Los Angeles, CA – California Insurance Bailout: As Los Angeles residents recover from one of the costliest natural disasters in U.S. history, California’s insurer of last resort, the FAIR Plan, faces mounting financial strain. With another hot and dry summer approaching, the risk of a future bailout looms large, potentially forcing state residents to cover additional costs.
FAIR Plan Assessment Strains Resources
Last month, the FAIR Plan required major insurers like State Farm, Allstate Corp., and Chubb Ltd. to contribute a combined $1 billion to replenish its reserves. This measure, known as an assessment, provided a rare glimpse into the program’s precarious financial health. California Insurance Bailout
Little Cushion Left for Future Disasters
Only three months into 2025, the FAIR Plan has little cash left to cover another potential disaster. California faces wildfires year-round, raising the possibility of additional assessments.
“The risk is really clear,” said Sridhar Manyem, head of industry research at AM Best, a credit-ratings agency. “Depending on the severity of the next wildfire, there is the possibility of a future assessment.”
Private Insurers Could Pass Costs to Policyholders
Under newly updated regulations, private insurers must cover assessments. However, they can seek permission to pass up to half of the first $1 billion to policyholders in a given year. Beyond that threshold, policyholders may bear the full burden. Consequently, assessments could drive up premiums for California homeowners. California Insurance Bailout
Climate Change Deepens Insurance Market Turmoil
The growing financial pressures underscore the increasing risks faced by California property owners. Climate change is heightening uncertainty in the insurance market. The January Palisades and Eaton fires erupted just weeks after new state regulations took effect, designed to ease the crisis caused by insurers limiting new policies or exiting California altogether.
State Farm’s 22% Emergency Rate Hike Adds Pressure
State Farm, California’s largest home insurer, recently received provisional approval for a 22% emergency rate hike. The company cited multibillion-dollar payouts from the Los Angeles fires as a threat to its balance sheet and the broader insurance market.
Utility Equipment Possibly Linked to Eaton Fire
Pedro Pizarro, CEO of Edison International, acknowledged that the company’s equipment might have played a role in the Eaton Fire. “California will always face some risk of a catastrophic fire,” Pizarro said, warning that these risks will create costs for consumers.
FAIR Plan’s Financial Shortfall Poses Bigger Threat
The FAIR Plan estimates liabilities related to the Palisades and Eaton fires at about $4 billion. Unlike private insurers, the FAIR Plan holds less cash because it covers high-risk properties that private insurers reject. This leaves it vulnerable to catastrophic events.
If the FAIR Plan held reserves similar to private insurers, premiums would become unaffordable, said Dave Jones, California’s insurance commissioner from 2011 to 2019. Victoria Roach, FAIR Plan’s president, echoed this concern last year, warning that “our rates are not adequate.”
Reinsurance Deductible Exceeds Available Cash
In a February letter attached to the assessment order, Roach disclosed that the FAIR Plan faces a $900 million reinsurance deductible and must pay up to $3.5 billion (including the deductible) to access full reinsurance coverage. The plan only had $510 million of unallocated cash available, leaving a $400 million gap that could trigger another assessment.
Consumer Advocates Warn of Growing Risks
Carly Fabian, a policy advocate for Public Citizen, called the funding gap “pretty concerning” and warned that it “pretty much guarantees another assessment.” The FAIR Plan currently estimates that 45% of its claims from the fires are total losses. However, Jones suggested this percentage might be too low, potentially increasing the need for more funds.
Consumer Watchdog Challenges Insurer Cost-Shifting
A legal battle is brewing over the recent assessment. Consumer Watchdog, an advocacy group, called the charge a bailout for big insurers. The group has vowed to challenge insurers in court if they try to pass assessment costs to policyholders.
“We don’t think it’s legal,” said Jamie Court, president of Consumer Watchdog. He argued that private insurers are allowed to operate in California based on the understanding that they will help maintain the FAIR Plan’s solvency.
California Insurance Commissioner Defends New Regulations
However, the California Department of Insurance rejected that view. Insurance Commissioner Ricardo Lara stated that holding insurers fully accountable for FAIR Plan assessments would drive more companies out of California. This would make insurance “much more unaffordable,” he warned during a hearing last week.
Deputy Commissioner Michael Soller emphasized that the state’s new regulations incentivize insurers to take on more high-risk policies. He noted that companies can now use new risk-assessment tools only if they increase their coverage of high-risk properties.
Goal: Shift Californians Back to Regular Insurance Market
Soller stressed that the state’s ultimate goal is to move Californians out of the FAIR Plan, which offers limited coverage at higher costs, and back into the regular insurance market.
“Nobody wants a FAIR Plan policy,” Soller said.
FAIR Plan Growth Signals a Worsening Problem
As private insurers retreat from California, more consumers have been forced to rely on the FAIR Plan. This shift creates a growing burden not just for homeowners in high-risk zones, but for the entire state insurance market.
“The more people that are put into a system that is already struggling, the worse the struggles become,” said Douglas Quinn, executive director of the American Policyholder Association. “These are very, very difficult, challenging times for the insurance industry.”
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