Fire insurance exodus pushes last-resort plan toward brink

As home insurers flee California, the state's last-resort insurance plan is warning that it's being pushed toward insolvency, forced to cover a rapidly growing number of properties that have lost traditional coverage and unable to collect enough in premiums to cover potential losses.

The number of homes and commercial properties in high-risk wildfire areas covered by the California FAIR Plan has more than doubled, from 154,000 in 2019 to 375,000, and liability exposure has ballooned from $50 billion in 2018 to $336 billion in February, its president told lawmakers at an insurance committee hearing last week.

"These are huge numbers," California FAIR Plan president Victoria Roach told the committee. "And they continue to grow. … As those numbers climb, our financial stability comes more into question."

Roach added that one bad wildfire or even a series of smaller fires could overwhelm the plan's resources, forcing it to bill all the state's insurers for liabilities it cannot cover, which they in turn would pass on to all their insured home and business customers as higher premiums.

"It's a gamble," Roach said. "We are one event away from a large assessment, there's no other way to say it, because we don't have a lot of money on hand, and we have a lot of exposure out there."

The FAIR Plan's financial instability has emerged as collateral damage from the state's insurance market meltdown. Major carriers have discontinued or restricted coverage in recent years following a series of costly wildfires — 14 of California's 20 most destructive wildfires burned the state in the last 10 years. That's forced property owners who've lost coverage onto the FAIR Plan in rapidly growing numbers — with 1,000 applications now every work day.

Elected Insurance Commissioner Ricardo Lara last fall announced plans for a major overhaul of the state's home insurance regulations and already has rolled out proposed new rules to speed approval of rate increases and allow computer catastrophe modeling to factor into them. Those changes are on track by the end of the year, Lara said.

But it isn't coming fast enough for both consumers and insurers. State Farm, the state's largest insurer, last year rocked the market by declaring it wouldn't issue new policies in California. The company dropped another bomb when it announced this week it will begin shedding coverage of 72,000 California homes and apartment buildings over the next year. Those customers are expected to end up on the FAIR Plan as well.

The state created the California FAIR Plan in the 1960s in response to insurers refusing to cover inner-city businesses following riots in Los Angeles' Watts neighborhood in 1965. It's a nonprofit association of all the state's authorized property insurance providers, chartered to provide temporary basic insurance for properties deemed so high risk that companies refused coverage.

The FAIR plan isn't tax-supported, and its barebones coverage — just fire and smoke damage — is paid from policy premiums that can be much more expensive than regular insurance because the risk pool is much higher.