California's FAIR Plan needs a billion-dollar bailout after the deadly LA fires

Other insurers are coming up with ways to lower risks--to people's lives, and to their own bottom lines

It isn't surprising that the California FAIR Plan—the state's insurer of last resort for homes that are otherwise uninsurable—needs an immediate infusion of $1 billion in order to continue to pay claims arising from last month's horrific Los Angeles fires. The fires are shaping up to be the most expensive wildfire event ever, with insured losses of at least $30 billion. As Moving Day readers will understand, the losses faced by the FAIR Plan, which has a total exposure of nearly $5 billion for the Eaton and Pacific Palisades fires, far exceed its cash reserves and reinsurance coverage.

Even after the assessed $1 billion flows into the FAIR Plan from insurers doing business in California, the Plan will have just $300 million in the bank as it confronts the 2025-26 fire season. That's not a great lookout for an entity that faces $458 billion in exposure—a 300% increase since 2020 in the value of the properties it insures.

Nor is this good news for California policyholders. Those insurers are permitted to pass half the assessed amount on to their policyholders. That means $500 million of the $1 billion—a theoretical $60 per California policyholder, according to Politico—will be added to bills that will also include higher premiums the state Commissioner of Insurance is expected to approve in the coming months. California law allows insurers to pass on 100% of any assessment exceeding $2 billion directly to policyholders.

The solvency and morality of state insurers of last resort will be under a spotlight in 2025, particularly in California, Louisiana, and Florida, as large insurers exit climate-risky areas leaving smaller, less sturdy entrepreneurs behind. The policyholder rosters of state plans will continue to swell (report here relies on 2022 data; things have advanced since then) to keep property markets moving. More intense and more frequent weather assaults will continue to hammer homeowners.

Beleaguered Americans will be finding out how surprisingly emaciated their coverage is—whoever sold it to them—and these bloated state plans will increasingly need to be propped up by policyholders and state-issued debt. The whole teetering structure will suddenly be in the news.

What if insurers—both state pools and private companies—actively worked with public authorities to lower risks to lives and properties? Two recent stories, one from the rubble of California's 2018 Camp Fire and the other from storm-wracked coastal North Carolina, demonstrate that good governance and rule-changes coupled with insurer interest can keep communities safer—and thus more insurable.

First, the story from Paradise (h/t Debbra Goh), where almost 20,000 homes, businesses, and community buildings were damaged. Fire experts know that a few steps greatly reduce risks to buildings: clear a five-foot buffer of vegetation around structures, don't allow embers inside buildings, build better roofs and gutters, etc. The Town of Paradise adopted stronger fire-resistant building codes (FEMA case study here), and a nonprofit funded by the insurance industry gave a grant aimed at helping some Paradise residents who were rebuilding their homes seek certification that that their homes met Wildfire Prepared Home standards. I noticed this story when Mercury Insurance issued a press release last month announcing that it would be writing policies in Paradise. The town had invited Mercury reps on a tour to show off their rebuilding efforts.

The Town of Paradise isn't Oz, despite the name. Just 2600 homes have been rebuilt so far, and it's not clear that there will be a sufficient tax base to keep the place rolling. But the town has made a thoughtful start, the insurance industry has made a fuss over its return, and the wildfire risks to people living in those rebuilt houses are likely lower than they were before 2018.

October 2023, Paradise, CA (AP photo/Noah Berger)

Another story comes from coastal North Carolina, where strong winds accompanying storms often cause major damage. There, the state Beach Plan (also known as the Coastal Property Insurance Pool), a nonprofit association funded by insurance companies designed for coastal residents who can't get insurance from private sources, sells wind insurance. These days, the Beach Plan is encouraging policyholders to apply for grants for installing fortified roofs—roofs that can protect homes from wind and water penetration—proactively, before the next storm arrives. The Beach Plan's reasoning is that it can save money on reinsurance by keeping claims at a minimum, and there's evidence that roof fortification substantially lowers both claims and losses.

North Carolina's Beach Plan, like the California FAIR Plan and Citizen's of Florida, is growing very quickly—it now accounts for most of the market for coastal wind insurance there. It's investing tens of millions of dollars of its surplus in fortified roofs, which is good for everyone. Here's the CEO of the Beach Plan, Gina Hardy, speaking about a year ago: “It’s more about people having homes to come home to,” Hardy says. “These fortified roofs are really making a difference in hurricane-type situations. It’s something we feel very passionate about investing in.”*

Long term planning and thought leadership in insurance is rare, because one-year planning horizons and the availability of lots of markets to invest in ("we can leave if it doesn't make sense!") don't encourage these practices. Here's a piece Francis Bouchard of Duke University's Nicholas Institute and Marsh McClennan wrote four years ago in hopes of inspiring his colleagues to take more of an interest in adaptation. I've heard Bouchard speak, and he sounds like a guy on a mission—certainly when it comes to insurer involvement in pushing building codes that would make existing homes safer.

Keeping communities physically safer, and so relatively insurable, is a good direction. It's not enough: changes in land use rules should be part of insurers' political efforts, because the presence of insurance in risky areas arguably amplifies the moral hazard created by allowing building there in the first place. But given the mayhem and despair taking hold in these difficult housing markets, let's take these two stories of incremental progress on safety as positive signs. These two narratives show we can do better.

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*Take a look at the State of Alabama's fortified roof work, which also includes grants to homeowners for repairs and requires insurers to give certified homes a discount.