California residents have become accustomed to historically large wildfires occurring at an astonishing pace, with eight of the ten largest fires ever recorded in California occurring in the last 10 years. The increasing frequency and destructiveness of wildfires has strained fire insurance systems to a near breaking point, and rural communities are often the most impacted by both wildfires and rising insurance costs.
Fire danger sign on scorched ground outside Klamath. Image source: National Interagency Fire Center
California’s FAIR Plan, commonly referred to as the “insurer of last resort,” was created by the California Legislature in 1968 to act as a temporary safety net for homeowners who were unable to find home insurance from regular providers. Unlike a typical home insurance plan, the FAIR Plan only covers fire damage to structures, not household goods or personal liability. Contrary to public perception, the FAIR Plan is not a state funded insurer. The FAIR Plan is instead a state managed insurance pool comprised of all private insurers licensed to conduct business in California.
When FAIR Plan premiums fail to cover their exposure, the California Insurance Commissioner may levy assessments of up to a total of $1 billion per year (gross, not per insurer) against private insurers based on the market share of these insurers. Ostensibly, private insurers are not permitted to pass the costs of these assessments along to their ratepayers without approval from the Insurance Commissioner.
Trends in FAIR Plan usage
FAIR Plan usage has grown significantly in recent years. In 2009, only 7% of California ZIP codes had FAIR Plan policies that accounted for more than 10% of policies in that ZIP code. By 2022, this was true of 22% of California ZIP codes. FAIR Plan usage tends to be much higher in rural areas, as demonstrated by the below map, published by Avery Bick and Nam Nguyen in this post.
To select a few extreme examples from this map, one ZIP code located in Placer County where the largest community, Foresthill, has a population of 1692, has a FAIR Plan rate of 69.625%. Another ZIP code in Orange county has a FAIR Plan rate of 79.67%, and their largest community, Silverado, has a population of only 932.
While the FAIR Plan was not intended to insure such a large proportion of California’s residents, the reason why that trend is unfolding is quite clear: private insurers are fleeing the state as fast as they can. State Farm (still the largest insurer in California) and Allstate stopped writing new homeowner fire policies in 2022. A series of other large insurers left the state in the following years, with Nationwide, Farmers, Travelers, Tokio, and American National all ceasing to write new policies from 2023-2025.
As FAIR Plan usage has expanded, premiums for FAIR Plan policies have also increased significantly, with some consumers seeing rate increases (rarely) as high as 300% in a single year. While the average FAIR Plan policy costs around $3,200 per year, it is common for policies to cost more than $10,000 per year in high fire risk areas.
Why has rural California been hit so hard by the insurance crisis?
The reason that this crisis has hit rural California particularly hard is relatively intuitive. As phrased by Prof. Minnich of UC Riverside, “People want to live with nature, but they don’t recognize that nature is explosively flammable.”
Housing in wildland urban interface (WUI) areas is much more prone to fire damage. Defined commonly as an area where urban development mingles with undeveloped wildland vegetation, WUI overlaps significantly with areas typically considered rural, but it may also include development on the outskirts of urban centers.
Residential development in WUI is the fastest growing land use type in the United States, with the number of houses in WUI increasing by 46% from 1990 to 2020. California has seen the greatest increase of houses in WUI, with one third of California households in WUI as of 2020. Note the striking resemblance that the below map of change in WUI in California, published by Prof. Miriam Greenberg in this article, bears to the above map of FAIR Plan coverage rates.
The increasing number of houses in high fire risk areas coupled with more frequent and destructive fires have proved a hurdle that insurers are often unable to clear without substantial premium increases.
The future of the FAIR Plan
Increased reliance on the FAIR Plan, along with massive exposure from the Palisades and Eaton fires has led Insurance Commissioner Ricardo Lara to levy the first assessment against FAIR Plan member companies since 1994. The assessment is for the full $1 billion allowed.
Additionally, Commissioner Lara mandated the use of wildfire catastrophe models in FAIR Plan's most recent rate increase application. The rate increase currently proposed would average a 35.8% increase, with about half of policyholders seeing an increase between 40% and 50%.
In addition to these efforts by the Department of Insurance, a variety of legislative measures have been passed or proposed to address California's insurance crisis. One of the most notable among these is Assemblymember Lisa Calderon's (D, 56th District) AB 1680, which seeks to overhaul the FAIR Plan in a number of ways, perhaps most significantly by extending FAIR Plan coverage to water damage, personal injury liability, and other coverages typical of standard home insurance policies.
Conclusions
These and other measures taken by California in response to the Palisades and Eaton fire make clear that policymakers know action is needed, but there is little doubt that they are inadequate. While efforts to mitigate the costs to FAIR Plan policyholders are important, California's insurance crisis is inherent in our homebuilding choices and lack of adequate wildfire hardening. As previous blog posts have noted, wildfire prevention efforts in rural areas of California are severely underfunded. Without serious efforts to mitigate wildfire risk, California is unlikely to halt the exodus of private insurers.
5 comments:
It is interesting to note that FAIR Plans were introduced in 1968 as a temporary solution for property owners who weren't able to find insurance on the traditional marketplace. To this end, I've seen FAIR described as "a short-term solution until the property can become eligible for conventional coverage." The statistics and analysis in this article suggest that the way these policies are being used in places where conventional coverage is no longer an option. Any hope of change in this trend highlights the relationship between insurance and home-hardening / other risk mitigation strategies -- namely that these are the tools homeowners (and insurance markets) will need to lessen risk and dial back dependence on FAIR Plans. The somewhat recent "Safer from Wildfire Regulations" (2023) seek to address this issue using a ground-up approach that combines homeowner and community-level mitigation with transparency measures tied to policy pricing from insurance providers.
The flight of home insurers from California concerned me when I saw it on the news last year. I wasn't aware of the existence of FAIR Plans at the time, so I thought there was no recourse. I noticed that the prevalence of FAIR Plans on your map happened to almost resemble this fire risk map https://osfm.fire.ca.gov/what-we-do/community-wildfire-preparedness-and-mitigation/fire-hazard-severity-zones that I came across while researching a completely unrelated topic. However, I noticed that the Western foothills and mountains surrounding the Central Valley didn't appear to have much prevalence in FAIR coverage. Is this because home insurers have mostly dropped coverage of rural, less affluent houses in the Eastern Central Valley while maintaining coverage in the presumably more affluent Western areas closer to the Pacific?
I feel like the January 2025 LA fires really showed the impact of a lack of fire coverage and the inability of the FAIR plan to adequately provide support for those who need it. On one hand, there was discussion of how expensive the wildfire coverage that affluent residents of the Palisades paid, whether through the FAIR plan or other insurance providers. On the other hand, the media conveyed many heartbreaking stories of residents in Altadena who had recently been kicked off of wildfire coverage why insurers like State Farm, but could not afford to pay for the FAIR plan coverage. Your post mentions that 1/3 of California residents are in WUI areas. If this is the case, it seems that the State needs to come up with a less temporary solution than FAIR to support households getting kicked off of their regular coverage.
As someone who grew up partially in the Altadena area and whose mother still lives there, I have been particularly privy to the devastation of the Eaton fire. While I am sympathetic to the potentially genuine “efforts to mitigate the costs of FAIR Plan policyholders”, I cannot help but feel pessimistic in a world that seems increasingly content with shifting costs to its most embattled citizens. Having walked through the streets of Altadena in the early weeks of January, seeing insurance lawyer advertisements pop up on every billboard and bus stop, fielding calls from property investors before we even knew if our house had survived, I cannot help but feel irate at the thought of increased emotional and physical costs. With that said, this post seems to suggest we are at a bit of a turning point, where the new era of insurance in California is to be defined. Perhaps, there is still time to rewrite the future. I certainly hope so.
This is one of those situations where I think that excessive regulation has potentially exacerbated this issue with home insurance. Under the current setup, California requires that home insurance pricing models be based on past losses as opposed to future projections. Additionally, the price change approval process means that the overall insurance burden in California is fairly low compared to other states, at least outside of these fire-prone areas. I'm not usually fond of market based solutions to problems in the US, but I think it's at least plausible that the price controls in the home insurance market are exacerbating this issue (though removing them entirely likely wouldn't 100% solve the issue either).
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