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California’s state fire insurer of last resort on brink of insolvency

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(The Center Square) – California’s state fire insurer of last resort is one fire away from insolvency — if damages exceed reinsurance, assessments on all policyholders could be thousands of dollars per fire that occurs anywhere in the state.

In testimony before the California Assembly Insurance Committee, Victoria Roach, president of the California FAIR Plan said, “We are one event away from a large assessment … There’s no other way to say it, because we don’t have the money on hand [to pay every claim] and we have a lot of exposure.”

The FAIR Plan was established as a “temporary safety net” by statute in 1968 for individuals who have no other available fire insurer.

FAIR covered just $50 billion of property in 2018, and now covers $320 billion as insurers leave the state due to inability to raise rates to meet claims paid out by fires. A fire as damaging as the 2018 Camp Fire, which cost $6 billion in claims after destroying 18,000 buildings and killing 85 people, would go far over FAIR’s $200 million in cash surplus and $2.5 billion in reinsurance. Under California regulations, the FAIR plan cannot include the cost of reinsurance in its rates, leaving the plan unable to raise rates high enough.

As a result, the plan’s only option in the case of catastrophe is to charge assessments on all FAIR plan users, which Consumer Watchdog lobbyist Kim Stone said in testimony could cost $1,000 per user per major fire in the state. FAIR plans currently cost approximately $3,200 per home per year.

Fire damage costs have increased as housing developments encroach on fire-prone areas, and state policies have limited the ability to clear out dangerous brush build-ups that fuel larger fires — whether via manual brush removal or controlled burns.

With the state’s largest insurers now limiting wildfire coverage, and many, such as Allstate and State Farm, no longer issuing new homeowners insurance policies due to costs outstripping their ability to raise rates, state legislators are proposing a workaround to bring private insurance policies back to the state.

Ratings agency S&P says the high cost of home insurance due to fire costs is driving homeowners out of the state and could have long-term negative consequences for public finances, including potential credit downgrades that would make the state’s debt even more expensive.

Their main strategy is to allow insurers to submit catastrophe models for wildfires and the damage they cause in applications to increase their rates, but some say this change would create a bevy of unintended consequences.

“The “catastrophic models” can become tools for climate alarmists, corrupting both the compilation and design of the models and what results they produce, as well as causing those politicized results to be used for more than just reinsurance calculations but also as “evidence” in climate litigation and as justification for more laws and regulations that will make it even harder for rural Californians to remain on their property (much less for anyone who wants to move into a rural area to be able to afford to do so),” said California Policy Center co-founder Edward Ring to The Center Square.

As an alternative, Ring supports allowing for more brush clearance and more responsible forest management practices to reduce overall fire risk.

“California must deregulate land management so we can bring back timber harvesting at the level it was back in the 1980s and early 1990s, and end the obstructionist policies that prevent property owners, big and small, from doing brush clearing, forest thinning, and timber harvesting,” Ring continued.

California Governor Gavin Newsom’s proposed budget for the 2024-2025 fiscal year includes $3.7 billion for fighting wildfires, but just over $300 million for forest and resource management that can prevent wildfires.

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