts to homeowners who have mitigated wildfire risks at their properties.

It also makes improvements to the FAIR Plan by expanding commercial coverage to $20 million per building, allowing more coverage for condominiums and homeowners associations, according to Mr. Lara.

Cal Fire crews douse a flare-up near the Barrett Mobile Home and RV Park as they fight the Border Fire on Sept. 1, 2022, in Dulzura, Calif.  (AP Photo/Gregory Bull)
Cal Fire crews douse a flare-up near the Barrett Mobile Home and RV Park as they fight the Border Fire on Sept. 1, 2022, in Dulzura, Calif.  (AP Photo/Gregory Bull)

He also announced a new regulation March 14 that would ease a restriction on insurers preventing them from using forward thinking models to set rates, using climate predictions to forecast potential fires. In 1988 California passed a measure that required insurers to use data based on the past 20 years to set rates.

According to a September 2023 report by the New York-based Insurance Information Institute, insurance companies in California failed to collect more from their policyholders’ premiums than what they paid in claims between 2013 and 2022, with $1.08 spent for every $1 received.

Reasons for that include 1988’s Prop. 103, which established what’s known as the intervenor process, in which state regulators review all proposed rate increases of 7 percent or greater, which can take years.

According to the institute’s report, recent disaster-prone years have led to losses, with fires in 2017 and 2018 costing insurers over $2 for every $1 they took in.

In 2018, the Camp fire, the deadliest and most destructive wildfire in state history, destroyed over 18,000 buildings in Northern California’s Butte County.

Excluding those two years, in the last decade, insurers spent 78 cents for every dollar received from premiums between 2013 and 2022—but the two bad years were enough to offset the rest, according to the report—leading to an overall deficit for the 10-year period.

The institute’s communications director, Janet Ruiz, told The Epoch Times in a recent interview that the insurance industry is working with state regulators to resolve some the issues.

“The insurance industry is working closely with the [Insurance Department] to make the necessary changes for insurance companies to be able to continue writing insurance in California,” she said.

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