As losses rise, California’s insurance system faces critical test

They said that the California FAIR Plan, which is the state’s “last resort” insurer, only had $377 million to pay claims that could go up to billions of dollars last week.

Los Angeles fires may have changed life in California, but it’s too early to say for sure. A big part of that change may depend on one question: Will an insurance program that wasn’t well known run out of money?

In 1968, lawmakers in California made the California FAIR Plan to help people who couldn’t get regular home insurance for a number of reasons. But because climate change is making wildfires happen more often and with more force, commercial insurance companies are pulling out of the state. The quickly growing FAIR Plan is now the only thing holding together California’s insurance market, which is becoming more and more fragile.

Because of the fires last week, that keystone may be about to break, which would have effects that would be felt all over California’s economy.

Their office says that as of last Friday, the FAIR Plan only had $377 million available to pay claims. Senator Alex Padilla is a Democrat from California. It’s not clear how many claims the plan will have to deal with yet, but so far, the fires are thought to have caused up to $30 billion in insured losses. That number could go up since the fires are still going.

The FAIR Plan is different from regular insurance companies in that it can’t refuse to cover homes just because they’re in dangerous areas. Major insurers have been putting more and more homes on the FAIR Plan’s books because they are too dangerous, and the risk of wildfires is rising.

In the years 2020–2024, the plan expanded to cover more than twice as many homes, or about 500,000 properties, and tripled in value, to about $500 billion.

The FAIR Plan has been covering more and more homes in the Pacific Palisades. As of Tuesday, the Federal Emergency Management Agency said that the fire in the area had destroyed more than 1,000 homes, damaged 5,427 others, and put 12,250 more at risk.

The FAIR Plan has not told the public how much money it had on hand since the fires started last week. Patrick Dorsey, a spokesman, would only say that the plan “is ready for disaster.”

Staff for Senator Padilla said that the $377 million number came from the office of Ricardo Lara, who is the California Insurance Commissioner and is in charge of the FAIR Plan. The office of the commissioner confirmed that the number was correct.

The FAIR Plan can rely on reinsurance if it doesn’t have enough money to pay all of its claims. Reinsurance is basically insurance for insurers in case their losses go over a certain amount.

Additionally, Mr. Dorsey refused to give further information on the amount of reinsurance coverage the FAIR Plan has. The staff for Senator Padilla said that the plan has $5.75 billion in reinsurance that can be used.

Reinsurance isn’t enough for the FAIR Plan to make up for its losses. It can ask California’s insurance companies for money to make up the difference.

But that demand, called an assessment, would create a new issue, according to Neil Alldredge, president of the National Association of Mutual Insurance Companies. In California, most home insurance policies are written by members of this association based on dollar value.

Mr. Alldredge said that the insurers that stayed in California were already having a hard time making money. He said that some might change their minds about staying if they also get a bill from the FAIR Plan.

“Will some of them judge how much risk they are willing to take? “Certainly,” Mr. Alldredge replied. “None of this will make the market in California more appealing.”

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