California’s property insurer of last resort is a single disaster away from imposing an assessment on the state’s policyholders to pay the resulting insurance claims – creating uncertainties in an industry that says it is already in crisis.
That’s the assessment of Victoria Roach, president of the California FAIR Plan, the property insurer of last resort in the state, which has taken on a rising number of policies as the California private insurance market continues to shed policies to lower its risk exposure. Roach testified in March before the California Assembly Insurance Committee about the FAIR Plan’s current operations.
"If we have a major event, we're going to look to the voluntary market, which is already in a precarious situation, to cover our losses," Roach told committee members.
The number of policies in the California FAIR Plan portfolio now exceeds 350,000, with the plan’s risk exposure rising from $50 billion in 2018 to $311 billion in 2023, according to Roach. Currently, the plan receives 1,000 policy applications per day, she said.
The reasons for the FAIR Plan, which is not a government entity, becoming a growing player in the state’s insurance market are multifold, according to those in the insurance industry. They range from major, devastating wildfires in 2017 and 2018; “atmospheric rivers” that have caused flooding in recent years; outdated state regulations related to a 1988 initiative, Proposition 103; and a litigation environment that results in excessive lawsuits and litigated claims.
“(Litigation) is a national issue,” Janet Ruiz, director of strategic communications for the Insurance Information Institute (III), told the Southern California Record. “But California also suffers from that due to the volume of claims – it’s the fourth largest insurance market in the world.”
Ruiz pointed out that over the years 2013 to 2022, California property insurers were paying out $1.08 for every $1 in premiums collected. In turn, more insurers are choosing not to renew policies in high-risk areas or not doing new business in the state, she said.
“Our rating system and our regulatory system is outdated and slow,” Ruiz said.
Observers of insurance litigation in the state have also voiced concerns about the level of jury damages awards for personal injuries, construction defects and other claims related to insurance policies.
Reforms supported by the III include allowing insurers to use risk modeling in their rate calculations, allowing them to include reinsurance costs in their premium prices and encouraging mitigation measures by homeowners and at a community level to reduce wildfire risks.
Despite concerns about the insurance load taken on by the California FAIR Plan, Insurance Commissioner Ricardo Lara and the FAIR Plan Association announced that they had agreed to increase coverage on existing commercial and business coverage to $20 million per local, more than double to the current limit. Business and farming groups generally welcomed the increase in coverage.
Ruiz said she was hopeful about potential regulatory reforms and a renewed emphasis on mitigation measures, including the under-grounding of utility wires in fire-prone areas, but said some reform measures would take at least a year to be phased in since property insurance policies are written on a per-year basis.