By Michelle Ma | Bloomberg
As Los Angeles-area residents recover from one of the costliest natural disasters in US history, California’s insurer of last resort is careening toward another hot and dry summer with its coffers already strained. That’s raising the prospect that state residents will need to pick up the bill for more funds.
The California FAIR Plan last month required member companies such as State Farm, Allstate Corp. and Chubb Ltd. to cough up a combined $1 billion to bolster its reserves as it sorts through liabilities from the Palisades and Eaton fires. The measure, known as an assessment, offered a rare look into the program’s relatively opaque financials. One key takeaway: Just three months into 2025, there’s little extra cash should another disaster hit this year. And California is battling blazes year-round.
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“The risk is really clear,” said Sridhar Manyem, head of industry research at AM Best, a credit-ratings company specializing in insurance. “Depending on the severity of the next wildfire, there is the possibility of a future assessment.” Under newly updated state regulations, private insurers are responsible for assessments but they can request permission to pass along as much as half of the first $1 billion to policyholders in a given calendar year — and all of the burden beyond that threshold. In other words, the cost of assessments can hit Californians in the form of charges that increase bills for anyone with home insurance.
The financial pressures underscore the rising risk stalking California property owners as climate change threatens to deepen the turmoil in the insurance market. The January fires in Los Angeles, which were unusual for that time of year, began just weeks after new state regulations took effect to ease a crisis spurred by insurers limiting new homeowner policies or fleeing California entirely amid worries over losses.
State Farm, California’s biggest home insurer, received provisional approval this month for a 22% emergency rate hike after warning that multibillion-dollar payouts in the Los Angeles area would threaten its balance sheet and the broader market.
“California will always face some risk of a catastrophic fire” and the risk will only get worse, Pedro Pizarro, chief executive officer of Edison International, said in an interview earlier this month. The power-utility owner has acknowledged the possibility that its equipment was involved in the Eaton Fire.
The risk “will create cost for consumers, for all of us as residents if we like living here, which we do,” he said.
A representative for the FAIR Plan declined to comment beyond saying it “remains focused on claims arising from the Los Angeles fires and serving affected policyholders.”
The plan estimates its liabilities related to the Eaton and Palisades fires at about $4 billion. The program typically holds less cash on hand compared with private insurers because it covers the riskiest risks — the homes and businesses that private insurers have decided they don’t want to cover at any price. That leaves it particularly vulnerable to a disaster like the January wildfires.
If the FAIR Plan held the same reserves as traditional insurers, premiums would skyrocket and be unaffordable, said Dave Jones, who served as the state’s insurance commissioner from 2011 to 2019. The plan’s president, Victoria Roach, warned last year that “our rates are not adequate.”
In a letter attached to the February assessment order from the state insurance commissioner, Roach disclosed that the FAIR Plan has a $900 million reinsurance deductible and as much as $3.5 billion in payments (including the deductible) that it has to make in order to access all available layers of reinsurance. FAIR also said it had $510 million of unallocated cash available to cover those costs, almost $400 million short of its deductible.
The gap between the FAIR Plan’s unallocated cash and its reinsurance deductible is “pretty concerning” and “pretty much guarantees another assessment,” said Carly Fabian, a policy advocate for Public Citizen, a consumer advocacy group.
The FAIR Plan currently estimates that 45% of its claims from the Palisades and Eaton fires are characterized as total losses. That may be too low, Jones said. A higher percentage would mean it will need more money.
Jones said another “optimistic assumption” FAIR is making is that there won’t be another catastrophic wildfire in the spring or summer. After the $1 billion assessment, the insurer will have about $305 million in cash by June.
It’s entirely possible the state will avoid devastating wildfires for the rest of the year. But the fire risks will likely rise across the mountains of Southern California starting in May and June, according to the latest outlooks from the National Interagency Fire Center. While in the past, California had a distinctive fire season that peaked in the fall, in recent decades the state has battled blazes year-round.
Meanwhile, a legal fight is brewing over last month’s assessment. Advocacy group Consumer Watchdog, which has called the charge a bailout for big insurers, has said it will challenge insurance companies in court if they ask to pass on assessment costs to policyholders.
“We don’t think it’s legal,” said Consumer Watchdog President Jamie Court, arguing that private insurers are allowed to do business in California on the premise that they will contribute to keeping the FAIR Plan solvent.
Critics also warn that letting insurers off the hook for future assessments risks encouraging them to offload more of their riskiest policies to the FAIR Plan, which has experienced 400% policy growth over the last five years.
The California Department of Insurance, the state regulator, has rejected that view. If insurers were completely on the hook for FAIR Plan assessments, more companies would leave the state or refuse to write new policies and that would make insurance “much more unaffordable,” California Insurance Commissioner Ricardo Lara said in a hearing last week. “All these strategies are getting them back.”
Deputy Commissioner Michael Soller says the state’s new regulations incentivize insurers to write more high-risk policies because only by doing so can they use crucial new risk-assessment tools.
“We’re trying to do this in a balanced way, so that we’re not back in another situation where insurance companies simply walk away from California,” Soller said.
The department’s goal is to get more Californians out of the FAIR Plan, which typically offers limited coverage and higher cost, and back into the regular market.
“Nobody wants a FAIR Plan policy,” Soller said.
But as insurance companies pulled back from California, more customers were only able to get coverage with the FAIR Plan. That’s turning into a growing problem not just for homeowners in risky fire zones, but for everyone in the state insurance market.
“The more people that are put into a system which is already struggling, the worse the struggles are going to be,” said Douglas Quinn, executive director of the American Policyholder Association. “These are very, very difficult, challenging times for the insurance industry.”
–With assistance from Brian K Sullivan and Mark Chediak.
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