FAIR to No One

Riverside County fire in October, 2023 (CNBC)

It's old news that California's property insurers are withdrawing from the state; this week State Farm announced that it would not be renewing 72,000 policies (it had already stopped writing new ones last year).

Thousands of homeowners in risky wildfire areas can only be covered by California's insurer of last resort, the Fair Access to Insurance Requirements (FAIR) plan. However, the FAIR plan's financial condition has become precarious: [bold added]

The number of homes and commercial properties in high-risk wildfire areas covered by the California FAIR Plan has more than doubled, from 154,000 in 2019 to 375,000, and liability exposure has ballooned from $50 billion in 2018 to $336 billion in February, its president told lawmakers at an insurance committee hearing last week...

The state created the California FAIR Plan in the 1960s in response to insurers refusing to cover inner-city businesses following riots in Los Angeles’ Watts neighborhood. It’s a nonprofit association of all the state’s authorized property insurance providers, chartered to provide temporary basic insurance for properties deemed so high risk that companies refused coverage.

The FAIR plan isn’t tax supported, and its bare-bones coverage — just fire and smoke damage — is paid from policy premiums that can be much more expensive than regular insurance because the risk pool is much higher.

The plan also isn’t subject to the insurance regulation under Proposition 103, the check on rates voters approved in 1988. But it is regulated by the state legislature and its rates approved by the elected insurance commissioner, though not under the review of consumer groups, which can intervene on regular policies.

[FAIR Plan President Victoria] Roach said that the FAIR Plan has encountered the same problems as regular insurance providers in getting policy rate increases approved to provide enough revenue to cover its risk exposure. Approvals take too long and don’t allow the plan to include the cost of reinsurance — which helps insurers absorb losses — or to factor in catastrophe risk models.

“Our rates are never actuarially sound because not all of our expenses are included in that ratemaking,” Roach told lawmakers. The plan must file for rate adjustments every two years, and she said its last increase requested in 2021 should have been “around 70%” but the plan asked for 48.8%. The insurance department approved only a 15.7% increase, she testified.

At the same time, the huge increase in properties needing last-resort coverage has greatly inflated the plan’s risk liability...

Roach said the FAIR Plan has cash on hand “somewhere in the neighborhood of $700 million.”

Your humble blogger does agree that insurance needs regulation--insurers could collect premiums and flee without having to make good on claims--but as usual California, in the name of protecting the consumer, has made it impossible to supply the product, even by the non-profit entity it created.