California Insurers Approved to Pass Hefty FAIR Plan Loss Assessment Costs on to Policyholders

California homeowners and businesses could face hefty temporary property insurance fees if the state’s insurer of last resort ever suffers losses that push it to the brink of insolvency.

The state’s Fair Access to Insurance Requirements (FAIR) Plan provides coverage for residential and commercial properties that may not be able to get insurance through the standard market. California requires private home insurers who do business in the state to participate in the FAIR Plan.

If the plan ever faces a large volume of claims from a single event that threatens to overwhelm the insurer’s solvency, it can ask the state’s insurance commissioner to approve a special assessment on FAIR Plan member insurance companies.

“In the highly unlikely event that the Plan is substantially threatened with insolvency, the FAIR Plan may levy an assessment on its member insurers, with the insurance commissioner’s prior approval,” Insurance Commissioner Ricardo Lara said in a Sept. 3 bulletin to FAIR Plan member insurance companies.

The Plan last levied such an assessment in 1994, according to the bulletin. FAIR Plan member companies can, in turn, ask the state for permission to pass some or all of the assessment costs on to policyholders in the form of temporary fees, Lara said.

FAIR Plan changes

Increasing wildfire risks and catastrophic weather events have made it difficult and costly for many Californians to find homeowners or commercial insurance. Insurance companies also cite the state’s strong consumer protection law, Proposition 103, as an obstacle to profitability for insurers operating in California.

When property owners can’t find coverage elsewhere, they turn to the state’s 50-year-old FAIR Plan. The number of Californians buying FAIR Plan coverage has steadily increased in recent years. In 2023, the insurer of last resort reported 89,995 residential and commercial policies on its books. In the first nine months of 2024, the number of policies ballooned to 134,576.

The Department of Insurance has repeatedly identified California’s FAIR Plan as a point of vulnerability in the state’s insurance market.

“While the FAIR Plan is a vital safety net, its expansion creates a negative feedback loop,” the department said in a July press release. “When the FAIR Plan takes on more customers, it causes traditional insurance companies to withdraw from certain areas, further increasing dependence on the FAIR Plan.”

Insurers may leave high-risk areas to avoid the possibility of major assessments by the FAIR Plan.

Commissioner Lara has taken multiple actions aimed at shoring up the state’s struggling property insurance market since taking office in 2019. Updates to California’s FAIR Plan included raising coverage limits to $3 million for residential properties and to $20 million per building for commercial policies.

Sheltering insurers from assessment losses

Lara’s Sept. 3 bulletin details a path for insurers to recoup their money from policyholders if the FAIR Plan wins DOI approval to issue a special assessment. Insurers may “collect supplemental fees from their own policyholders, in the lines that were assessed.” The percentage insurers can recoup varies based on the types and policy limits insurers sell in affected lines and the assessment amount.

Allowing FAIR Plan insurers to recoup assessment losses from policyholders will help keep California’s property insurance market stable and property insurance available in the state, the bulletin notes multiple times.

What’s next: Potential effect on California’s insurance market

California insurers have responded to escalating losses and risks by limiting their homeowners, commercial, and fire insurance business in the state, seeking double-digit rate increases, or withdrawing from the California market altogether. Most recently, Liberty Mutual announced it won’t renew 17,000 dwelling fire policies, and American National filed with the DOI to non-renew all its homeowners policies.

Allowing insurers to recoup FAIR Plan assessments will help ensure “a stable and solvent FAIR Plan,” Lara said in the bulletin.

“I believe this sounder financial sustainability structure is necessary to ensure the FAIR Plan’s financial resiliency,” Lara said. The approach “is similar to other existing California insurance safety net mechanisms, in place today, where insurers may assess policyholders in the highly unlikely event of an insurer insolvency, such as the California Insurance Guarantee Association, the California Life and Health Insurance Guarantee Association, and the California Earthquake Authority.”

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