No. of Recommendations: 2
" The rules change means insurance companies can bill their customers if they are forced to bail out the plan, which has an estimated $200 million in cash and $2.5 billion in reinsurance, according to data it reported last year.
That is likely not enough to cover the Fair Plan’s share of the losses from the fires, forecast at up to $6 billion by analysts at Evercore ISI.
The Fair Plan’s business ballooned after private insurers pulled back from the state, gearing up for a disaster by not renewing policies as their risk models warned of likely conflagrations.
As the blazes spread, estimates of the financial toll keep rising. Analysts at Morningstar DBRS now forecast insured losses of up to $30 billion—the highest for any fire in the world in recent times.
Private insurers have sufficient reserves to cover the expected claims, and none are expected to be pushed into insolvency by the disaster, analysts said.
But the spiraling cost could financially overwhelm the Fair Plan, the decades-old, government-created insurance safety net.
Like similar insurance safety nets in more than 30 other states, including disaster-prone places such as Florida, the Fair Plan wasn’t set up as a typical insurer. It operates with little cash in the bank, as a way of keeping rates—while higher than private insurers’ premiums—within reach of policyholders. Regulated insurers agree to bail out the plan, if needed, as a price of doing business in the state.
The Fair Plan is required to take all-comers, which means its customers are heavily concentrated in fire-prone areas.
A heap of charred rubble marks where Henry and Brenda Sharp’s $2 million Altadena building once stood. The couple, in their 70s, are scrambling to figure out their losses, and how much their insurer, the Fair Plan, will pay.
“It’s burned down,” Brenda Sharp said of their three-bed, three-bath home and three rental units on the property. “Our whole neighborhood burned down.”
In the Sharps’ Altadena ZIP Code alone, the plan had insured almost $1 billion of properties at the end of September, up 47% from the previous year, the latest data show.
If the Fair Plan breaches its financial resources, the state can call on commercial home insurers to pay the rest of the claims, by imposing what’s called an assessment on the companies.
The charge on each company would be roughly proportionate to its share of the home-insurance market. The largest home insurers include State Farm, Farmers Insurance, Allstate and Mercury Insurance.
If the Fair Plan loses more than $2.5 billion, it will likely need to assess, said Michael Wara, director of the climate and energy policy program at Stanford University. “It’s very likely they have lost more than $2.5 billion,” he added."
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