California Authorities Warn Property Owners of Potential Insurance Shortfalls After Los Angeles Wildfires
In the wake of the devastating wildfires in Los Angeles, the California state government’s mandated Fair Access to Insurance Requirements (FAIR) plan may not be able to cover all claims, potentially leaving homeowners with additional costs to make up the difference. According to a new law that took effect last September, California homeowners could end up footing the bill if the losses from the recent wildfires exceed the FAIR plan’s payment capability.
Speaking on the recent episode of EpochTV’s “California Insider,” former California Insurance Commissioner Dave Jones informed host Siyamak Khorrami, “Ultimately, there will be sufficient funds in the FAIR plan to pay claims, but the way it ensures funding adequacy is by assessing charges to all California policyholders.”
“If it really happens, then it will be that way. People will receive additional bills… This will be a big surprise for Californians,” Jones remarked. AccuWeather estimates that the economic losses from the Los Angeles wildfires could surpass $150 billion. Analysts suggest that the insurance industry’s losses could be close to $20 billion or even higher. “This is a huge loss for the insurance industry,” Jones emphasized.
He explained that the FAIR plan is a “non-voluntary insurance industry pool,” where companies collectively raise funds to provide insurance for properties at the highest risk. Recent data shows that the FAIR plan holds approximately $700 million in cash and $200 million in reserves, along with $2.5 billion in reinsurance, which will aid in covering losses.
The total risk exposure of the plan exceeds $458 billion, up 61% from September 2023. Since 2020, the number of homes covered by the FAIR plan has increased by 123%, while commercial policies surged by 161% during the same period.
As per the FAIR plan’s website, there are 1,467 policies in wealthy Pacific Palisades, representing approximately $5.89 billion in risk. The area is one of the most expensive housing markets in the U.S. and the fifth-riskiest region in California. As of the evening of the 17th, the Palisades Fire had consumed nearly 24,000 acres, destroying over 4,000 structures, with a containment rate of 39%. According to online real estate company Zillow, the average home price in Pacific Palisades is around $3.5 million, with some of the coastal homes destroyed valued in the tens of millions of dollars.
In the fire-affected Altadena area, ravaged by the Eaton Fire, over 14,000 acres have been burnt, impacting nearly 8,000 structures. The FAIR plan covers just under 1,000 policies in that region. Zillow estimates the average home price in the area to be around $1.3 million. By the evening of the 17th, the containment rate for the Eaton Fire stood at 65%.
Jones noted that if a large number of burnt homes are under the FAIR plan’s coverage, it could jeopardize its ability to pay claims. A regulation proposed in July and issued by the California Insurance Commissioner in September of the same year altered the plan’s loss compensation method by expanding risk coverage to include all policyholders.
If the FAIR plan cannot meet claim payments, individual insurance companies must fill the gap based on their relative market shares. The new guidelines allow insurers, with approval from the Insurance Commissioner, to recoup costs from policyholders through special assessments. The California Insurance Commissioner stated that this process is to ensure the stability of the ultimate underwriter.
The Insurance Commissioner mentioned that the FAIR plan covers high-risk policies, and maintaining its solvency is crucial for settling future claims. “Although the FAIR plan has not faced a solvency crisis in the past 30 years, we will not take it lightly,” expressed Insurance Commissioner Ricardo Lara in a statement, indicating that these changes aim to enhance the plan’s underwriting capacity for high-risk properties.
Lara highlighted that the enhanced version of the FAIR plan is an essential step in stabilizing California’s insurance market strategy. “By strengthening the FAIR plan and providing financial stability and coverage, we are creating long-term security for consumers, homeowners, and businesses throughout the state, something that should have been achieved earlier.”
Similar provisions are already in place in Florida and Louisiana within the so-called shared market environment to share losses and reduce risks. Jones cautioned that as losses from the Los Angeles wildfires continue to escalate, insurance premiums for Californians will rise soon, stating, “In the future, the cost of obtaining insurance for Californians will be very high.”