It's too early to know what changes the Los Angeles fires will bring to life in California, but much will depend on the answer to one question: Will funding for a once-obscure insurance program dry up? Maybe.
That program, the California FAIR Plan, was created by the state Legislature in 1968 to cover people who were unable to obtain standard home insurance for a variety of reasons. But as climate change makes wildfires more frequent and intense and private insurers retreat from the state, the fast-growing FAIR plan has become the linchpin holding California's increasingly fragile insurance market together. are.
The fires that started last week are threatening to fracture that cornerstone, with repercussions that could ripple throughout California's economy.
As of last Friday, only $377 million was available for claims under the FAIR plan, according to the office of Sen. Alex Padilla, D-Calif. It is not yet clear how much money the plan will pay out, but the total insured losses from the fires so far are estimated at up to $30 billion. The number could rise further as the fires continue to burn.
Unlike regular insurance companies, FAIR Plan cannot deny coverage to a home simply because it is located in a vulnerable area. As a result, FAIR plans are piling up homes deemed too dangerous by major insurance companies as the risk of wildfires increases.
Between 2020 and 2024, the number of homes covered by the plan more than doubled to about 500,000 properties, and its value tripled to about $5 trillion.
Homes in the Pacific Palisades are increasingly eligible for FAIR plans. Fires in the region have so far destroyed more than 1,000 homes, damaged 5,427 and threatened 12,250 more, according to data released Tuesday by the Federal Emergency Management Agency.
Since the fire broke out last week, FAIR Plan has declined to disclose how much cash it has on hand. Spokesman Patrick Dorsey would say only that the plan is “prepared for disaster.”
Sen. Padilla's staff said the $377 million figure came from California Insurance Commissioner Ricardo Lara's office, which regulates the FAIR plan. The comptroller's office confirmed the numbers were accurate.
If your FAIR plan doesn't have enough funds to pay all your claims, you can rely on something called reinsurance. In other words, insurance is provided by an insurance company in case the loss exceeds a certain amount.
Dorsey also declined to provide details on how much reinsurance coverage the FAIR plan provides. According to Senator Padilla's staff, the plan has $5.75 billion in reinsurance available.
If the FAIR Plan cannot cover losses through reinsurance alone, it may seek money from California insurance companies to make up the difference.
But Neil Alldredge, president of the National Association of Mutual Insurance Companies, said that requirement, called a rating, would raise new problems. Members of the National Association of Mutual Insurance Companies write the majority of home insurance policies in California in dollar amounts.
California's remaining insurance companies are already struggling to make a profit, Aldridge said. Some may reconsider their decision to stick around if they also receive a bill from the FAIR plan, he said.
“Are some of them assessing their risk appetite? Yes,” Aldridge said. “None of these things make the California market more attractive.”
The prospect that government-backed insurance plans won't be able to cover the losses has raised concerns in Congress. Last year, Sen. Sheldon Whitehouse, a Rhode Island Democrat and then-Senate Budget Chairman, expressed concern about the financial strain on Florida's state insurance plan of last resort, saying, warned of the possibility of
“The inability to pay insurance claims due to climate change could trigger a cascading failure that harms our entire economy,” the senator said.
Last March, FAIR Plan chairwoman Victoria Roach suggested to MPs that they were taking on too much risk. “If we were a normal insurance company, we would not have been able to grow at this pace,” Roach said during the committee hearing. “As these numbers rise, our financial stability becomes more in question.”
He also made a comment that seemed to predict the current flare-up.
“We're one step away from a large-scale evaluation,” Roach testified. “There's no other way to say it, because we don't have the money on hand and we have a lot of exposure.”
Mr. Dorsey declined to interview Mr. Roach or other executives involved in the project.
There are other reasons to question the plan's ability to absorb losses from the Los Angeles fires.
The FAIR Plan, like other insurance companies in California, requires approval from the state Insurance Commissioner to increase premiums. Dorsey, the FAIR Plan spokeswoman, said the plan requires charging fees “sufficient to cover losses and expenses.”
But Roach told lawmakers at the hearing that the FAIR plan would require a rate increase of about 70% in 2021. The plan formally called for a 48.8% rate hike, perhaps anticipating that regulators were unlikely to approve such a large increase, he said.
Roach said the insurance commissioner allowed the FAIR plan to increase its premiums by just 15.7%.
Michael Soler, a spokesman for the state insurance commissioner, said some of the costs the FAIR plan cited in seeking higher premiums, including reinsurance, were prohibited under state rules at the time.
Last April, Roach appeared before an independent state regulator to testify again about the financial challenges facing the FAIR program. One former lawmaker, Anthony Cannella, said the arrangement looked less than ideal. The insurance company may decide that some homes are too risky to cover, but if the FAIR plan suffers a loss on those homes, that same insurance company will have to pay for that loss anyway. It won't happen. .
“It's like a mansion on the sand,” Cannella said.
Ms. Roach said nothing to dispute her claims. Instead, she laughed.
