California’s insurance system faces a crucial test as wildfires ravage the state, threatening the financial stability of the FAIR Plan, the state’s insurer of last resort. The plan has just $377 million available to pay claims, which could reach billions, leaving officials scrambling to address the growing crisis.
The FAIR Plan was created in 1968 to cover people who couldn’t get standard home insurance due to various reasons. As climate change makes wildfires more frequent and intense, the rapidly growing FAIR Plan has become a linchpin holding together California’s fragile insurance market.
However, with the Los Angeles fires still burning, the plan is on the verge of breaking under the strain. Estimated losses from the fires so far are $30 billion, which could grow as the fires continue to spread.
Unlike regular insurance companies, the FAIR Plan can’t refuse to cover homes in vulnerable areas, leading to a buildup of high-risk properties on its books. This has raised concerns about the plan’s ability to absorb losses.
The FAIR Plan relies on reinsurance to mitigate its risks, but with $5.75 billion in available coverage, it’s unclear whether this will be enough to pay all claims. If not, the plan may demand money from California’s insurance companies, further straining the state’s already fragile market.
Insurers have struggled to make ends meet in recent years, and an assessment from the FAIR Plan could push them to reconsider their decision to stay in the California market. “Climate-caused uninsurability has the potential to trigger cascading failures that undermine our entire economy,” warned Senator Sheldon Whitehouse last year.
The prospect of a state-backed insurance plan unable to cover losses has sparked concern in Congress and among industry experts, who warn that the FAIR Plan’s financial stability is precarious. As the situation unfolds, one thing is clear: California’s insurance system faces an unprecedented challenge.
Source: https://www.nytimes.com/2025/01/14/climate/californias-insurance-fair-plan-fires.html