LA fires could drastically drive up insurance premiums — and test California’s new market rules

By Free Republic | Created at 2025-01-11 21:40:40 | Updated at 2025-01-11 23:51:36 2 hours ago

LA fires could drastically drive up insurance premiums — and test California’s new market rules
Santa Monica Daily Press ^ | January 10, 2025 | Levi Sumagaysay, Jeremia Kimelman

Posted on 01/11/2025 1:17:16 PM PST by Angelino97

The deadly and destructive fires in Los Angeles — which some say could be the costliest in the state’s history — will further strain the insurance market and worsen the financial position of California’s insurer of last resort.

Data about Pacific Palisades, the devastated LA neighborhood whose residents include movie stars and directors, help illustrate the insurance problems plaguing the state. An estimated 1 in 5 homes in the upscale neighborhood were covered by the insurer, known as the FAIR Plan.

Property owners in California have increasingly been turning to the plan, a pool of insurers required by state law to sell fire policies to consumers who can’t find regular insurance elsewhere. That’s because, for the past few years, insurance companies have been canceling policies or refusing to write new ones in California, citing rising risk of wildfires. As a result, the FAIR Plan’s number of homeowner policies grew to more than 451,000 as of September 2024, an increase of 123% over the past three years.

Last year, State Farm decided not to renew tens of thousands of policies in the state, including about 1,600 in Pacific Palisades. As of September, there were 1,430 residential FAIR Plan policies in the enclave’s 90272 ZIP code, an 85% increase from the previous year, according to the plan’s latest data.

Elsewhere in Los Angeles, some cities and neighborhoods with spiking FAIR Plan use have either been evacuated or are near the fires. They include the 90402 ZIP code in Santa Monica, where FAIR Plan policies have increased 128% year over year.

Now, after at least five people have died and more than 2,000 structures have been destroyed in the LA area, and as those who have lost their homes begin to submit claims with their insurance companies, there’s a big question mark around the state’s plan to try to ensure insurance availability. A plan touted by Insurance Commissioner Ricardo Lara as a way to get insurance companies to write policies in the state again just became effective at the beginning of the year.

The so-called sustainable insurance strategy includes having the state speed reviews of rate hike requests from insurance companies and allow insurers to use catastrophe models when setting their premiums. Insurers would also be able to adjust for the cost of their own financial backstop, known as reinsurance. The concessions mean insurers will raise premiums for the state’s property owners but in exchange must write or maintain a certain number of policies in high-risk areas.

“There’s no doubt that this massively complicates things,” said Stephen Collier, professor of city and regional planning at UC Berkeley whose research focuses on insurance, climate change and urban planning. “It couldn’t be at a worse possible time.”

Lara also told CalMatters today that “of course this is going to complicate an already complicated market.”

But the commissioner said he has been in touch with insurance companies in the past couple of days: “The reforms are in place now, the (insurers’) commitments are in place now. As far as my conversations as recently as last night, those still stand and move forward.”

In addition, the FAIR Plan, the insurer for many of those affected by the current blazes, will likely have to pay claims for tens of billions of dollars in damages.

Collier said that massive potential liability could make insurers “think twice” about whether they want to keep writing policies in the state. “Having all this risk transferred to the FAIR Plan doesn’t get insurers off the hook if they’re still writing in the California market,” he said. That’s because insurers in the state are on the hook to pay into the plan when it can’t cover all its claims.

Pacific Palisades is on the FAIR Plan’s list of top five areas in Southern California with the highest wildfire exposure, or potential insurance payout — at nearly $6 billion. Other neighborhoods in the top five, in order, are all in San Bernardino County east of Los Angeles: Lake Arrowhead ($9.14 billion), Crestline ($7.81 billion), Big Bear City ($7.1 billion) and Big Bear Lake ($6.73 billion).

The FAIR Plan’s total exposure statewide as of September, the end of its fiscal year, is $458 billion.

Victoria Roach, president of the FAIR Plan, has over the past couple of years raised concerns about the plan’s finances as its number of policies grows. For example, in testimony before the California Assembly Insurance Oversight Committee last year, she said “as those numbers climb, our financial stability comes more in question.”

Roach also said at that same hearing that the FAIR Plan was “one event away from a large assessment.” An assessment is when the plan does not have enough reserves to pay claims and must turn to its member insurers to ask them to contribute to doing so. The FAIR Plan will impose a surcharge on insurance companies based on their market share in the state.

Roach was unavailable for an interview on Wednesday, but Hilary McLean, a spokesperson for the FAIR Plan, said: “We are aware of misinformation being posted online regarding the FAIR Plan’s ability to pay claims. It is too early to provide loss estimates as claims are just beginning to be submitted and processed.”

McLean added that the plan has “payment mechanisms in place, including reinsurance, to ensure all covered claims are paid.”

Meanwhile, the commissioner’s plan to right-size the insurance market had barely gotten off the ground when the LA fires started on Tuesday, having launched less than a week before.

Denni Ritter, vice president at American Property Casualty Insurance Association, said the state’s “horrific fires underscore the importance of this work” to reform California insurance rules. “We remain committed to working with California’s leaders to restore the health of our insurance market so that Californians can access the coverage they need,” she added.

Lara pointed out that his reforms include an agreement with the FAIR Plan. This provides the Insurance Department with “data to track any solvency issues” with the plan and allows insurers to proactively ask for premium increases for future catastrophic claims, which Lara said “creates another set of certainty” for insurers that should keep them in the state’s market.

The message from Lara and some other experts is clear: Insurance customers are facing possibly drastically higher premiums in the short run, with the hopes that it will all lead to stabilization of the market in the long run.

Lara’s predecessor as state insurance commissioner, Dave Jones, said “with the LA fires, once they have a handle on their losses, insurers will seek even higher rate increases.”

Said David Russell, professor of insurance at Cal State University Northridge: “These fires are validating the rate increases and (insurance) industry pressure over the last 18 to 24 months.” He added that “ultimately we need those rate requests to be granted,” and quickly.

Forecasting company AccuWeather’s preliminary estimate of the economic toll from this set of fires is $52 billion to $57 billion — and they are continuing to burn. Dan DePodwin, senior director of forecasting operations at AccuWeather, said that includes an estimate of the insured losses, which may account for 25% to 50% of the total, though it is too early to know for sure. The estimate also takes into account possible future economic losses, including to people’s health, businesses and the infrastructure around the major urban area.

“It could be the costliest set of fires in modern California, if not U.S., history,” he said.

TOPICS: Business/Economy; Government; News/Current Events; US: California
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1 posted on 01/11/2025 1:17:16 PM PST by Angelino97

To: Angelino97

Can you say, “Federal Bailout”?, I knew you could.

2 posted on 01/11/2025 1:18:00 PM PST by dfwgator (Endut! Hoch Hech!)

To: dfwgator

Yep, we will all be paying for it, even under Trump. I fully expect Congress to bypass him and pay California to rebuild.

3 posted on 01/11/2025 1:21:15 PM PST by CatOwner (Don't expect anyone, even conservatives, to have your back when the SHTF in 2021 and beyond.)

To: Angelino97

4 posted on 01/11/2025 1:23:48 PM PST by E. Pluribus Unum (The worst thing about censorship is █████ ██ ████ ████ ████ █ ███████ ████. FJB.)

To: Angelino97

Because when it was too risky for an insurer for the rate that is allowed, Mr. and Ms. Taxpayer were made to cover the elite’s mansions.

5 posted on 01/11/2025 1:24:57 PM PST by 9YearLurker

To: Angelino97

The only solution is for individauls to form private mutual assurance associations that are not corporate public insurance companies that are subject to the myriad of bizarre state laws and regulations. Christian groups run private mutual heath associations outside traditional health insurance companies and they seem to function very well.

6 posted on 01/11/2025 1:25:53 PM PST by allendale

To: Angelino97

As I read this week the FAIR plan only has about $200 Million in cash so they can’t pay off the massive claims they might receive. Yes a bailout will be requested but NC and the rest of the states hit by the hurricane still have problems.

To: Angelino97

It’s much cheaper to pay for wildfire mitigation than recovery...

8 posted on 01/11/2025 1:28:57 PM PST by TheDon (Resist the usurpers! Remember the J6 political prisoners! Remember Ashli Babbitt!)

To: Angelino97

In my career, I have had to work with underwriters (as an employee) to reduce the risk to the insurance companies who sold policies to my company. An inspector would come in, identify those areas that pose a risk of a claim, and recommend mitigation and improvements. Based on the inspections and customer reaction to the observed risks, the insurance company would set the rate.

I'm surprised that the insurance companies didn't perform the risk assessments and recommendations to policyholders in California. Imagine how many homes, churches, and other buildings would have been saved if such a process was followed in the years preceding the fire. That "ounce of prevention" over the "pound of cure" that some politicians talk about.

9 posted on 01/11/2025 1:33:53 PM PST by asinclair (It's too bad there will never be a RICO indictment of the DNC.)

To: Angelino97

Bear in mind that structures might cost 30% more to build in California than elsewhere.

Here in Florida building cost might be around $140/square foot.

A house that costs $400,000 to build elsewhere might cost $520,000 in California.

Something like 12,000 structures have burned.

That’s something like $6 billion. Maybe a third of the structures are three times the cost to add another $4 billion. There’s also debris removal costs - maybe $500 million more.

To: Angelino97

Somebody needs to throw that dirtbag Ricardo Lara in jail. Thieving RAT. He’s the breakfast taco that caused this mess and now the aho wants to stick it to the insurance companies. Incompetent liberal pig. We need to get Fat Alvin the Chumpmunk to charge Lara with 34 felonies.

11 posted on 01/11/2025 1:37:03 PM PST by FlingWingFlyer (Deport that piggie, Marchan!!! NOW!!! Send his butt back to Colombia! He's milked America enough.)

To: Angelino97

12 posted on 01/11/2025 1:37:04 PM PST by FlingWingFlyer (Deport that piggie, Marchan!!! NOW!!! Send his butt back to Colombia! He's milked America enough.)

To: TheDon

“It’s much cheaper to pay for wildfire mitigation than recovery...”
Try to tell a Democrat EPA lover and Ghia worshiper that.

13 posted on 01/11/2025 1:40:11 PM PST by rellic (no such thing as a moderate Moslem or Democrat )

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