Jessica Edmondson Director of Media Outreach | Insurify
California homeowners and businesses could face significant temporary property insurance fees if the state’s insurer of last resort encounters losses that threaten its solvency.
The state’s Fair Access to Insurance Requirements (FAIR) Plan provides coverage for residential and commercial properties unable to secure insurance through the standard market. California mandates private home insurers operating in the state to participate in the FAIR Plan.
Should the plan face a substantial volume of claims from a single event that jeopardizes its solvency, it can request the state’s insurance commissioner to approve a special assessment on FAIR Plan member insurance companies.
“In the highly unlikely event that the Plan is substantially threatened with insolvency, the FAIR Plan may levy an assessment on its member insurers, with the insurance commissioner’s prior approval,” Insurance Commissioner Ricardo Lara stated in a Sept. 3 bulletin to FAIR Plan member insurance companies.
The last such assessment was levied in 1994, according to the bulletin. Member companies can subsequently seek permission from the state to pass some or all of these assessment costs onto policyholders as temporary fees, Lara added.
Increasing wildfire risks and catastrophic weather events have made it challenging and costly for many Californians to obtain homeowners or commercial insurance. Insurance companies also point to Proposition 103, California’s strong consumer protection law, as an impediment to profitability for insurers in the state.
When property owners cannot find coverage elsewhere, they turn to the 50-year-old FAIR Plan. The number of Californians purchasing FAIR Plan coverage has steadily increased recently. In 2023, it reported 89,995 residential and commercial policies. By the first nine months of 2024, this number had risen to 134,576.
The Department of Insurance has repeatedly identified California’s FAIR Plan as a vulnerability within the state’s insurance market.
“While the FAIR Plan is a vital safety net, its expansion creates a negative feedback loop,” noted a July press release from the department. “When the FAIR Plan takes on more customers, it causes traditional insurance companies to withdraw from certain areas, further increasing dependence on the FAIR Plan.”
Insurers may leave high-risk areas to avoid potential major assessments by the FAIR Plan.
Since taking office in 2019, Commissioner Lara has taken multiple actions aimed at stabilizing California’s struggling property insurance market. Updates included raising coverage limits to $3 million for residential properties and $20 million per building for commercial policies.
Lara's Sept. 3 bulletin outlines how insurers can recoup their money from policyholders if DOI approves a special assessment by the FAIR Plan. Insurers may “collect supplemental fees from their own policyholders, in lines that were assessed.” The percentage insurers can recoup varies based on policy types and limits sold in affected lines and assessment amounts.
Allowing FAIR Plan insurers to recoup assessment losses from policyholders will help maintain stability in California’s property insurance market and ensure availability of property insurance in the state, as noted several times in Lara's bulletin.
California insurers have responded to escalating losses and risks by limiting their homeowners', commercial, and fire insurance business in the state; seeking double-digit rate increases; or withdrawing from California altogether. Recently, Liberty Mutual announced it would not renew 17,000 dwelling fire policies while American National filed with DOI to non-renew all its homeowners' policies.
Allowing insurers to recoup FAIR Plan assessments will help ensure “a stable and solvent FAIR Plan,” Lara emphasized in his bulletin.
“I believe this sounder financial sustainability structure is necessary to ensure the FAIR Plan’s financial resiliency,” Lara said. This approach “is similar to other existing California insurance safety net mechanisms... where insurers may assess policyholders in... an insurer insolvency.”
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