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California FAIR Plan warns major disaster could wipe out insurer of last resort

California’s insurer of last resort warns major wildfire could wipe out funds
California’s insurer of last resort warns major wildfire could wipe out funds 04:00

With more and more insurers pulling out of the state's fire insurance market, homeowners are being pushed into a program called the California FAIR Plan—an insurer of last resort for those in high-risk areas.

But the system is becoming overwhelmed and officials are warning that it may be on the brink of insolvency.

Catastrophic wildfires have turned areas that were never seen as high risk into places where fire insurance isn't even available.

The State is beginning to understand the scope of the problem. Last week, the California Department of Insurance held a hearing about the state of the FAIR Plan, and those who run the program didn't exactly have good news.

"The FAIR Plan continues to grow in size as consumers find themselves without coverage. As a result, we have doubled in size in the last three years," said FAIR Plan President Victoria Roach. "As those numbers climb, our financial stability comes more into question."

By law, every insurer operating in the state must participate in the FAIR Plan. But if losses exceed the plan's funding, the rest must be made up by the insurance companies, who will pass it on to consumers as a surcharge.

Insurance broker Karl Susman told CBS News Bay Area the ballooning size of the FAIR Plan now makes that inevitable.

"FAIR Plan has about $300 billion in total exposure, meaning how much they actually insure, and about $200 million in the bank," he said.  "So, it's not hard to see that in the event of a large, catastrophic event, they're not going to have the funds to be able to pay for it."

"For many companies, this financial burden will be too great," Roach warned the committee. "And it may result in them pulling out and no longer writing insurance in the state."

That's already happening. State Farm just announced that it will not be renewing another 70,000 policies in California.

In response, the state is formulating what's called the "Sustainable Insurance Strategy," that would change regulations to allow insurers to charge more for homes in high-risk areas, basing rates on the actual fire danger of a property.

"What this is going to do is it's going to allow carriers to come back into the market," said Susman.  "Right now, we have rates that are extremely high, and this is what happens when you don't have competition. When you have basically no private industry working and people are relying on the FAIR Plan, the rates going to be high.  So, once the carriers all come back and start competing again, we'll see rates come down."

Harvey Rosenfield, the founder of Consumer Watchdog, said the insurance companies are intentionally forcing homeowners into the FAIR Plan as a way of getting every homeowner in the state to pay the FAIR Plan's losses.

"From our point of view, we see this as creating a scare tactic," he said, "to create an opportunity for the Legislature to bail the insurance industry out by forcing every homeowner in the state to pay off the debts of the FAIR Plan, whether you're in a risky area or not. So, even if you're in downtown San Francisco, and the risk of wildfire is nil and you're not a FAIR Plan policy holder, you could still pay thousands of dollars to bail out the FAIR Plan."

As wildfires grow in size, so does the cost of recovery.  It is a cost that will eventually be borne by everyone, which means no one will be very happy about it.

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