FAIR plan: CA’s insurance rates haven’t kept pace with risks, costs

Homes destroyed during the Thomas fire in Ventura, 2018. (Photo: Joseph Sohm, via Shutterstock)

Every California homeowner wants low insurance rates. As an insurance broker, I want the lowest rate for all my customers, whether they live in the city, near the woods or on a mountain. Even so, I would accept reasonably higher rates if they resulted in a healthier insurance marketplace and avoiding the dread so many Californians face when their coverage is dropped.

Increasingly, California residents have been left with no choice but to accept the California FAIR Plan, the insurer of last resort, and the typically higher rates that come with it.

The FAIR Plan provides basic fire insurance coverage when traditional insurance is not available, often for properties that other insurers decline to cover because they are considered high-risk. The FAIR Plan is intended to serve as a temporary safety net until traditional insurance options are available.

The increased risk is real. Since 2013, the number of acres burned per wildfire and number of structures damaged per acre burned have increased.

But, as our state suffers from persistent drought and other impacts of climate change, an increasing number of homeowners find that they live in areas now considered high-risk for wildfire, and the FAIR Plan is their only option.

The California Department of Insurance (CDI) has the authority to approve or deny rate increases. Yet the CDI has been resistant to approve rate increases that insurance companies say are needed to cover the increasing risk of wildfire in many parts of the state. As a result, insurance rates have not kept pace with risks and costs that insurers face. This needs to change.

The increased risk is real. Since 2013, the number of acres burned per wildfire and number of structures damaged per acre burned have increased, indicating that wildfires in California have become more severe and impactful, according to Milliman, a global actuarial and consulting firm. All eight of the largest California wildfires on record occurred in the last five years alone.

The impact of wildfires has been devasting to the insurance industry. From 2016 to 2019, insurers accumulated losses of $37 billion due to California wildfires, greatly exceeding the $32 billion in premiums paid by homeowners.

Insurance works when premiums are sufficient to cover losses in the event of a disaster. As the risk and magnitude of disaster go up, so do rates. Most insurers seek to manage risk by spreading coverage across a geographically diverse pool of properties, so the risk is limited to a small portion of their portfolio.

As the insurer of last resort, the FAIR Plan is left to manage an increasingly concentrated high-risk pool.

Even though climate change has significantly increased the risk for disaster, California’s rates have been kept artificially low, which is evident when compared to the rest of the nation.

With proposed rate filings backing up at the CDI, many insurers are declining to add or renew thousands of homeowners’ policies and avoiding concentrated, high-risk properties altogether to manage increasing risks and potentially catastrophic costs related to worsening wildfires. As risks and costs continue to mount for insurers, some companies are considering leaving California altogether, putting even more financial strain on the remaining market.

As the insurer of last resort, the FAIR Plan is left to manage an increasingly concentrated high-risk pool. Because the FAIR Plan has a high concentration of high-risk policies, its policies are typically more expensive than coverage provided by traditional carriers.

The CDI has taken some steps to address the insurance crisis, such as placing a moratorium on homeowner policy non-renewals in or around areas declared by the governor to be in a state of emergency.

The insurance commissioner is also attempting to force the FAIR Plan to expand its coverages, a matter currently in litigation, while continuing to keep rates artificially low. Expanding the FAIR Plan would stifle competition and could lead other insurers to leave the market, which will mean even higher rates for many homeowners.

California’s insurance crisis will persist unless the California Department of Insurance approves rates that reflect the true cost of increased risk. Such action will make the market more competitive to the benefit of all consumers.

Ultimately, a better balance of insurance affordability and availability will lead to a healthier market for coverage and a stronger state.

Editor’s Note: Aurora Mullett is the owner of Intrinsic Insurance Services, an independent insurance brokerage based in Orangevale, Calif.

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