The state-funded insurer catering to California residents lacking private coverage necessitates an additional $1 billion to handle fire damage claims in Los Angeles.
The FAIR Plan, an insurance pool funded by major private insurers, has gained significant traction in California due to growing concerns over property risk. With premiums and minimal coverage, it serves as a temporary solution for homeowners unable to secure private insurance. In 2024, the pool boasted over 452,000 policies, more than double the number from 2020 [1].
Currently, the FAIR Plan anticipates a loss of roughly $4 billion from the Eaton and Palisades Fires. The catastrophe, which ignited on January 7, resulted in the destruction of nearly 17,000 structures and claimed at least 29 lives [1]. As of this week, over 4,700 claims have been submitted, with the plan already doling out $914 million in payouts.
Recently, the FAIR Plan requested state approval to have insurers shoulder half of the plan’s costs, which they can then pass on to policyholders in the form of a one-time fee. These funds will be collected within the next two years by the insurers, subject to state Insurance Department approval [1].
Though the state hasn't disclosed the fee's exact amount yet, the approval marks the first time the FAIR Plan has sought additional funding in over 30 years [1].
Insurance Commissioner Ricardo Lara, backing the move, stated, "I took this necessary consumer protection action with one goal: the FAIR Plan must pay claims just like any other insurance company." Lara emphasized, "Wildfire survivors can’t cash ‘what ifs' to pay for food and rent, but they can cash FAIR Plan checks" [1].
The FAIR Plan also expects to receive $1.45 billion in reinsurance funds to offset the financial impact of claims. With these funds, they anticipate retaining approximately $400 million by July [1].
To date, 45% of the wildfire claims filed are categorized as total losses, while 45% are reported as partial losses. The remaining 10% fall under fair rental value [1].
Insurers affirm their commitment to assisting the recovery process after the fires. They contend that the ability to recoup some of the costs from ratepayers will prevent companies from exiting the state, potentially jeopardizing coverage for millions of Californians [1].
Mark Sektnan of the American Property Casualty Insurance Association, a national trade association for home, auto, and business insurers, stated, "This is essential to prevent even greater strain on California’s already unbalanced insurance market and avoiding widespread policy cancellations that would jeopardize coverage for millions of Californians" [1].
However, a consumer watchdog group, opposed to a rule that allows insurers to pass costs to policyholders, has announced its intention to challenge the effort. Carmen Balber, executive director of Consumer Watchdog, said, "Consumer Watchdog is exploring every legal option to stop a bailout if any insurance company seeks to make consumers pay" [1].
The State of California is intensively working to stabilize its insurance market following numerous insurance company withdrawals in 2023. Due to increasing wildfire risks and losses, insurers claims they find it difficult to fairly price risks on properties [1].
From 2015 through 2021, 15 out of the top 20 most destructive wildfires in California history have occurred, emphasizing the increasing threat posed to the state [1].
In response, the state has granted insurers more leeway to enact premium increases in exchange for issuing more policies in high-risk areas. This includes measures acknowledging climate change while setting prices and covering the expenses of reinsurance for California consumers [1].
The FAIR Plan and its evolving situation reflect the ongoing challenges faced by the insurance industry in California as it grapples with escalating wildfire risks and the exodus of major insurers from the market.
[1] Enrichment data (limited use for context)
Businesses may also be impacted by the increasing wildfire risks and insurance market challenges in California. For instance, some businesses might see their insurance premiums rise due to these factors, affecting their bottom lines.
To mitigate the financial impact on policyholders, insurers believe that the ability to recoup some costs from ratepayers will help prevent companies from leaving the state, thus maintaining insurance coverage for businesses and homeowners alike.
