California FAIR Plan has $336 billion of property exposure on its books, backed up by just $200 million of capital and $700 million of cash on hand, according to President Victoria Roach.
“It’s a gamble. We are one event away from a large assessment” on the state’s admitted property writers, Roach told the California Assembly Insurance Oversight Committee. “There’s no other way to say it. We have no money on hand and we have a lot of exposure.”
In 2018, she said the FAIR Plan had $50 billion of exposure. “If we were a regular insurance company we couldn’t grow at this rate,” Roach told legislators.
One factor behind the growth has been a series of orders — often contested by FAIR— from state Insurance Commissioner Ricardo Lara to expand the insurer of last resort’s lines and increase limits. He initiated them as the voluntary market shrank, initially in wildfire-exposed areas, and real estate values soared.
But the same insurers that are exiting old or refusing new policies are required to participate in the FAIR Plan and share its profits and losses. And any admitted fire, allied lines, homeowners or commercial multiperil writer that exits the state remains a FAIR member for two years.
Were an assessment charged it would be based on market share in the state, with credits applied for coverage written in a wildfire area.
FAIR has a $4.8 billion reinsurance tower, but each layer includes co-insurance that would spark an assessment on members if losses climbed, said Roach. Carriers are given 30 days to pay once an assessment is approved.
Department of Insurance spokesperson Michael Soller said the CDI will “continue to monitor FAIR Plan’s capacity and financial stability to ensure that it is not overextended and has the proper reinsurance in place to handle any major claim event.”
Few, if any voluntary insurers would carry the concentration of risk held by the FAIR Plan in various communities. Multi-billion-dollar exposures within a seven-mile quarter circle exist for FAIR in Nevada City, on the Western Slope of the Sierra Nevada in Northern California, south to five communities in San Bernardino County, which stretches from the boundary with Los Angeles County east to Nevada.
Many are at major, severe or extreme risk of wildfire, according to the First Street Risk Factor.
Roach said 60% of the FAIR Plan’s exposure is in areas at higher risk of wildfire loss.
For instance, the insurer of last resort has about a 50% market share in Lake Arrowhead—almost $8.5 billion of exposure in San Bernardino, Roach said.
First Street says more than 18,000 Lake Arrowhead properties, or 99%, are at risk of wildfire. The area has burned several times in recent decades. More than 1,000 structures were damaged or destroyed by the Old Fire in 2003, one of just three pre-2015 fires on the Cal Fire list of the state’s 20 most destructive blazes.
And some of these risk-concentrated communities are “on top of each other,” so a fire in one area will likely spread to the next, Roach said.
The strongest growth for the FAIR Plan lately has come from Northern California, Roach noted. Exposure in Truckee, north of Lake Tahoe, grew 42% year-over-year.
A string of catastrophic wildfires in Northern and Southern California in 2017 and 2018 tightened the property market in California. Inflation and regulatory issues tipped the voluntary market into its current state, carriers have said, because they haven’t been able to align risk and the cost of claims with rate.
Roach said the same of the FAIR Plan. The association must submit a rate filing at least every two years and last did so in August 2021, the year after it was approved for a 15.6% increase, about half of what it had sought.
By 2021 the rate need called for a 70% rate hike, but she said the FAIR Plan sought 48.8%. In September 2023 it was approved for a 15.7% bump.
Much of the shortfall was caused by quirks in California’s regulatory process. The FAIR Plan couldn’t factor in its understandably high net cost of reinsurance, said Roach. Nor could it include a catastrophe model. And the CDI couldn’t consider FAIR’s low amount of capital, because the association should pass profits back to member carriers.
The CDI is working this year on regulatory changes that would allow insurers to base projected wildfire, terrorism and flood losses on catastrophe models, instead of a catastrophe factor decided by historical losses.
It also introduced changes to decades-old, unclear rules they blame for bogging down the rate decision process.
Roach said the FAIR Plan is waiting to file for additional rates after the CDI’s proposals are enacted. She estimates that the process would take about 14 months to take effect.
However, exposure also needs to decline to improve the situation at FAIR. “They have to play together. Today there’s not a lot of options” for insureds, said Roach, and what should be the state’s insurer of last resort is often the first or only option as carriers — including seven of the state’s 12 largest property/casualty insurance groups — keep restricting or exiting business.
American Agents Alliance Executive Director Mike D’Arelli agreed with Roach, telling the committee the situation for property owners in California is worse than they can imagine. “We have nothing to sell. Carriers are not available,” he said, and the FAIR Plan has become the “snake that swallowed an elephant.”
“It’s a ticking time bomb,” said D’Arelli. “The bottom line is we need to get carriers adequate rate. You need to keep your boot on the throat of the department. Hold joint hearings every 30 days … put teeth in it.”
Roach said enrollment could reach 500,000 in the near future. It is currently taking in 20,000 to 22,000 applications monthly and the association is bound, with few exceptions, to write all of them.
After Roach met with the legislative committee, State Farm General Insurance Co. said it will cut about 72,000 homeowners, apartment and business owners policies in an effort to “ensure its long-term sustainability” in California. It will start nonrenewals on July 3.
State Farm had already, in the first half of 2023, stopped accepting new California applications for commercial and personal property/casualty lines.
The five largest homeowners multiperil writers in California in 2022, based on direct premiums written, were: State Farm Group, with a 20.58% market share; Farmers Insurance Group, 14.46%; CSAA Insurance Group, 6.66%; Liberty Mutual Insurance Cos., 6.43%; and Allstate Insurance Group, 6.36%; according to BestLink.