California’s insurer of last resort is a ‘ticking time bomb’

By Thomas Frank | 03/18/2024 06:59 AM EDT

The state-chartered insurer is in dire financial straits because of climate-juiced disasters, increased enrollment and rules that limit its ability to assess rates.

Dark smoke fills the sky.

Dark smoke fills the sky as the Camp Fire rages through Paradise, California, on Nov. 8, 2018. Noah Berger/AP

California residents would be forced to pay billions of dollars to bail out the state’s insurer of last resort if a major wildfire hits, the insurer’s president warned last week in a startling admission that speaks to the growing cost of climate change.

The comments are the latest and perhaps starkest indication of how intensified disasters due to global warming are eroding the U.S. property insurance industry and shifting rebuilding costs from insurers to the general public.

In California and hurricane-prone Gulf Coast states, property insurers are retreating from risky areas, forcing people to buy coverage from state-chartered insurers that can impose surcharges on insurance policies statewide to pay claims.


The California FAIR Plan has been overwhelmed by a surge of new policyholders and would need to impose charges on millions of insurance policies of varying types throughout the state after a major wildfire.

“We are one event away from a large assessment,” Victoria Roach, president of the California FAIR Plan, told a state legislative committee Wednesday. “There’s no other way to say it, because we don’t have the money on hand [to pay every claim] and we have a lot of exposure.”

A large assessment in California could be the costliest in U.S. history due to the size of the state and large amount of property located in wildfire-prone areas. In recent years, California has experienced some of the nation’s most-destructive wildfires.

During two hours of painstaking testimony before the California Assembly Insurance Committee, Roach indicated an assessment could be $2 billion or more.

“It’s a ticking time bomb,” Michael D’Arelli, executive director of the American Agents Alliance, an insurance agents’ association, said at the hearing. “We are going to have a major event and meltdown.”

State-chartered insurance programs in Florida and Louisiana both have imposed assessments after major hurricanes drained their reserves. The California plan collected $260 million in assessments in the 1990s, when the plan was less than one-tenth its current size.

Today, one major wildfire could force the California plan to impose a surcharge of nearly $1,000 on insurance policies throughout the state, Kim Stone, a lobbyist for Consumer Watchdog, said at the hearing. A series of major wildfires could cost policyholders $3,700.

“We are very concerned about a potential assessment to consumers,” Stone said.

Brewing for several years, California’s insurance crisis burst into national news last May when State Farm, the largest property insurer, said it would no longer write new policies in the state.

Seven of California’s 12 largest property insurers have limited their coverage. In addition, The Hartford, a small insurer in California, stopped writing new homeowners’ policies in the state in February.

The retreat prompted an explosion in the FAIR Plan’s policy count — and its financial vulnerability.

With 1,000 people a day seeking coverage, the FAIR Plan now insures $320 billion worth of a property. That’s a sixfold increase from $50 billion in 2018.

“As those numbers climb, our financial stability becomes more in question,” Roach said.

Florida, Louisiana and coastal Texas have seen similar scenarios since severe hurricanes between 2020 and 2022 chased away insurance companies, forcing hundreds of thousands of people to buy coverage from state insurers of last resort.

Insurance premiums are soaring across the Gulf Coast and in many parts of the U.S. as insurers face increasing losses from disasters and rising costs from inflation, labor shortages and supply bottlenecks.”

Roach gave rare insight into the dire finances of the FAIR Plan, which does not routinely make financial information public unlike counterparts in other states. The FAIR Plan has a $200 million surplus and $2.5 billion in reinsurance, which is a type of insurance for insurers, to pay claims after a catastrophic wildfire.

But Roach warned the program could face $6 billion in claims if the state experienced a wildfire as damaging as the 2018 Camp Fire, which destroyed 18,000 buildings and killed 85 people. When the FAIR Plan drained its reserves, it would have to impose assessments, potentially of up to $3.3 billion.

“We’re like one bad fire away from complete insolvency,” Assemblymember Jim Wood, a Democrat from northern California, said to Roach. “If this were on Wall Street, I’m not sure you could get away with this.”

“I agree with you,” Roach replied.

Part of the problem in California and other states is the inability or unwillingness of state-chartered plans to charge rates that accurately reflect the risk of wildfires or hurricanes to individual properties.

California insurers including the FAIR Plan are restricted by unusual insurance regulations imposed after state voters approved a ballot measure in 1988 to control insurance premiums.

One regulation requires the FAIR Plan to exclude the money it spends to buy reinsurance — a major expense — in its calculations of premiums that are needed.

In 2021, the FAIR Plan needed to raise its premiums by 70 percent on average, Roach told lawmakers. Plan officials, trying to minimize rate shock, asked the California Department of Insurance for a 49 percent hike.

The department approved a 16 percent increase.

“Our rates are never actuarially sound because all of our expenses are not included in that ratemaking,” Roach said.

California Insurance Commissioner Ricardo Lara proposed a regulation Thursday that would ease a restriction barring insurers from using projections of future damage and climate conditions to set premiums. Insurers currently must set annual premiums based on claims over the previous 20 years.

Lara’s proposal would bring California in line with most other states, where property insurers are using increasingly sophisticated climate models to forecast damage from wildfires, storms and flooding.

Days before the hearing, Roach proposed to the state insurance department the idea of easing the reinsurance restriction as part of a series of changes to improve the FAIR Plan’s finances.

“We are deep in discussions with them right now about: How do we change that? How do we make it work so that we can include the net costs of reinsurance in our rates?” Roach said. “We’re hoping to move that forward soon to be able to get our rates closer to where they need to be.”

Correction: An earlier version of this story incorrectly identified The Hartford insurance company as among the 12 largest property insurers in California.