As Angelenos begin the long process of rebuilding after recent devastating wildfires, a program created in the aftermath of the Watts Riots in the 1960s may prove critical to California homeowners.
In August 1965, long-simmering racial tensions provided the perfect kindling and a simple traffic stop exploded into devastating riots. After the smoke had cleared, 34 lives were lost, and over a thousand people were injured. Rioters caused over $40 million in property damage (the equivalent of hundreds of millions of dollars today).
The extensive damage caused many insurers to refrain from covering properties in areas considered most high risk. This left many without required insurance coverage. In response, the state created a program that would provide basic insurance coverage for those who needed it, but had no other options. These days, the FAIR (Fair Access to Insurance Requirements) Plan is becoming more of a first option than a last resort.
The reliance on the program today stems from the state’s private insurance exodus driven by a challenging regulatory environment and an increasing number of costly wildfires. Over the past several years, multiple large private insurers have opted not to write new homeowners insurance policies. But can this program pay out the billions in claims that will be filed in the wake of the January 2025 fires? That’s the multibillion-dollar question.
So what is the California FAIR plan?
The FAIR Plan is an option for homeowners who are unable to obtain insurance from any private insurance company. The program was created by the state government, but it is financially backed by private home insurance companies that do business in the state. This means that the money the FAIR Plan pays comes from an assessment to the participating insurance companies, not from taxpayers.
Close to half a million Californians use the FAIR plan for their homeowners’ insurance coverage. From September 2023 to September 2024, the number of FAIR plan policyholders rose by 41 percent. The average FAIR Plan premium was $2,876, approximately twice the statewide average premium.
Does the FAIR plan have enough money to pay claims?
The FAIR Plan has approximately $200 million of surplus, and $700 million cash on hand. This may not be enough to pay all its claims. The plan is skating on thin ice financially, as it must pay $900 million in losses before receiving up to $2.63 billion in support from reinsurance (insurance for insurance companies). Losses from the fires could exceed $900 million. This means that the FAIR Plan would have to find more money, which would be done via assessments of the private insurance companies in the state or the issuance of bonds to make up the difference.
What happens if the FAIR plan goes bust?
If the money in the FAIR Plan runs out, insurance companies operating in California may be required to contribute additional capital to the plan. In addition, if the losses are large enough policyholders may also have to pay extra. The FAIR Plan has not had an assessment since 1994 when the Northridge earthquake caused $260 million in damage.
In the aftermath of the Los Angeles fires, if the FAIR Plan makes an assessment, it would need to be approved by the state’s insurance commissioner. Alternatively, the money the plan needs could be raised through bonds, as proposed in Assembly Bill 226. However, this legislation hasn’t passed the assembly yet and would require support from two-thirds of the Assembly.
What other options exist for hard-pressed homeowners?
In addition to well-known large insurance companies that operate nationally, there are Excess & Surplus Lines Insurers (E&S) that specialize in insuring high-risk properties. The cost of a policy from an E&S insurer is typically higher than for a policy from a standard lines company. Unlike regular, private insurers, E&S insurers have “freedom of rate and form,” which means they are not required to issue policies at rates and policy language approved by the state’s insurance department. Only 0.5 percent of homeowners in California are covered by E&S insurers.
Have there been any California insurance company failures?
The only California insurance to have become insolvent in recent years was a tiny insurer, Merced Property & Casualty Company, which was heavily exposed to losses from the 2018 Camp fire. Merced’s claims were, however, paid by the California Insurance Guarantee Association. Several large private insurers have, however, declined to write new policies or have scaled back their business in the state.
What does the future look like for California homeowners?
After four decades of burdensome regulation that distorted California’s insurance market, the Department of Insurance has launched its Sustainable Insurance Strategy, which permits insurers to charge risk-adjusted rates, paving the way to a stable and competitive California insurance market with more choices for insurance buyers. However, prior to the introduction of the reforms many insurers already stopped writing business in the state. The question now is, are the new measures enough?
Jerry Theodorou is policy director for the Finance, Insurance, and Trade Program at the R Street Institute.