NEVADA COUNTY, Calif. — The California Department of Insurance said the state’s insurer of last resort, the FAIR Plan, can pass costs it can’t afford in the wake of a major wildfire onto insurance companies, which can recoup some or all of that money from policyholders.
The department (CDI) announced the change back in late July and, on Tuesday, issued a bulletin to insurance companies, offering more details and clarification.
"In a major disaster, the FAIR Plan will pay out all of its retained earnings, reinsurance, and other backstop funds first. Insurance companies and consumers would share any additional costs up to $2 billion, and the Insurance Commissioner must approve any assessment on policyholders before they pay anything," the CDI said in an FAQ page. "While the FAIR Plan hasn’t had a solvency crisis in 30 years, we are taking no chances. The changes will strengthen the FAIR Plan’s financial reserves and backstops so it can fully and expeditiously pay all future claims from consumers. Before these changes, insurance companies could pass along 100% of the costs to Californians in an extreme worst case loss scenario."
This comes amid a crisis of affordability and availability in California’s homeowners insurance market. In recent years, the majority of companies that write homeowners policies here have paused or limited business in the state, citing the growing risk of wildfires, increased cost of rebuilding homes and an unfriendly regulatory environment.
As a result, more people are finding the so-called ‘insurer of last resort’ - the bare-bones, costly California FAIR Plan - is their only resort. Though its existence is mandated by the state, the FAIR Plan’s pool of money to pay out claims comes from the policies it sells – not taxpayers.
The FAIR Plan has ballooned in recent years – and insurance experts say it was never meant to be this big. The number of policies has nearly tripled since 2019, going from 154,494 residential policies and 4,601 commercial policies in Sept. 2019 to 408,432 and 11,026 policies, respectively, in June 2024.
That means its financial risk exposure is bloated as well, going from $50 billion in 2018 to nearly $393 billion as of June.
That led one lawmaker to ask FAIR Plan President Victoria Roach earlier this year how much cash-on-hand the FAIR Plan has.
“Surplus is about $200 million. Cash-on-hand is somewhere in the neighborhood of $700 million,” Roach told the California Assembly Insurance Committee at a hearing held back in March.
“So a tiny percentage of what your exposure is,” replied Assembly Speaker pro Tempore Jim Wood (D-Healdsburg).
Roach said the FAIR Plan had purchased about $2.5 billion in reinsurance —essentially, insurance for insurers — and explained why that’s still not enough.
“If you look at the Paradise fire that happened and you look at about 45 miles south of that area, if that burned today — that same fire footprint, fire map, that happened in Paradise… we would have over $6 billion in losses,” Roach said.
CDI said even with the major wildfires the state has seen since 2017, the FAIR Plan has not had a disaster it hasn’t been able to afford since 1994.
On Tuesday, a bulletin from the California Department of Insurance — which regulates how much a company can charge customers — said, “In the highly unlikely event that catastrophic losses render the FAIR Plan unable to pay operating expenses and policyholder claims because it does not have sufficient retained earnings, reinsurance, and/or proceeds from catastrophe bonds, if sold, the FAIR Plan may request the Insurance Commissioner’s approval to assess each member insurance company its fair share if necessary to pay the Plan’s operating expenses and policyholder claims.”
In other words, if the FAIR Plan can’t pay its claims, it can ask for that money from insurance companies doing business in California, which can then — with the permission of CDI — turn around and recoup some or all of those costs from their policyholders.
"We're like one bad fire season away from complete insolvency, is what it feels like to me,” Asm. Wood said.
"We are one event away from a large assessment. There's no other way to say it, because we don't have the money on hand, and we have a lot of exposure out there," Roach replied. “We’re a not-for-profit. We don’t have a lot of money sitting around… Our rates are not where they need to be, and so if we have a major event, we’re going to look to the voluntary market, who is already in a precarious situation, and we’re going to look to them to help us cover our losses. The more we grow, the more we expand, the more that becomes a reality.”
Insurance expert Karl Susman, of Susman Insurance Agency, told ABC10, there are two ways to look at the CDI allowing the FAIR Plan to pass assessments along to consumers.
“The bad side is that there is the potential. There's always the potential, right? The good side is — now, we know: if you're with the FAIR Plan, you do not have to worry about your claim being paid because there's all of this money that's going to come into it first,” Susman said.
A year ago, California Insurance Commissioner Ricardo Lara unveiled his Sustainable Insurance Strategy: solutions to the insurance crisis he plans on having in place by the end of 2024. He hopes it will stabilize the market, bring more companies back to the state and take some of the burden off the FAIR Plan.
One change, for example, would allow companies to use forward-looking, so-called ‘catastrophe modeling' when applying for rate increases. Essentially, it’s a computer algorithm that would allow companies to better predict and price where wildfire risk is highest. Currently, companies can only use the past 20 years’ worth of data. In exchange for that tool, however, CDI is requiring companies write more policies in wildfire-prone areas, including taking people off the FAIR Plan and bringing them back into the regular market.
The Insurance Commissioner has also promised faster rate approvals. The system for getting rate hikes approved has slowed down over the decades since the legislation creating the process — Prop 103 — passed some 30 years ago. Now, a rate increase request can take well over a year to get approved, for myriad reasons. Companies say they can’t keep up with the rising cost of doing business. A more efficient process, the department hopes, will make California more attractive for doing business once again.
“We know with all of these guidelines coming out, that the carriers, when they re-enter the market, FAIR Plan business will be the first business they start taking,” Susman said.
Susman hopes to see change sometime early next year. In the meantime, homeowners remain in an unstable insurance market.
“I mean, this is, like, people can’t afford to live,” Assemblymember Joe Patterson (R-Rocklin) said at the March hearing.
The FAIR Plan says the areas with the highest financial risk for them include Nevada City, Grass Valley and Truckee.
The historic Nevada County Gold Rush-era town of Washington, nestled in the Tahoe National Forest, is among the areas hardest hit by the insurance crisis of affordability and availability.
Charity Jackson, who owns the Washington Hotel, has seen both her homeowners and commercial insurance for the hotel go from the regular market to the FAIR Plan after getting non-renewed.
“My homeowners, including liability, used to be $1,300, and, sure, it's going to go up. But I think now, just my FAIR Plan is close to $5,000 for my house. That's a huge amount of money, especially if you are fixed income, low-income, disabled, senior,” Jackson said.
Insurance premiums for her and nearly everyone she knows in town are becoming unaffordable, she said.
“It's going to continue to happen, which is scary,” Jackson said. “I mean, I don't know how I'm making it work right now.”
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