Sacramento Business Journal – For growing number of homeowners, the FAIR Plan insurance of last resort is only option


In case it wasn’t clear California’s residential insurance market is in crisis, it’s emblematic that the fire insurer of last resort is now the state’s fastest-growing insurer.

The California FAIR Plan Association has nearly tripled in size over six years from 126,709 policies in 2018 to 365,694 policies in 2024. In February this year, the FAIR Plan wrote its record-breaking number of new policies for a single month.

The upshot of current market dynamics is that more people are being put into the riskiest pool of insurance, California’s FAIR Plan, which is meant to be a temporary bridge to keep people insured while the voluntary market finds a better solution.

It’s possible that the FAIR Plan has broken its record of new policies since February. More recent data isn’t available because FAIR Plan officials are not currently answering press calls as it focuses all its resources on keeping up with demand for new policies, said an email from Nathan Yañez with Lucas Public Affairs, a communications firm representing the FAIR Plan. Meanwhile, most of the voluntary insurance companies in the state are either not writing new policies or outright cutting their exposure in California.

“The numbers are frightening. You should be scared. Everyone should be scared,” said Mark Sektnan, vice president in California with the Washington, D.C.-based American Property Casualty Insurance Association, a national trade association. “The FAIR Plan is probably the fastest-growing insurance company in the state.”

Carmen Balber, executive director of Los Angeles-based Consumer Watchdog, agreed that the FAIR Plan is probably the fastest-growing insurer in the state, considering that insurance companies are largely declining new policies. Consumer Watchdog wrote Proposition 103, which was approved in 1988 and has set insurance rules for nearly 30 years.

“Californians don’t want to be on the FAIR Plan as much as the FAIR Plan doesn’t want them on it,” Balber said.

Following a string of wildfires, companies in the voluntary market of insurers started cutting back exposure in California by limiting new policies, followed in 2023 by some of the largest insurers in California outright halting new policies.

Insurers complain that California’s insurance regulations do not allow them to set rates commensurate with risk. They also say it takes too long to get rate increases they need to cover current and future risk. Future risk tends to be more expensive as housing values, materials and labor prices have inflated in recent years, Sektnan said.

The riskiest pool is not only growing, but is also becoming a long-term insurer. Hilary McLean, a FAIR Plan spokesperson, said in January that 90% of current FAIR Plan customers are renewing their FAIR Plan policies for another year, CalMatters reported.

Earlier this year, the largest voluntary insurer in California, State Farm, said it will reduce its exposure in California by cutting 72,000 policies because it needs to stay within regulatory standards to maintain a level of reserves to pay claims should they arise.

The issue of level of reserves is also a concern for the FAIR Plan, which has seen its exposure rise to $340 billion by March of this year, more than triple its exposure of $112.7 billion in 2019.

It’s not unusual for FAIR Plan coverage to cost homeowners two to four times what previous voluntary coverage cost, and it’s a more limited policy that doesn’t offer as much protection or value. What it does provide is base insurance coverage, which is required for any property that carries a mortgage.

The FAIR Plan is not a company. It’s an association of all the insurance companies that do business in the state. If the FAIR Plan runs into problems, all the insurers in the state take a pro-rata share of filling the gap. That is a scary prospect for insurers as FAIR Plan policies are concentrated in the most fire-prone geographies.

The possibility of the FAIR Plan needing to be bailed out is not just theoretical. It happened in the mid-1990s. The overall insurance market was assessed by the FAIR Plan following the 1993 Malibu and Altadena wildfires.

Always meant to be the insurer of last resort, the nonprofit California FAIR Plan Association was set up in 1968, when brush fires and riots in California saw some areas become uninsurable. FAIR stands for Fair Access to Insurance Requirements, and it was meant to be an interim and limited program to support insurance needs when the private sector pulls back.

Now with more areas being deemed too risky or impossible to insure, the FAIR Plan is becoming a large high-risk pool. That means it could suffer catastrophic loss if one of the areas where it has a concentration were to burn.

Insurers of homes and apartment buildings in California therefore not only have to be concerned about their own exposure in their underwriting, but they also must consider that if they gain market share in California, they also get more exposure to statewide risk of the FAIR Plan running into a problem.

The FAIR Plan now insures about 4% of all property insurance fire policies in the state. That’s up from 1.2% as recently as 2017.

“Concentrating all the high-risk customers into one pool doesn’t make sense,” said Michael Soller, spokesman for the California Department of Insurance, which is working on a Sustainable Insurance Strategy to make California more attractive to insurers. To that end, Gov. Gavin Newsom’s office announced last fall that they intend to write a workable plan by the end of this year.

Some key sticking points between insurance companies and existing state policy under Proposition 103 are methods and transparency.

The method insurance companies want to use to set insurance rates are sophisticated and proprietary catastrophe models to be able to price risk in the current market.

But under Proposition 103 rules, California rates are set based on a 20-year history of incidents and are approved in public hearings.

“Basing rates on the past is akin to driving your car with the rearview mirror and ignoring everything in front of you,” Sektnan said.

Insurers want to be able to use modern catastrophe modeling to assess risk in a rapidly changing market, Sektnan said, adding that all insurance company earnings in California from 1999 through 2016 were wiped out in a single year in 2017.

Some of the only good news on the insurance front is that last year wasn’t a bad one by recent California wildfire standards, and that “there is a lot of realization with the Legislature, insurance companies and the governor that there is a problem,” he said.

All existing catastrophe models are proprietary, Balber said, which means that they’re not transparent as required by California law.

In June, California Insurance Commissioner Ricardo Lara released a framework meant to entice insurance companies to return to writing new homeowners policies in fire-prone areas. Lara is suggesting that 28 of California’s 58 counties should be on a preliminary list of distressed counties where insurance companies would be allowed to use catastrophe modeling to develop residential and commercial insurance rates in return for returning to writing policies in those areas within two years.

Lara set a date at the end of June for an online workshop on the use of catastrophe models in California.

And the California Department of Insurance in July will introduce another major part of Lara’s Sustainable Insurance Strategy to reform the state’s insurance market with proposed regulation to allow insurance companies to incorporate their reinsurance costs in their rate filings. Lara’s office said if insurers had the ability to cover more risk, they could take more risk in underwriting. Because of Proposition 103’s strict public disclosure rules, the costs of reinsurance, which is a private market, are not allowed to be reflected in insurance rates under current state policy. Lara proposes to change policy language to allow reinsurance fees.

All the proposed changes are being pursued under the commission’s existing authority under Proposition 103, Soller said.

Consumer Watchdog would like to see requirements that force insurance companies to sell regular policies to homeowners who harden their homes and clear nearby brush in areas that are prone to fire danger.

That sounds good, but some of the state’s most fire-prone areas have large populations of retirees or residents on fixed incomes who can’t afford to fireproof their homes. There are instances of retirees who spent tens of thousands of dollars hardening their homes, and then still got dropped by their insurance, Sektnan said.

Balber said there should be subsidies paid for by the state and insurance companies to harden homes and to harden communities where the residents can’t afford to pay for the work.

“There will also be homeowners who can see the light at the end of the tunnel that if they harden their home, they will be eligible for regular insurance,” Balber said. If insurance companies participate in that effort to harden communities statewide, it would reduce liabilities to them and to the FAIR Plan.

Hardening is a mixed bag, however, said Sektnan. If you harden your house, but your neighborhood catches fire, your house will likely burn, too, he said. He said entire communities need to be hardened, and that’s a tougher fix.

No one is arguing that people who reside in high-risk areas should pay less for insurance than people in lower-risk settings.

The problem is that so many high-risk policies are being concentrated in high-risk areas that the exposure to a single catastrophic fire could upend the system, and that could sting insurers so hard they just leave the state, especially if they believe that they’ll get hit again year after year without being able to charge enough to make their risk worthwhile. If the risk is too high, insurers could exit the state, similar to what has happened in Florida.

In 2023, the average annual home insurance rate in the U.S. was $2,377, according to industry tracker Insurify Inc.

California’s average rate in 2023 was $1,782, with an estimate of an 8% increase by the end of this year. In Florida, the average rate in 2023 was $10,996, which is expected to increase 7% by the end of the year, Insurify reported. In Florida, the state-run Citizens Property Insurance Corp. is now the largest insurer in the state, primarily because so many carriers have stopped writing policies due to hurricane and storm damage over the past decade.

California doesn’t even make it to the top 10 in highest average rate, but in California more and more homeowners in high-risk areas are being concentrated into the FAIR Plan.

“The insurance market has reached a crisis point in California, and, sadly, I hear from constituents who are fearful that homeownership will not be feasible for much longer due to rate increases and non-renewals. Even the Ishi Conservation Camp located in my district, staffed with firefighters, couldn’t obtain fire insurance through the FAIR Plan,” said an emailed statement from California state Sen. Brian Dahle, a Republican whose district covers 15 largely rural Northern California counties, including the city of Paradise, which was destroyed by the 2018 Camp Fire.

“We are one major disaster away from the FAIR Plan becoming insolvent resulting in people losing their homes,” Dahle said.

Even without a new disaster, higher insurance rates are causing homeowners to put off sales in areas at risk of wildfire, said Melanie Barker, president of the California Association of Realtors, and co-owner of Summit Real Estate in Oakhurst, which is southeast of Yosemite National Park.

In a 2023 survey, Realtors found that a third of potential buyers had difficulty finding insurance or couldn’t close a deal because insurance was too expensive.

Higher insurance costs get mixed into the mortgage, adding substantially to the monthly payment, and this is happening at a time when interest rates are higher than they have been for years, she said.

“I am now carrying more inventory than I have in years,” Barker said. “Everyone expects insurance rates to go higher. No one expects this to get better anytime soon.”

She said she knows of an 80-year-old homeowner whose home is paid off. Because he was a long-term customer, his rates stayed stable for years until last year, when his carrier offered a policy renewal at a 700% increase.

Insurance is an annual contract. Every year, the homeowner and the insurer can decide not to renew. It’s not helping in California that the costs of rebuilding are being driven up by inflation in the cost of materials and labor. Those factors are pushing insurers out of the state.

The Allstate Corp., the fourth-largest property insurer in California in 2022, stopped writing new policies in California in November that year. State Farm announced on May 26, 2023, that it would cease new home insurance in California effective May 27 of that year. Farmers Insurance, California’s second-largest insurer, in the summer of 2023 said it was limiting the number of new policies it would write in the state.

And in March of this year State Farm subsidiary State Farm General Insurance Co. announced it would drop insurance on 72,000 existing policies in California starting this summer. State Farm General is the provider of homeowners insurance in California for State Farm.

The action was necessary, State Farm said on its website, to “maintain adequate claims-paying capacity for our customers and to comply with applicable financial solvency laws. It is necessary to take these actions now.”

State Farm said it would not renew 30,000 homeowners, rental dwelling and other property insurance policies in the state, and it wouldn’t renew 42,000 commercial property insurance policies for apartment owners.

“This decision was not made lightly and only after careful analysis of State Farm General’s financial health, which continues to be impacted by inflation, catastrophe exposure, reinsurance costs and the limitations of working within decades-old insurance regulations,” it said in a news release.

That new underwriting went into effect July 3. State Farm didn’t respond to requests for comment. State Farm lost $4.7 billion in 2023 and $8.7 billion in 2022, according to its annual report.

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