An aerial view of a burned-down community from a 2020 forest fire, representing the devastation an unprepared California FAIR plan could face.

California’s Insurer of Last Resort is Unprepared for a Major Catastrophe

California’s FAIR Plan, the state’s insurer of last resort, admitted it is financially unprepared to cover potential catastrophic losses. 

During a legislative hearing, the plan said it faces an estimated $311 billion in potential losses, up from $50 billion just six years ago.

Why it matters: With inadequate reserves, taxpayers would need to pay billions of dollars to bail out the FAIR plan in a worst-case catastrophe. 

The big picture: FAIR Plan’s coverage has rapidly expanded to 370,000 homeowners, doubling in five years. It could cover 500,000 homeowners by next year, amplifying the risk of substantial losses.

That’s because private insurers have withdrawn. Seven of California’s 12 largest property insurers have limited their coverage, in part due to increasing natural disasters and state-imposed premium limits.

By the numbers: Despite holding approximately $200 million in surplus, FAIR Plan’s lack of financial transparency and exemption from standard reserve requirements raise concerns about its ability to withstand a severe fire season.

  • “We’re one bad fire season away from complete insolvency – it feels like a big gamble,” Assemblymember Jim Wood, a Democrat from Sonoma County, said during the hearing. “If this were on Wall Street, I’m not sure you’d be able to get away with this.”

Zoom in: FAIR Plan faces regulatory limitations that prevent it from adjusting premiums to cover potential shortfalls.

  • FAIR Plan president Victoria Roach told lawmakers that the FAIR Plan needed to raise its premiums by 70 percent on average in 2021. The California Department of Insurance approved a 16 percent increase.

What’s next: State Insurance Commissioner Ricardo Lara plans to introduce reforms allowing private insurers to consider future climate risks and reinsurance costs in premium calculations. The aim is to attract them back to the market and relieve pressure on the FAIR Plan.