(The Center Square) – California’s fire insurer of last resort has long been on the brink of insolvency. Not only could FAIR customers — in the absence of a government bailout — face major assessments, it’s likely the FAIR’s relatively low property insurance maximums could leave many Palisades property owners with uncovered losses.
Now, with the FAIR plan holding just $200 million in cash and facing nearly six billion dollars of exposure in the Pacific Palisades alone, every FAIR customer in the state could face an assessment in the thousands of dollars to cover losses from the three major blazes raging across the Los Angeles area.
Because state regulations prevent the plan from passing on the cost of reinsurance, which covers losses in excess of available funds, to its customers, every customer in the state may face a major assessment.
FAIR, created as a “temporary safety net,” covered just $50 billion of property in 2018, and now covers $458 billion. Even a single large blaze would wipe out FAIR’s relatively paltry $2.5 billion of reinsurance.
Making matters worse, FAIR only covers up to three million dollars of home value, while the median home listing in the Palisades is $4.6 million.
Because the state has to approve fire insurance rate hikes, insurance rates have not kept up with fire losses, leading insurers to exit the state in droves, leaving FAIR as the only option for over one million property owners.
FAIR covered just 445,000 properties in September 2021, rising to 1.4 million by September 2024.
In the Pacific Palisades, where State Farm recently canceled over 1,600 policies a few months ago, FAIR plan residential plans in the 90272 zip code grew 85% from 2023 to 2024.
While the state insurance regulator just approved a plan to let fire insurers use “catastrophe” modeling that would let them rapidly raise rates, consumer activist group Consumer Watchdog warned that the balance of power could soon be going too far the other way.
“Companies can use secret algorithms to correspond to black box climate models to raise insurance rates,” said Consumer Watchdog President Jamie Court in a statement. “Even the insurance commissioner doesn’t know how much rates will go up because no one can see in the black box.”
While rates have risen less than what is required by the market for insurers to remain in business, they still have risen fast enough to drive California residents to other states. Global credit ratings agency S&P warned that property-insurance driven outmigration could even risk government revenues and credit ratings.
One alternative to the state’s fire and insurance crisis could lie with addressing the 15 million acres in California the United States Forest Service says requires forest thinning to become healthy and resilient. With a USFS estimated “treatment” cost of $1,000 per acre, such a program would cost the government $15 billion.