California FAIR Plan Approves $1 Billion Assessment for Wildfire Claims
California FAIR Plan Approves $1 Billion Assessment for Wildfire Claims
California Insurance Commissioner Ricardo Lara has approved a $1 billion assessment on admitted market insurers to help cover claims from the Los Angeles wildfires. The assessment, requested by the California FAIR Plan, is the first in more than 30 years and aims to strengthen the Plan’s financial stability as wildfire losses continue to rise.
Wildfire Claims and Losses
The FAIR Plan has already paid more than $914 million to policyholders, including advance payments, for claims related to the Palisades and Eaton fires. As of February 11, it received 3,469 claims for damage from the Palisades Fire and 1,325 claims from the Eaton Fire. These claims break down as follows:
– 45% total losses
– 45% partial losses
– 10% fair rental value losses (covering lost rental income due to a covered peril)
Major insurers in California have also reported significant losses, with Travelers Companies Inc. estimating $1.7 billion in losses from the recent wildfires. Preliminary estimates suggest insured losses from the L.A. wildfires could reach $40 billion.
Reinsurance and Financial Stability
The FAIR Plan is utilizing reinsurance to help pay claims. It has already met its $900 million deductible and accessed $350 million in reinsurance. The Plan can tap into additional reinsurance layers up to a $5.78 billion limit, which includes co-reinsurance components similar to co-pays. To access all available reinsurance, the FAIR Plan must pay up to $3.5 billion, including the deductible and co-pays.
Funding Challenges and Industry Response
The American Property Casualty Insurance Association (APCIA) has urged California to explore alternative funding solutions, such as catastrophe bonds and lines of credit, to ensure the FAIR Plan remains financially stable. APCIA Vice President Mark Sektnan emphasized the need for actuarially sound rates to rebuild reserves and protect policyholders.
However, consumer advocacy group Consumer Watchdog criticized the assessment, calling it a “homeowner surcharge to bail out insurers.” Executive Director Carmen Balber argued that insurers are responsible for FAIR Plan losses due to their decision to reduce homeowner coverage, and the group is considering legal action to challenge the assessment.
Background on the FAIR Plan
The California FAIR Plan was created in 1968 as a last-resort insurance option for homeowners unable to secure coverage in the standard market. Every property insurance company licensed in California is required to be a FAIR Plan member as a condition of doing business in the state.
With the increasing frequency and severity of wildfires, the financial future of the FAIR Plan remains a critical issue for California homeowners and insurers alike. The ongoing debate over funding solutions and rate adjustments will play a key role in determining the Plan’s long-term sustainability.