California legislature signs off on FAIR Plan financing

Takeaways:

• Legislature authorizes bonds to finance FAIR Plan shortfall
• Insurer of last resort strained by increase in policyholders
• Consumer group suing to make insurers fund all of the FAIR Plan

California's legislature has passed a bill to help finance the state's home insurer of last resort, but as of September 18, was still making corrections before sending it to the governor.

AB 226, the California FAIR Plan Association bill, has been winding its way through the legislature since January 9, right after the L.A. wildfires. The bill authorizes the FAIR Plan to issue bonds to raise funds to increase its liquidity and ability to pay claims. The FAIR Plan assessed member insurers $1 billion after the L.A. fires, later reduced to $500 million, with policyholders being assessed for the rest. 

The bill could address the FAIR Plan's continued increases in exposure, policy counts, premiums and new business. Insurance regulation and business experts say the plan is overwhelmed although the bill and recent measures by the state's regulator have started to address the plan's issues.

Tom Carvalho, San Francisco-based managing director at Burns & Wilcox, an insurance brokerage, described how widespread the use of the FAIR Plan has become. "They used to be the insurer of last resort, and they've become a genuine, consistent option for certain agents," he said. "You see a lot of agents resorting to the FAIR Plan, possibly too early, and they maybe have other avenues that would be better for their insureds. But it's still a market where there are voluntary options available, and those should be explored."

Funding of the FAIR Plan (and its reinsurance costs) through assessments on insurance policyholders is the subject of a lawsuit brought by Consumer Watchdog against the regulator, the California Department of Insurance (CDI). 

Michelle Youshock, head of personal lines at World Insurance Associates, sees the assessments as necessary. "Without being able to allow pass through costs on the reinsurance, it makes it difficult for insurers to stay in the space," she said. "I'm excited to see better conversation that is more insurer-friendly. It has been consumer-focused, which I appreciate and respect, however, it's important to make sure insurers can show and provide and deliver on their promises."

Being able to issue bonds means being able to borrow from investors, which can spread out assessments against policyholders and insurers over more time, explained Dave Jones, director of the climate risk center at UC Berkeley, and the state's previous insurance commissioner from 2011 to 2019. 

"The sale of the bonds doesn't eliminate the underlying losses of the FAIR Plan, and its need to pay off those losses and borrow money from the bonds to pay off those losses," he said.

However, Jones added, funding sources for the FAIR Plan still have to be found, to meet the bond obligations. "They're still going to have to, in all likelihood, do the surcharges and assessments," he said.

Consumer Watchdog's suit against CDI could decide which parties are ultimately responsible for funding the FAIR Plan, although a final decision could take years through appeals and injunctions, according to Jones.

"If Consumer Watchdog is successful, that means we go back to the way historically it's been done, and the way that it's done in most states, which is that the insurance companies are responsible for a FAIR Plan shortfall," he said. "That is the better approach, because the insurance companies are deciding how many people are going to be on the FAIR Plan by virtue of their decision to write or renew insureds."

If CDI wins the case, the $500 million cap on insurers' responsibility for funding the FAIR Plan would stay intact. "All the rest of us then are on the hook going forward," Jones said, "and there are going to be more of these events where the FAIR Plan runs out of money."