California's Fair Plan Changes & Concerns | To The Point (Airdate: 2024-07-26) | ABC - KXTV

Published Date: 07/26/2024

alifornia’s FAIR Plan Expansion: Relief or Risk? Breaking Down the Latest Changes and Industry Concerns

California’s insurance market continues to be one of the most volatile in the country. Homeowners, landlords, and businesses alike are struggling to find — or afford — coverage. As major insurers scale back or exit the state, the California FAIR Plan, once a last-resort safety net, has become the default option for tens of thousands of policyholders.

Now, a new regulatory change from the California Department of Insurance (CDI) is expanding the FAIR Plan’s reach — but not without controversy.

On July 26, 2024, California Insurance Commissioner Ricardo Lara announced a major expansion of the FAIR Plan’s commercial coverage limits and a controversial provision that could allow insurers to pass certain costs onto consumers.

While the Department calls this part of a “sustainable insurance strategy,” critics argue it could amount to an industry bailout that shifts financial risk onto policyholders.

Let’s unpack what’s happening, what it means for California homeowners and businesses, and why experts like Karl Susman, host of Insurance Hour, say this decision is both a blessing and a warning sign.

What Is the California FAIR Plan?

The California FAIR Plan (Fair Access to Insurance Requirements) was created in 1968, during a time when property insurance was becoming scarce after a series of urban riots and wildfires.

Contrary to popular belief, the FAIR Plan is not a government-funded insurer. It’s a shared risk pool made up of all the insurance companies licensed to do business in the state. Each insurer contributes financially to the FAIR Plan in proportion to their market share.

That means when you buy a FAIR Plan policy, your premium isn’t subsidized by tax dollars — it’s part of a collective arrangement among private insurers.

The FAIR Plan’s original purpose was to serve as a temporary bridge, providing bare-bones fire coverage to property owners who couldn’t find insurance elsewhere. But over the last five years, it’s become a pillar of the state’s insurance system — handling more than 300,000 active policies, a number that has more than doubled since 2019.

The July 2024 Announcement: Raising the Limits

Until now, the FAIR Plan’s maximum coverage limit for commercial properties — including condominium and homeowners’ associations (HOAs) — was $20 million.

Under the new rules announced by Commissioner Lara, that limit will rise to $100 million, a fivefold increase.

“The upside,” explained insurance expert Karl Susman, “is there’s more coverage available for organizations like homeowners associations. The downside is, we’re putting even more weight on the FAIR Plan — which is already overburdened with exposure.”

This change could help large commercial property owners and community associations who have been unable to secure private coverage for wildfire or property risk. Many HOAs, for example, have faced near-total coverage gaps, putting both property values and homeowners at risk.

But as Susman pointed out, this additional exposure means the FAIR Plan will be taking on significantly more risk — with potentially massive consequences if another catastrophic wildfire strikes.

Why Critics Call It a “Bailout”

The controversy stems from a lesser-known part of the new policy: the recoupment provision.

Here’s how it works:

If the FAIR Plan experiences catastrophic losses (for example, a wildfire that triggers $1 billion or more in claims within a single year), it can assess member insurance companies — meaning it can demand financial contributions from all participating insurers to cover those losses.

Under the new rule, insurers will now be allowed to recoup some or all of that assessment by adding supplemental fees to their customers’ bills, even if those customers are not insured by the FAIR Plan.

In plain terms, every homeowner in California could end up paying for FAIR Plan losses, regardless of which company insures them.

That has some watchdogs sounding the alarm.

“We think it’s outrageous to call this a bailout of the insurance industry on the backs of policyholders,” said Carmen Balber, Executive Director of Consumer Watchdog. “If the FAIR Plan finds itself in financial trouble, that’s because the insurance industry dumped policyholders on the FAIR Plan. The industry should be responsible for paying its own bills.”

The Legal Question

Consumer Watchdog and other advocacy groups also question the legality of the new cost-sharing mechanism.

According to Balber:

“The statute authorizes the FAIR Plan to assess insurance companies. Nowhere in the law does it say those companies can pass that cost on to consumers.”

The Department of Insurance, however, argues that this is an emergency safeguard, not an immediate fee. The mechanism would only trigger after multiple layers of financial backstops fail.

First, the FAIR Plan’s own reserves would be used.
If those were exhausted, the Plan would assess insurers.
If that assessment still fell short, and only then, would policyholders see a supplemental charge.

As one Department official put it, “We’re way down the line before it would trickle down to consumers.”

Still, critics aren’t convinced. Once such a mechanism exists, they argue, it could easily become a recurring cost recovery tool for insurers — especially as wildfire losses continue to climb.

The FAIR Plan’s Expanding Role

This expansion of coverage limits for commercial properties, coupled with the new cost-sharing mechanism, is part of a larger “Sustainable Insurance Strategy” launched by Commissioner Lara in September 2023.

The strategy aims to modernize California’s insurance system through:

• Faster rate approvals
• Increased use of catastrophe models
• A requirement that insurers write policies in 85% of distressed ZIP codes
• FAIR Plan reforms to expand coverage availability

While many experts agree that modernization is long overdue, they warn that overreliance on the FAIR Plan could backfire.

“We’re trying to make a temporary fix do a permanent job,” Susman cautioned. “The FAIR Plan was never designed to handle the level of exposure it’s carrying now.”

Indeed, with more than $300 billion in insured property now under its umbrella, the FAIR Plan’s solvency risk is growing — even as climate change, inflation, and rebuilding costs continue to rise.

The Domino Effect

The FAIR Plan’s expansion is not happening in isolation. It’s part of a broader pattern in which insurers — both national and regional — are limiting new business or pulling out of California entirely.

Major carriers like State Farm, Allstate, and Farmers have either paused or restricted new homeowners’ policies, citing:

• Escalating wildfire losses
• Regulatory delays in approving rate increases
• Rising reinsurance costs

When private carriers withdraw, more policyholders migrate to the FAIR Plan — which increases exposure, which increases the likelihood of future assessments, which in turn may lead to higher statewide costs.

It’s a feedback loop that, without reform, could threaten the stability of California’s entire property insurance market.

“It’s a domino effect,” Susman said. “The FAIR Plan gets bigger, the risk gets bigger, and eventually the costs spread to everyone.”

What This Means for Homeowners and HOAs

For now, the immediate impact of the July 2024 announcement will be felt most by large commercial policyholders — particularly condominium and homeowners’ associations that manage multi-unit properties.

The FAIR Plan has up to eight months to implement the new $100 million coverage limits. That means HOAs struggling to secure adequate insurance for their communities could soon have access to expanded protection.

However, that protection may come with higher premiums and potentially less comprehensive coverage than what’s offered in the traditional market.

Homeowners outside those associations, meanwhile, should prepare for possible rate adjustments or surcharges down the line — though, as regulators emphasize, such costs would only occur in the event of a catastrophic loss.

Still, in a state where billion-dollar wildfires have become almost annual events, that’s not an abstract risk.

A Balancing Act: Sustainability vs. Affordability

Commissioner Lara’s goal — to create a sustainable insurance marketplace — is both ambitious and necessary. But as this latest FAIR Plan decision shows, sustainability and affordability often pull in opposite directions.

Expanding FAIR Plan coverage can provide short-term relief for policyholders who have nowhere else to go. Yet, it also exposes the system to greater financial risk — a risk that, under the new rules, could eventually flow to consumers statewide.

In essence, California is betting that by stabilizing the FAIR Plan now, it can buy enough time for private insurers to return to the market under the new regulatory framework.

Whether that bet pays off depends on two things: how effectively the state manages future catastrophes, and how soon meaningful rate modernization takes effect.

The Bottom Line

The expansion of the FAIR Plan is both a relief valve and a warning sign. It’s a temporary fix in a system that desperately needs long-term structural reform.

As Karl Susman put it, “We’ve got to stop treating the FAIR Plan like a permanent solution. It’s supposed to be the last resort — not the only resort.”

Consumers, insurers, and regulators alike are watching closely to see how these new changes play out. If the FAIR Plan can handle its growing load without tipping into financial distress, it could buy California’s insurance market valuable time. If not, the very safety net designed to protect homeowners could become the next source of crisis.

For now, one thing is certain: every Californian has a stake in what happens next.