California’s FAIR Plan — Under Insured?

California’s insurer of last resort, the FAIR Plan, now insures 370,000 homeowners. That’s more than double the 50,000 homes it covered five years ago. FAIR Plan President Victoria Roach says the number of homes covered could hit 500,000 by sometime next year.

That’s a huge problem because the value of the 370,000 homes is $311 billion and growing. Six years ago the value of the 50,000 homes was $50 billion.

The FAIR Plan problems began when State Farm, Allstate and several other large insurers pulled out of California’s homeowners market. Right now the FAIR Plan has a surplus of about $200 million.

“We don’t have a lot of money sitting around,” she said. “Our rates are not adequate. If we have a major event, we’re going to look to the voluntary market — which is already in a precarious situation — to cover our losses.”

Roach made her comments at a California Assembly hearing on wildfires. Her comments shook one member — Assemblyman Jim Wood — to the core.

“We’re one bad fire season away from complete insolvency — it feels like a big gamble,” he said. “If this were on Wall Street, I’m not sure you’d be able to get away with this.”

Roach told the hearing that a big part of the problem is California regulations not allowing the FAIR Plan to raise rates. Reinsurance costs cannot be figured into rate costs.

California Insurance Commissioner Ricardo Lara is hoping his final push to get his Sustainable Insurance Strategy done will take away some of the pressure the FAIR Plan is under. Lara’s plan, the Sustainable Insurance Strategy, is aimed at bringing the major insurers back into California’s homeowners market.

“It’s clear that we can no longer look solely to the past to help guide us to the future,” Lara said.

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