Designed for people who can't get coverage in the private market, California's household insurance plans don't have enough money to pay claims from Los Angeles wildfires and can inject cash from regular insurance companies. I'm getting it.
State regulators said Tuesday that the program, known as the Fair Plan, will allow it to raise $1 billion to run its business in California and pay its claims. It could increase insurance costs for homeowners across the state.
This situation is a dangerous new phase for the California home insurance market, already upset by wildfires and has become frequent and intense due to climate change. In the face of increased losses, major insurers like state farms have already been pulled back from the state, making it difficult for homeowners to find coverage.
The pressure to depart now is even greater.
The $1 billion valuation is the largest since the fairplan was created in 1968, and for the first time since the 1994 Northridge earthquake near Los Angeles, the fairplan faces claims that it cannot pay on its own. This fee will be split into insurers based on market share, as required by state law.
“The top priority right now is that fair plans pay that claim,” California insurance commissioner Ricardola said in an interview. “A fair plan, the way we set it up is that it is doing what it is supposed to be.”
As of 2023, the largest insurers by state market share were state farms, farmers insurance groups and CSAA insurance, according to data from AM Best, which assesses the financial strength of insurance companies. The top 10 other major insurance companies include Liberty Mutual, Allstate and Travelers.
State regulations allow insurers to pass half the cost of their valuation to their customers at the former, with a higher rate. Insurance companies need to absorb the other half.
“They are supposed to eat it through profit,” Lara said. “Consumers cannot be responsible for 100% of this cost.”
These companies could face bills from fair plan assessments for tens of millions or more. Payment must be made within 30 days according to state law. Leaving California will not ease the insurance company's share of fair plan valuation. But they may conclude that they continue to write home insurance within the state.
The challenges facing California insurance companies didn't start with a wildfire in Los Angeles last month. The fires in 2017 and 2018 have wiped out the insurance companies' quarter-century profits and led them to reduce the number of homeowners covered by many airlines. What exacerbates the problem was the fact that California regulators have historically made it difficult for insurers to raise premiums.
Still, the Los Angeles fire has further diluted the financial position of the insurance companies. Last week, state farms urged state regulators to raise the rate of 22%. He said this is “necessary to avoid the dire situation in California's customers and insurance markets.” Lara's office said he is still reviewing the request.
As private insurance companies cut their business in California, more homeowners are being pushed into fair plans. It was designed as a last resort, but covers more and more homeowners. Between 2020 and 2024, the number of homes with policies based on a fair plan has more than doubled, at a value of around $50 trillion. Many of these homes were in areas that were devastated by the Palisade fire.
As of February 4th, the plan had received more than 3,400 requests from Palisades Fire and more than 1,300 requests from Eaton Fire. Approximately 45% of these claims were against the “total loss” of the house that was completely destroyed.
As wildfires get worse, a vicious cycle is emerging. More insurance companies will push more homeowners towards fair plans, unable to cover claims after the next disaster, leading to more valuations of regular insurance companies, and more from the state . Faster.
Lara is trying to break that downward cycle. In December, he introduced changes that allowed insurers to claim higher premiums in exchange for covering more homes in high-risk areas. It would put pressure on a fair plan and reduce the incentive for private insurance companies to leave the state, he said.
Lara said other changes would be needed, including giving fair plans the ability to borrow money through bonds and credit lines. If that happens, if future wildfires produce claims that the plan cannot cover, then another assessment is not necessarily required.
The proposal has been supported by the insurance industry. “The state must explore diverse funding solutions,” Mark Sectan, vice president of the American Association of Real Estate Victims Insurance, said in a statement. He also said state regulators must allow fair plans to charge higher premiums.
But the change cannot come from the insurance sector alone, Lara said. Officials need to strengthen rules on how and how people build homes and infrastructure, he said. This way, the community will be less damaged by future fires.
“Right now, responsibility is about local government and it's about building it better,” Lara said.
