California Insurers Can Pass Half of $1B FAIR Plan Rescue Cost to Policyholders

California’s insurer of last resort for fire insurance says it needs $1 billion to ensure it can continue paying claims in the wake of the Palisades and Eaton wildfires. And State Insurance Commissioner Ricardo Lara approved the California FAIR Plan’s request to assess insurance companies for the funds it needs.

Lara’s approval limits how much of the assessment insurers can pass on to policyholders to half — $500 million. Insurers can add temporary supplemental fees to policy premiums but can’t pass the assessment on to policyholders in future rates, according to a press release from Lara’s office.

Wildfire claims burn through FAIR Plan funds

As of Feb. 9, the not-for-profit insurer said it’s received around 3,469 claims stemming from the Palisades Fire and about 1,325 from the Eaton Fire. It’s already paid out more than $914 million for those wildfire claims, including advance payments to policyholders.

Claims from the wildfires aren’t just numerous — they’re also expensive.

Approximately 45% of the claims are total losses, meaning the FAIR Plan must pay policyholders the maximum amount of their individual policy limit. Another 45% are partial losses, and 10% of those claims are “fair rental value” only, meaning payouts cover lost rental income.

And “it’s important to note these approximations may shift as new claims are submitted and confirmed, including claims made before policyholders were able to return to their properties and determine the extent of the damage,” the insurer said in a statement announcing its assessment request.

The not-for-profit insurer said it needs the $1 billion assessment to “access additional available layers of reinsurance and maintain operations, such as continuing elevated staffing levels and other ongoing expenses.”

FAIR Plan administrators have estimated the plan’s total losses from the Palisades and Eaton fires at around $4 billion.

Without the assessment, the plan would run out of funds by the end of March, leaving it unable to pay claims or meet operating expenses, according to Lara’s order approving the assessment.

California insurance laws allow the FAIR Plan, with Lara’s approval, to assess all participating insurance companies to pay for its losses when the plan faces a substantial threat to its solvency. All insurers licensed to sell property insurance in the state must participate in the FAIR Plan, which issues fire insurance policies on behalf of participating companies. Insurers share in the profits, losses, and expenses of the plan based on their California market share.

A new crisis for California’s insurance market

The wildfires that swept across the Greater Los Angeles area in January burned more than 47,900 acres and destroyed or damaged more than 16,250 homes, small businesses, schools, places of worship, and other buildings.

Total damage and economic losses from the wildfires could range between $250 billion and $275 billion, AccuWeather estimated. Insured losses may be as high as $40 billion.

California’s FAIR Plan isn’t the only insurer in the state struggling to pay claims in the wake of the catastrophe.

On Feb. 3, State Farm General Insurance, California’s largest property and casualty insurer by market share, petitioned Lara for an emergency rate increase of 22% for homeowners policyholders. The insurer said it’s received more than 8,700 claims and paid out more than $1 billion.

“We know we will ultimately pay out significantly more, as these fires will collectively be the costliest in the history of the company,” the company said in a letter to Lara. Wildfire costs will deplete the company’s capital and could prompt rating agencies to lower the company’s financial strength rating.

What’s next: Impact on homeowners

On average, California homeowners pay $1,921 per year for home insurance, according to Insurify data. While that average is far from the highest in the country (Florida has that distinction at $11,759 annually), it can be difficult for property owners to find coverage in the Golden State.

Since 2020, multiple insurance companies have stopped writing new home insurance policies in California. Others have non-renewed nearly 3 million homeowners insurance policies. Fewer options in the market means more homeowners have had to turn to the FAIR Plan for coverage or go without fire insurance altogether.

The $1 billion assessment to rescue California’s FAIR Plan will help the state’s last-resort insurer continue to pay its claims. But policyholders across the state will pay for half the assessment — $500 million — through a temporary supplemental fee that will appear on their bills as a percentage of their premiums.

And while Lara’s order approving the $1 billion assessment bars insurers from passing the cost on to consumers in future rates, insurers can still request rate increases for their own losses.

But Consumer Watchdog, a consumer advocacy group based in California, has called the assessment a “bailout” for insurance companies.

“The FAIR Plan is in trouble because insurance companies dumped too many homeowners,” Carmen Balber, Consumer Watchdog executive director, said in a statement on the non-profit’s website. “Bailing out insurance companies for FAIR Plan losses isn’t going to keep them selling in California.”

Balber said the organization is “exploring every legal option to stop a bailout if any insurance company seeks to make consumers pay.”

Related articles