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 increasing 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.”
The prospect of a state-backed insurance plan unable to cover losses has generated concern in Congress. Last year, Senator Sheldon Whitehouse, Democrat of Rhode Island and then chairman of the Senate Budget Committee, said he was worried about financial strain on Florida’s state insurance plan of last resort and flagged the “possible future requests for a federal bailout.”
“Climate-caused uninsurability has the potential to trigger cascading failures that undermine our entire economy,” the senator said.
Last March, the president of the FAIR Plan, Victoria Roach, suggested to lawmakers that it was assuming too much risk. “If we were a regular insurance company, we couldn’t grow at this rate,” Ms. Roach said during a committee hearing. “As those numbers climb, our financial stability comes more in question.”
She also made a comment that seemed to foreshadow the current fires.
“We are one event away from a large assessment,” Ms. Roach testified. “There’s no other way to say it, because we don’t have the money on hand and we have a lot of exposure out there.”
Mr. Dorsey declined to make Ms. Roach or other executives with the plan available for an interview.
There are other reasons to question the plan’s ability to absorb losses from the Los Angeles fires.
The FAIR Plan, like other California insurers, needs approval from the state insurance commissioner to increase premiums. Mr. Dorsey, the FAIR Plan spokesman, said the plan is required to charge rates that are “sufficient to cover losses and expenses.”
However, Ms. Roach told lawmakers during the hearing that in 2021, the FAIR Plan needed to increase rates by about 70 percent. Perhaps anticipating that regulators were unlikely to approve such a big jump, she said the plan formally requested a rate increase of 48.8 percent.
The insurance commissioner allowed the FAIR Plan to increase its premiums by just 15.7 percent, Ms. Roach said.
Michael Soller, a spokesman for the state insurance commissioner, said some of the costs the FAIR Plan cited in seeking higher premiums, including reinsurance, were prohibited under state rules at the time.
Last April, Ms. Roach appeared before an independent state oversight agency, again testifying about the financial challenges facing the FAIR Plan. One former lawmaker, Anthony Cannella, noted that the arrangement seemed less than ideal: Insurers could decide that some homes were too risky to cover — but if the FAIR Plan lost money on those homes, then those same insurers would have to pay for it anyway.
“It just seems like a house of cards,” Mr. Cannella said.
Ms. Roach said nothing to dispute his assertion. Instead, she laughed.
