California’s home insurance plan of last resort, designed for people who can’t get coverage on the private market, does not have enough money to pay claims from the Los Angeles wildfires and is getting an infusion of cash from regular insurers.
State regulators said Tuesday that they will allow the program, known as the FAIR Plan, to collect $1 billion from private insurance companies doing business in California to pay its claims. That is likely to drive up insurance costs for homeowners across the state.
The situation marks a perilous new stage for California’s home insurance market, which had already been reeling from wildfires made more frequent and intense by climate change. Facing growing losses, major insurers like State Farm were already pulling back from the state, making it harder for homeowners to find coverage.
Now the pressure to leave will be even greater.
The $1 billion assessment is the largest since the FAIR Plan was created in 1968, and the first time since the 1994 Northridge earthquake near Los Angeles that the FAIR Plan has faced claims it can’t pay on its own. The fee will be divided among insurers based on their market share, as required by state law.
“The number one priority right now is that the FAIR Plan pay out its claims,” Ricardo Lara, California’s insurance commissioner, said in an interview. “The FAIR Plan, the way we’ve set it up, is doing what it’s supposed to.”
As of 2023, the state’s largest insurers by market share were State Farm, Farmers Insurance Group and CSAA Insurance, according to data from AM Best, a company that rates the financial strength of insurers. Other major insurers in the top 10 included Liberty Mutual, Allstate and Travelers.
State regulations allow insurers to pass along as much as half the cost of the assessment to customers, in the former of higher charges. Insurers must absorb the other half.
“They’re supposed to eat that through their profits,” Mr. Lara said. “Consumers cannot shoulder 100 percent of this cost.”
Those companies could face bills from the FAIR Plan assessment in the tens of millions of dollars or more — and by state law, they must pay within 30 days. Leaving California would not relieve insurers of their share of the assessment for the FAIR Plan. But they might conclude that continuing to write home insurance policies in the state has become too risky.
The problems facing insurers in California did not start with last month’s wildfires in Los Angeles. Fires in 2017 and 2018 wiped out a quarter-century of profits for insurers, leading many carriers to reduce the number of homeowners they covered. Making the problem worse was the fact that California regulators have historically made it difficult for insurers to raise their premiums.
Still, the Los Angeles fires made insurers’ financial position even more tenuous. Last week State Farm asked state regulators for an urgent 22 percent rate increase, which it said was necessary “to help avert a dire situation for our customers and the insurance market in the state of California.” Mr. Lara’s office said he is still reviewing the request.
As private insurers reduce their business in California, more homeowners are being pushed into the FAIR Plan, which was designed as a plan of last resort but is increasingly covering more and more homeowners. Between 2020 and 2024, the number of homes with policies under the FAIR Plan more than doubled to almost half a million properties with a value of about half a trillion dollars. Many of those homes were in the area devastated by the Palisades fire.
As of Feb. 4, the plan had received more than 3,400 claims from the Palisades fire, and more than 1,300 claims from the Eaton fire. About 45 percent of those claims were for “total losses” — homes that were completely destroyed.
As wildfires get worse, a vicious cycle is emerging: More insurers leave, pushing more homeowners toward the FAIR Plan, which is less able to cover claims after the next disaster, leading to more assessments on regular insurers, pushing them out of the state even faster.
Mr. Lara is trying to break that downward cycle. In December, he introduced changes that would allow insurers to charge higher premiums in exchange for covering more homes in high-risk areas. That would take pressure off the FAIR Plan and reduce the incentive for private insurers to leave the state, he said.
Mr. Lara said other changes are needed, including giving the FAIR Plan the ability to borrow money through bonds or a line of credit. That way, if future wildfires produce claims that the plan can’t cover, it wouldn’t necessarily need another assessment.
That proposal has support from the insurance industry. “The state must explore a diverse range of funding solutions,” Mark Sektnan, a vice president for the American Property Casualty Insurance Association, said in a statement. He also said that state regulators must allow the FAIR Plan to charge higher premiums.
But the change can’t come from the insurance sector alone, Mr. Lara said. Officials need to tighten the rules around how and where people construct homes and infrastructure, he said, so that communities suffer less damage from future fires.
“The responsibility now is on local governments to build better,” Mr. Lara said.
