I thought my home was safe from insurance problems. I don’t live in a wildfire area. Most of us don’t. But my insurance is at risk and yours is too. The reason is a combination of climate change making big losses more common, well-meaning regulation making it difficult for insurance companies to respond, and a “safety valve” on the insurance market that is rapidly turning into a bloated anchor that threatens to sink the remaining companies.

“We’re one bad fire season away from complete insolvency.”

Assemblymember Jim Wood (Healdsburg) at a 3/13/24 Assembly Insurance Committee meeting

The costs for property insurers in California have been going up steadily in recent years. Inflation, labor shortages, and supply chain problems that increase rebuilding costs are playing a role. At the same time, more frequent wildfires are increasing risk and losses. As a result, insurers are relying more on their own insurance (aka “reinsurance”) to cover payouts, and those prices are going up, with fewer companies willing to (re)insure fire risk.

Why, you might ask, don’t insurance companies just raise their rates to cover these additional costs? The problem is that they can’t. They can’t raise them high enough, and they can’t raise them fast enough. The Department of Insurance reviews any proposals to change rates (1) and those reviews often take a year or more. Even then, insurers aren’t allowed to include certain costs in their rate filings. They cannot include the cost of reinsurance, which is growing bigger each year. Nor can they include the increasing risks of climate change, since they are only permitted to use backwards-facing models. These restrictions were put in place to control price increases. Reinsurance can reflect costs outside of California, which we don’t want Californians to pay. And proprietary climate change models could lead to unjustified high rates. But the rules are no longer serving us well.

As insurers struggle to adjust rates, their reserves are dropping. When reserves go down past a certain point, guidelines require that insurers cut back on policies, whether or not those policies are in wildfire areas. The result has been a widespread withdrawal from the market of many of the largest insurers.

There is, however, one insurer in California that is not subject to the “required reserves” guidelines. That insurer, which is taking on many of the dropped customers, is the California FAIR plan.

The California FAIR plan was set up to be an insurer of last resort. In the 1960s, after the Watts riots, it was difficult to get insurance in the inner cities. The FAIR plan was designed to help with that, and since then it has expanded to provide a backstop in other cases, in particular in wildfire-prone areas. But with private insurers pulling out of the state, this “last resort” plan has grown well beyond its intended size and role. In September 2023, for example, 40% of the business that came to FAIR was outside of a wildfire area. The program continues to expand to meet customer demand, recently adding support for larger limits on both residential and commercial property values.

All of this growth might be okay except that the FAIR plan, like the other insurers, is not able to set its rates to cover costs. The program is rapidly building up risk without a corresponding increase in assets. Victoria Roach, CEO of the FAIR plan, explained in a recent hearing: “In 2021 … we filed for a 48% increase. Our rate need at the time was around 70%. We asked for 48.8%. And we got approved at 15.7%. A lot of that is because of the things we are talking about here. The net cost of reinsurance is not allowed. Catastrophe [modeling] is not allowed. And we’re not allowed to account for the cost of capital in our rates.”

The rapid growth in policies, she noted, is exacerbating the problem. “As our numbers climb, our financial stability becomes more in question … because we can’t support those numbers.” The FAIR plan does have insurance, but the $2.5 billion or so is not enough to cover their $330 billion (and growing) exposure. Furthermore, they do not even have enough capital to cover the $900 million deductible. (2)

“This is a critically important issue that, if left unaddressed, has far-reaching implications for the health of the California insurance market and our ability to restore a healthy, competitive market.”

Seren Taylor, Vice President of the Personal Insurance Federation of California, at a 3/13/24 Assembly Insurance Committee meeting

The state’s insurance lifeboat is sinking and there is no quick fix. The legislature is looking at a substantial insurance overhaul, but at best it will be passed at the end of the year. And even that is not enough. Roach observed that “Even if today they told me, charge whatever you want, it’s still 2025, at best, until I can start charging that rate, and 2026 until I really get that rate into my system.”

What happens if the FAIR plan cannot cover its losses? The insurer is not backed by the state or by taxpayers. Instead, they collect needed funds from the private insurers in the state. This assessment applies to any company that has sold insurance in California in the past two years, and it is proportional to the amount of insurance that they sold. Roach explains that in the event of a major fire, or even a few smaller ones, they would be in this situation. “We’re going to look to the voluntary market, which is already in a precarious situation, to cover our losses. The more we grow, the more we expand, the more that becomes a reality.”

“We are one event away from a large assessment. There’s no other way to say it. We don’t have the money on hand, and there’s a lot of exposure out there.”

FAIR Plan CEO Victoria Roach at a 3/13/24 Assembly Insurance Committee meeting

Roach provides an example. If the Paradise Fire were to happen again, just 45 miles to the south, then the FAIR plan would have over $6 billion in losses. If just $2 billion of that were assessed out, then all property insurers would be on the hook for a portion, perhaps several hundred millions of dollars. According to Seren Taylor, Vice President of the Personal Insurance Federation of California, insurers would be forced not only to raise rates but also to shed tens of thousands of properties in order to have adequate reserves. In anticipation of that, he says, “It’s reasonable to expect that insurers would reduce their exposure to this unfunded risk by pulling back from the CA market.” And that is what many are doing.

The California FAIR plan, which was intended to stabilize the property insurance market, has instead become a destabilizing force, one that is growing bigger every day and threatening to bill us all for its looming debt. Roach says they are getting 1000 new applications each day. In May 2023 FAIR had 9000 brokers. Now they have 54,000. They signed a record 15,000 policies just last month (February), and in mid-March were at 373,000 policies, up 10% from December’s 340,000.

“It’s like a snake that swallowed an elephant.”

American Agents Alliance Executive Director Mike D’Arelli at a 3/13/24 Assembly Insurance Committee meeting

Rates must be fixed so insurers can cover their costs. The rate approval process should be revised so rates can be adjusted in a timely manner. And the FAIR plan has to reduce its exposure, with private insurers coming back into the market and taking some of their policies. Much of this is in the works, but none of it is happening fast enough as we face down more fire seasons.

“Renters and lower- and middle-income homeowners with comparatively low fire risk should not be on the hook for rebuilding more expensive homes or even second homes in high fire-risk areas like Lake Arrowhead or Truckee. We are very concerned about a potential assessment to consumers.”

Consumer advocate Kim Stone at a 3/13/24 Assembly Insurance Committee meeting

Even once the new regulations are in place, will insurance be affordable? Assemblymember Joe Patterson (Rocklin) says “I can’t stress enough … the amount of calls that I get regarding people having to move to the FAIR plan and what that cost is…. People can’t afford to live…. For me, there’s a huge sense of urgency.”

“Insurance in the past 6 months or so has become a full-time blood sport for people trying to get covered.”

Tahoe resident on Facebook (February 2024)

One way to control rates is for insurance companies to give property owners credit for reducing their risk by hardening buildings and implementing defensible space. This is an approach endorsed by the Consumer Watchdog and others. The FAIR plan does this today, with Roach saying “We were one of the first companies to provide a discount to consumers for making those changes.” This practice should be pervasive, much like a good driver discount. But the required changes may not be cheap.

“We got renewed on 3/31/24 for the next year through our agent in Auburn. We had to jump through a lot of hoops with emails and photos. It  cost us an arm and leg to comply with their requirements but we made it. I cried when we got the acceptance letter.”

Tahoe resident on Nextdoor (March 2024)

Discussions about home insurance abound in online forums in fire-prone areas. Here is one example.

It’s not only homeowners who are being hurt. Peter Ansel, Senior Policy Advocate for the California Farm Bureau, says that “For farming and ranching members in the state, insurance has become a massive cost issue. It is driving small farmers out of business in the state.” Dan Dunmoyer, President and CEO of the California Building Industry Association, says that 10,000 new condominiums are on hold across the state as builders struggle to get insurance.

Will California figure this out? Similar dynamics are playing out in Florida, Louisiana, and along the Gulf coast, where climate change has intensified storms, premiums have skyrocketed, and insurers are pulling out, even with many of the changes in place that California is proposing in its Sustainable Insurance Strategy. We are all at risk of costlier and/or scarcer insurance plans while our legislature tries a variety of fixes. What do we learn from this?

A few years ago there was a lot of discussion about where to live as climate change impacts our environment. Many were suggesting places like Duluth and Buffalo. But the suggestion I heard that made the most sense to me was to live somewhere with an effective government. Because changes are coming, some of them pretty quickly, and we need to find ways to adapt and to mitigate. This insurance conundrum is an example of that. There will be more.

I’d be interested in hearing any difficulties you have had with property insurance, or thoughts you have on how to fix it.

Notes

1. Requests for rate increases of 7% or more are also subject to an “intervenor” process that adds more scrutiny and takes more time.

2. Here is what Roach said in full about this at the Assembly Insurance Committee Meeting on March 13, 2024. “Our tower goes up to $4.8 billion. The actual amount of reinsurance is about $2.5 billion that we purchased…. We’re a single peril in our insurance. … We’ve now gone to a 100-year event. We’ve never had that much reinsurance before. Last year we had about $1.7 billion, and this year we are around $2.5 billion that we’ve purchased. Ours is low compared to other residual markets based on the exposure that we have, again because we have a lot of co-reinsurance in that $5 billion tower… [I believe she is referring to the ability of the FAIR plan to assess other insurers.] Our deductible, our retention, is $900 million, which is more than the $700 million I told you we have on hand. But it has to be one event too. We could easily be in assessment territory if we had three small fires because we’re not going to hit our reinsurance, so we have to assess to get through those three fires.” See meeting at 1:44:45.

Current Climate Data

Global impacts (February 2024), US impacts (February 2024), CO2 metric, Climate dashboard

Don’t miss the 3rd annual LOVE OUR EARTH FESTIVAL, Saturday, April 13, from 10 am to 2 pm at Bloomhouse, 2555 Pulgas Avenue in East Palo Alto. Learn how to mitigate climate change, build community resilience, and have fun for all ages! Admission is free.

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