California's FAIR Plan's financial future | To The Point - (Airdate: 2024-09-03) ABC10 - KXTV
Published Date: 09/03/2024
California’s FAIR Plan Faces a Financial Stress Test: What Homeowners Need to Know
California’s home insurance system is once again under strain — and this time, the warning signs are flashing from its last line of defense: the California FAIR Plan.
Once intended as a temporary safety net for homeowners unable to find private coverage, the FAIR Plan has ballooned into a primary insurer for hundreds of thousands of Californians. Its explosive growth is now raising urgent questions about solvency, consumer protection, and the long-term sustainability of the state’s entire insurance framework.
In a recent To The Point segment on ABC10, host Becca Habegger broke down the escalating crisis and spoke with insurance expert Karl Susman about what the Department of Insurance’s latest announcement really means for homeowners, insurers, and California’s financial stability.
The FAIR Plan: A Safety Net Stretched to Its Limits
The California FAIR Plan Association, created in 1968 after riots and urban fires left many properties uninsurable, is not a state-funded program — despite its official-sounding name. Instead, it’s a pool of private insurers required by law to participate, collectively providing basic fire insurance to property owners who can’t obtain coverage on the open market.
For decades, the FAIR Plan remained relatively small. But as climate-driven disasters and regulatory challenges forced carriers to withdraw from wildfire-prone regions, the FAIR Plan’s enrollment surged.
The numbers tell a stark story:
- In 2019, roughly 155,000 homeowners were covered by the FAIR Plan.
- By mid-2024, that figure exceeded 408,000 — a 160% increase in just five years.
- The plan’s total exposure — the value of the properties it insures — skyrocketed from $50 billion in 2018 to nearly $393 billion in 2024.
That means the FAIR Plan is now carrying eight times more financial risk than it did just a few years ago, without a proportional increase in its financial reserves.
The Numbers Behind the Risk
At a recent California Assembly Insurance Committee hearing, FAIR Plan President Victoria Roach offered a rare glimpse into the plan’s balance sheet.
- Cash on hand: around $700 million
- Surplus: roughly $200 million
- Reinsurance coverage: about $2.5 billion
Those numbers sound large — until you compare them to the scale of potential losses.
“If a wildfire similar to the Camp Fire of 2018 occurred just 45 miles south of that same area,” Roach explained, “it could generate over $6 billion in claims.”
That’s nearly ten times more than the FAIR Plan’s liquid resources.
In other words, a single catastrophic event could wipe out the FAIR Plan’s reserves overnight — leaving a gaping financial shortfall.
Who Pays If the FAIR Plan Runs Out of Money?
That’s the question on everyone’s mind — and the California Department of Insurance (CDI) recently provided a controversial answer.
According to new CDI guidance, if the FAIR Plan becomes insolvent or runs out of funds paying wildfire claims, private insurance companies operating in California will be required to cover the difference.
In practice, this means that insurers like State Farm, Allstate, or Farmers — even those no longer writing new homeowners policies in the state — would be assessed to replenish the FAIR Plan’s losses.
These companies would then be allowed, with CDI approval, to recoup those costs from policyholders, meaning that every homeowner in California could indirectly help bail out the FAIR Plan.
“There’s always the potential that costs could be passed along,” Habegger noted in her report.
“But the good side is that FAIR Plan policyholders can be confident their claims will be paid, because there’s a safety net of funding behind it.”
Karl Susman: “The FAIR Plan Is Not Sustainable in Its Current Form”
Insurance expert and Insurance Hour host Karl Susman told ABC10 that the FAIR Plan’s growing exposure underscores a deeper structural imbalance in California’s insurance market.
“The FAIR Plan was never designed to carry this much risk,” he said. “It was supposed to be a short-term safety net — not the main source of homeowners insurance for nearly half a million Californians.”
According to Susman, the CDI’s announcement is both a reassurance and a red flag.
On the one hand, it ensures that claims will be paid, even if the FAIR Plan’s own reserves are depleted. On the other, it highlights the fragile interdependence between the FAIR Plan and the private market — the very system that’s already under strain.
“The same companies being told to help bail out the FAIR Plan,” Susman explained, “are the ones reducing exposure because they can’t operate profitably under current regulations.”
In essence, it’s a circular problem: insurers retreat from high-risk areas → homeowners turn to the FAIR Plan → FAIR Plan grows unsustainably → insurers are asked to fund its losses.
“You can’t have a system where the backup plan becomes the only plan,” Susman emphasized.
The Human Cost: “People Can’t Afford to Live”
Behind the policy debates are real homeowners facing impossible financial choices.
Take Charity Jackson, owner of the historic Washington Hotel in Nevada County. She told ABC10 that her property insurance costs have skyrocketed since being moved to the FAIR Plan after her private policy was non-renewed.
“My homeowners used to be around $1,300,” she said. “Now my FAIR Plan alone is close to $5,000 — and that doesn’t even include liability coverage.”
For families on fixed or low incomes, those costs are unsustainable.
“People can’t afford to live,” Susman agreed. “We’re seeing rural homeowners being priced out of their communities — not because of taxes or mortgages, but because of insurance.”
Reinsurance: The Hidden Driver of the Crisis
A key but often overlooked factor in California’s insurance woes is reinsurance — the insurance that insurers buy to protect themselves from catastrophic losses.
FAIR Plan President Roach revealed that the plan currently carries about $2.5 billion in reinsurance coverage, but as global disasters increase, reinsurance prices have spiked dramatically.
Private insurers face the same problem. Reinsurers, many of them global giants based in Europe, are charging more to cover wildfire and flood risks — and California’s strict rate-approval process doesn’t let carriers pass those costs fully onto consumers.
The result is a financial bottleneck that affects every layer of the insurance ecosystem.
The Department of Insurance Steps In
In response to the mounting crisis, Insurance Commissioner Ricardo Lara has rolled out the Sustainable Insurance Strategy (SIS) — a comprehensive reform plan designed to stabilize the market and reduce dependence on the FAIR Plan.
The key pillars include:
- Allowing forward-looking catastrophe models in rate filings — enabling insurers to price based on future risk instead of outdated historical data.
- Requiring insurers to write in high-risk areas — carriers that reenter the market must serve wildfire-prone zones proportionally to their statewide share.
- Encouraging mitigation discounts for homeowners who harden their properties against wildfire.
- Modernizing FAIR Plan operations, including better funding mechanisms and clearer disclosure of financial health.
Susman welcomed the effort, calling it “a necessary reset for a system that’s been frozen since 1988.”
“These reforms should start taking effect by the end of the year,” he said. “When carriers re-enter the market, FAIR Plan business will be the first they start taking.”
He predicts measurable improvement by mid-2025, though pricing pressures will likely remain.
“We won’t see 2018 premiums again,” he cautioned. “But we should see availability come back — and that’s the first step toward long-term stability.”
Why This Matters for Every Homeowner
The implications of the FAIR Plan’s financial fragility extend far beyond the 400,000 policyholders currently enrolled.
If a major wildfire season were to trigger FAIR Plan insolvency:
- Private insurers would face enormous assessments.
- Policyholders statewide could see premium increases.
- Reinsurance markets might tighten further, compounding costs.
In short, the FAIR Plan’s financial health is a systemic issue — one that affects every homeowner in California, whether they’re directly covered by it or not.
The Broader Question: Who Bears the Risk?
California’s insurance crisis ultimately comes down to one fundamental question: Who should bear the cost of living in a high-risk environment?
For decades, that cost was socialized through low premiums and strict rate caps. But as climate impacts accelerate, the balance between affordability and solvency is breaking down.
Susman argues that smart regulation — not heavy-handed control — is the key to restoring equilibrium.
“The goal isn’t to make insurance cheap,” he said. “The goal is to make it fair, transparent, and available. Right now, we don’t have any of those three.”
Looking Ahead: A Crucial 12 Months
The next year will be pivotal.
The CDI expects to finalize new modeling and rate-approval guidelines by late 2024, with insurers able to submit new filings in early 2025. If successful, that could bring major carriers back into the state and reduce FAIR Plan enrollment.
However, much depends on how quickly those reforms are implemented — and how well the FAIR Plan can manage its risk in the meantime.
Susman summed up the stakes clearly:
“If we don’t fix this now, we’re heading toward a full-scale insurance collapse. The FAIR Plan can’t keep absorbing this much exposure. At some point, something has to give.”
The Takeaway: Stability Through Shared Responsibility
California’s insurance crisis isn’t the result of one failure — it’s the outcome of decades of well-intentioned but outdated regulation, compounded by climate volatility.
The FAIR Plan’s financial stress test has exposed both the fragility and the interdependence of the system. But it’s also driving a long-overdue reckoning — one that could finally modernize how risk is priced, shared, and mitigated.
If regulators, insurers, and consumers can align around transparency and responsibility, California can lead the nation once again — not just in recovery, but in resilience.
Because as Susman reminded viewers, “Insurance only works when everyone participates — and when the system itself can weather the storm.”
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