Crucial Test for California Insurance as Losses Surge

 
The California FAIR Plan, the state’s insurer of last resort, had just $377 million available last week to pay claims that could reach billions, officials said.

It’s too soon to know how the Los Angeles fires will change life in California, but it may heavily depend on the answer to a single question: Will a once-obscure insurance program run out of money?

That program, the California FAIR Plan, was created by state lawmakers in 1968 to cover people who couldn’t get standard home insurance for various reasons. But as climate change makes wildfires more frequent and intense, causing commercial insurance companies to pull back from the state, the rapidly growing FAIR Plan has become the linchpin holding together California’s increasingly fragile insurance market.

Because of the fires that started last week, that linchpin may be about to break, with consequences that would reverberate throughout California’s economy.

As of last Friday, the FAIR Plan had just $377 million available to pay claims, according to the office of Senator Alex Padilla, Democrat of California. It’s not yet known how much in claims the plan will face but the total insured losses from the fires so far has been estimated at as much as $30 billion. Because the fires are still burning, that number could grow.

Unlike regular insurance companies, the FAIR Plan can’t refuse to cover homes just because they’re in vulnerable areas. As a result, as the risk of wildfires grows, homes deemed too dangerous by major insurers have been piling up on the FAIR Plan’s books.

Between 2020 and 2024, the number of homes covered by the plan more than doubled, to almost half a million properties with a value that tripled to about half a trillion dollars.

Homes in the Pacific Palisades have been increasingly covered by the FAIR Plan. Fire in the area has destroyed more than 1,000 homes so far, damaged 5,427, and threatens another 12,250, according to data released Tuesday by the Federal Emergency Management Agency.

Since the fires started last week, the FAIR Plan has refused to publicly disclose how much money it had on hand. A spokesman, Patrick Dorsey, would say only that the plan “is prepared for disaster.”

Senator Padilla’s staff said the $377 million figure came from the office of California Insurance Commissioner Ricardo Lara, who regulates the FAIR Plan. The commissioner’s office confirmed the number was accurate.

If the FAIR Plan doesn’t have enough money to pay all its claims, it can rely on something called reinsurance — effectively, insurance for insurers in case their losses exceed a certain amount.

Mr. Dorsey also declined to provide details about how much reinsurance coverage the FAIR Plan carries. Senator Padilla’s staff said the plan has $5.75 billion in reinsurance available.

If the FAIR Plan can’t make up its losses from reinsurance alone, it can demand money from California’s insurance companies to make up the difference.

But that demand, called an assessment, would set up a new problem, according to Neil Alldredge, president of the National Association of Mutual Insurance Companies, whose members write the majority of home insurance policies by dollar value in California.

The insurers that have stayed in California were already struggling to make money, Mr. Alldredge said. If they also get a bill from the FAIR Plan, some may reconsider their decision to stick around, he said.

“Will some of them evaluate their risk appetite? Absolutely,” Mr. Alldredge said. “None of this is going to make the California market more attractive.”