California Insurers Will Survive Fires—But FAIR Plan Faces Big Questions

The California wildfires that have caused—and continue to cause—death and destruction in the Los Angeles area are a big test for the state's insurance market.

Insurers have reduced their exposure in high-risk areas of California through nonrenewal and a reduced number of product sales to protect their financial positions against major events such as the current wildfires, which are unprecedented in their scale.

But have insurers done enough to mitigate the financial costs of a disaster like the one that is currently unfolding in California? Newsweek asked experts on the insurance market if they expect insurers to survive the financial fallout. Here's what they said.

Karen Clark: Fires May Have Positive Impact on Insurance Market

We can't speak for all insurers, but certainly the major insurers in the state will survive. More worrisome may be the solvency of the California FAIR Plan which has a lot of exposure in the impacted areas.

These tragic fires may actually have a positive impact on the market by expediting the review of the catastrophe models and thereby paving the way for risk-based premiums and advanced risk management tools.

More insurers may be willing to write more business in the state if they can charge adequate rates and effectively manage their exposure concentrations.

Karen Clark is co-founder and CEO of Karen Clark & Company.

Stephen Collier: Further Erosion in California Insurance Market Is Likely

It's a complicated question.

First, insurers have reduced their exposure a lot by reducing the number of policies they are writing in areas with high fire risk in California. Pacific Palisades is one of the areas in which they have pulled back sharply.

Second, one of the results of this pullback has been a concentration of risks in the California FAIR plan—the "insurer of last resort". The big question is whether the FAIR plan will be able to cover these losses through its own reserves and reinsurance.

If it doesn't, then these liabilities will be back with the private insurers, but spread over all of them. So private insurer bankruptcies is likely not the issue here.

Third, that said, this may very well change insurer risk perception and willingness to write in the California market. Due to the FAIR plan and other regulation, any admitted market insurer is going to get exposure to fire risk. There is no way out of it.

We will have to see how things play out, but there is a significant likelihood that these events lead to further erosion in the California market.

Fourth, this is particularly problematic right now, because the California Department of Insurance was just rolling out a new "Sustainable Insurance Strategy" that tried to get insurers to write more policies in high fire risk areas in exchange for "more rate" (i.e. higher premiums). These events cast the prospects of that strategy into serious doubt.

Stephen Collier is professor of city & regional planning at UC Berkeley's College of Environmental Design. He specializes in insurance.

Robert P. Hartwig: Insurers Took Defensive Action to Remain Solvent

I expect all, or very nearly all, insurers exposed to the California wildfires to survive. I am not aware of any insurers currently on the brink of insolvency. If there is a failure, it will likely be a very small insurer likely had some issues prior to the outbreak of these fires.

The bottom line is that policyholders in California have little-to-no risk of their insurer going insolvent.

It's important to recognize that the nonrenewals and moratoria imposed by some insurers in California in recent years were a direct result of the refusal of the California Insurance Department to allow insurers to charge a premium sufficient to cover the risk they assume when writing wildfire-exposed homes in California.

Insurers' defensive actions are designed to ensure that the insurer remains solvent.

In other words, had insurers not taken the actions they did to reduce their exposure, then it's likely their financial positions would have deteriorated materially, which for some may have impinged on their ability to pay claims.

Robert P. Hartwig is clinical associate professor, Finance Department, and director, Center for Risk and Uncertainty Management, at the University of South Carolina's Darla Moore School of Business.

Carolyn Kousky: We Are Locked in to Ever-Escalating Risk

California's insurance market has been in a period of ongoing stress.

Since the 2017 and 2018 wildfires—the most destructive in the state's history until this month—insurers have been fundamentally rethinking their exposure to wildfire in order to protect their bottom line as risks grow.

Beginning around 2019, several insurance companies began to reduce their exposure and cancel insurance policies in areas of high wildfire risk. Major insurers made announcements about their decision to pull back from the California market.

In response, more consumers have had to move into the state's insurer-of-last-resort, the FAIR plan, which has seen an over 200 percent growth since 2018.

The last couple years, the state insurance commissioner has led some important reforms to improve the regulatory environment for insurers and make it easier for them to provide coverage in a catastrophe-prone state.

That said, there's growing concern that our failure to decarbonize at the pace and scale needed has now locked us in to ever-escalating risk. When risks are high, insurance is expensive and hard to get.

Without transformative investment in reducing the losses associated with climate impacts and increasing our resilience, we are headed into an uninsurable future—or a future where insurance is unaffordable for the majority of American households.

We now face urgent policy questions about how we design our markets-of-last resort to ensure inclusive financial protection and fiscal soundness, how we support the broad risk reduction measures now needed, and how we manage climate risks to create communities that continue to thrive in the face of ever-increasing climate disasters.

Carolyn Kousky is associate vice president, economics and policy analysis, at the Environmental Defense Fund. She is author of Understanding Disaster Insurance: New Tools for a More Resilient Future, and vice-chair of the California Climate Insurance Working Group.

What Is California's FAIR Plan?

The FAIR Plan was established under California law in 1968 and is intended to help cover California homeowners who cannot find insurance in the market because they are deemed too high risk by individual insurers.

It is "a syndicated fire insurance pool comprised of all insurers licensed to conduct property/casualty business in California," according to the FAIR Plan website, and it is is "not a state agency, nor is it a public entity. There is no public or taxpayer funding."

The website says: "While we will support homeowners regardless of a property's fire risk, unlike traditional insurers, our goal is attrition.

"For most homeowners, the FAIR Plan is a temporary safety net—here to support them until coverage offered by a traditional carrier becomes available."

As of September 2024, the FAIR Plan's total exposure is $458 billion, a 61.3 percent annual increase.

Its top five areas of exposure are Lake Arrowhead ($9.14 billion), Crestline ($7.8 billion), Big Bear City ($7.105 billion), Big Bear Lake ($6.72 billion), and Pacific Palisades ($5.89 billion).

Updated, 9:30 am ET, 1/15/25: A comment by Carolyn Kousky was added.