Who's on the hook for California's uninsurable homes?

Summary

Episode Summary: "Who's on the Hook for California's Uninsurable Homes?"

Podcast: The Indicator from Planet Money
Hosts: Wayland Wong and Adrienne Ma
Release Date: January 16, 2025

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Introduction

In the January 16, 2025 episode of The Indicator from Planet Money, hosts Wayland Wong and Adrienne Ma delve into the pressing issue of uninsurable homes in California. As wildfires increasingly threaten the Golden State, traditional insurance companies are retreating, leaving homeowners reliant on government-backed solutions. This episode explores the intricacies of California's Fair Access to Insurance Requirements (FAIR) Plan, its role in the current insurance landscape, and the looming challenges it faces.

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Personal Stories: Living with Fire Risk

The episode opens with the story of Kael Beck, a long-time California resident residing on the Central Coast near Monterey. Despite being away from the immediate devastation of Los Angeles wildfires, Kael has experienced three evacuations due to fire threats.

Kael Beck (00:33):
"It's a very small street. It's one way in and one way out. And that's one of the scary things as far as fire goes. But it's just like, you know, we have room for all of our animals. We have five dogs and a mini horse."
— Wayland Wong, 00:33

Kael and his wife purchased a fixer-upper in 2020, but their idyllic life was soon disrupted when their home insurance was revoked.

Kael Beck (01:03):
"If you don't have fire insurance, your mortgage will drop you. So we had to get on the Fair Plan."
— Adrienne Ma, 01:03

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The Fair Plan: California's Insurer of Last Resort

With traditional insurers pulling out, the FAIR Plan has become a vital yet strained lifeline for many Californians. The FAIR Plan is a state-backed program designed to provide fire insurance to homeowners who cannot obtain it through private insurers.

Adrienne Ma (01:23):
"The Fair Plan, it's a fire insurance program in California that's known as an insurer of last resort. With traditional insurance companies quitting the state, a growing number of homeowners are turning to the Fair Plan. And that's putting a strain on an insurance system that was already under pressure before the LA wildfires."
— Wayland Wong, 01:23

Amy Bach, co-founder and executive director of United Policyholders, provides insight into the FAIR Plan's structure and challenges.

Amy Bach (04:21):
"It's called an involuntary association. What it means is that if you are what's called an admitted insurance company in the state of California, which means you are fully regulated and in compliance with our laws and regulations, you must participate in the Fair Plan. By California law, they hold their noses, but we need them."
— Amy Bach, 04:21

The FAIR Plan operates similarly to traditional insurers by collecting premiums and investing funds. However, it faces significant hurdles:

• Higher Premiums: Customers often pay more for limited coverage.

  Adrienne Ma (04:58):
  "A FAIR spokesperson told a local news station in 2022 that the average annual premium was around $3,200. And remember, that is just for fire insurance."
  — Adrienne Ma, 04:58

• Limited Coverage: The plan primarily covers fire, lightning, and smoke, excluding other risks like water damage or liability.

  Amy Bach (05:08):
  "The only thing a Fair Plan policy really covers is fire. That doesn't cover water, doesn't protect you from lawsuits."
  — Amy Bach, 05:08

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Growing Strain on the FAIR Plan

As wildfires become more frequent and severe, the number of FAIR Plan participants has surged, stretching the program's resources thin.

Adrienne Ma (05:24):
"In California, where it's become harder to get fire insurance in the last few years, more homeowners and businesses have gone on the Fair Plan. Take Pacific Palisades, which has been devastated in the LA wildfires. One community where State Farm dropped customers last year. In 2020, the Fair Plan had about 350 policies in the Pacific Palisades zip code. By 2024, that number had grown to around 1,400 policies. That represents $6 billion in exposure."
— Adrienne Ma, 05:24

Meredith Fowley, a UC Berkeley professor studying wildfire economics, expresses concerns about the FAIR Plan's sustainability.

Meredith Fowley (06:18):
"The whole goal is to get people back into the larger market. But if it's hard for people to find insurance, they're going to have to stay in the Fair Plan. And the Fair Plan just wasn't designed to be a permanent solution for a large swath of the market."
— Meredith Fowley, 06:18

The FAIR Plan was established in 1968, long before climate change became a central consideration in insurance pricing. This historical context renders the program ill-equipped to handle modern climate-related risks.

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Challenges in Pricing and Payouts

Determining adequate premiums for catastrophic events like wildfires is complex due to their rarity and unpredictability.

Adrienne Ma (07:04):
"And these catastrophic events, because they're so rare, they don't have like, lots and lots of experience to draw on. Are the Fair Plan rates adequate? It is a real challenge to understand what even is an adequate premium to charge."
— Adrienne Ma, 07:04

Furthermore, the FAIR Plan's ability to pay out claims is under scrutiny, especially with the potential of record-breaking wildfires.

Wayland Wong (07:30):
"So how will the Fair Plan pay out claims? Well, the program does have reserves it can draw on. It also has its own insurance, which is called reinsurance. And if the Fair Plan exhausts those sources and still needs to pay out, it would turn to its members, the private insurance companies."
— Wayland Wong, 07:30

This mechanism could inadvertently compel major insurers like State Farm to contribute, even if they've exited the market.

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Regulatory Measures and Future Outlook

California's insurance regulator has implemented measures to stabilize the insurance market amidst these challenges:

• Mandatory Coverage Increases: Insurers are required to enhance their coverage in wildfire-prone areas.

  Adrienne Ma (08:46):
  "Even before the LA wildfires, California's insurance regulator has been trying to stabilize the market and keep companies from quitting the state. One measure requires insurers to up their coverage in wildfire distressed areas."
  — Adrienne Ma, 08:46

• Moratorium on Cancellations: A one-year halt on insurance cancellations in areas affected by significant wildfires ensures continued coverage for homeowners.

  Adrienne Ma (08:59):
  "Officials have also declared a one year moratorium on insurance cancellations for areas affected by the Palisades, Eaton and other fires. Those homeowners will stay covered for a year regardless of whether they lost their homes."
  — Adrienne Ma, 08:59

Despite these efforts, experts like Amy Bach caution that the FAIR Plan is nearing its limits and may require additional support from private insurers, potentially leading to contentious negotiations.

Amy Bach (08:19):
"If [the FAIR Plan] happens, I'm sure it's going to be controversial. I'm sure that there'll be a lot of negotiating on the math."
— Amy Bach, 08:19

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Personal Impact and Conclusion

Kael Beck remains optimistic despite the higher costs associated with the FAIR Plan.

Kael Beck (08:25):
"If you want to live where you can have five dogs and a mini horse in California, you're going to be in fire risk. There's no way around that."
— Kael Beck, 08:25

The episode concludes by highlighting the precarious balance between necessary insurance coverage and the escalating risks posed by climate change-induced wildfires. As California grapples with these challenges, the sustainability of the FAIR Plan and the broader insurance ecosystem remains uncertain.

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Production Credits

This episode was produced by Corey Bridges with engineering by Neil Tiebald, edited by Julia Ritchie, and fact-checked by Sierra Juarez. The Indicator is a production of NPR.

Transcript

[NPR]

NPR.

[Wayland Wong]

This is the indicator from Planet Money. I'm Wayland Wong.

[Adrienne Ma]

And I'm Adrienne Ma. Kael Beck has lived in California for most of his life, and that's meant living with fire risk. He says he's had to evacuate three times, although currently he lives on the Central coast, which is far from the wildfires devastating Los Angeles. He and his wife bought a fixer upper near Monterey in 2020.

[Kael Beck]

It's a very small street. It's one way in and one way out. And that's one of the scary things as far as fire goes. But it's just like, you know, we have room for all of our animals. We have five dogs and a mini horse.

[Wayland Wong]

Wow, you have a mini horse?

[Kael Beck]

Yeah. His name is Willow and he's, he's raised with dogs, so he pretty much just sleeps on the porch.

[Adrienne Ma]

So life is pretty grand for Willow, the mini horse. But Kael hit a pretty big snag about a year after buying the house. His home insurance company said it would no longer cover him for fires.

[Wayland Wong]

His insurer said one problem was too many overgrown shrubs and trees on the property. So Kale got a wood chipper and cleared the land himself. But then he says his whole zip code was deemed too risky. Kail couldn't get fire coverage from any insurance company.

[Kael Beck]

If you don't have fire insurance, your mortgage will drop you. So we had to get on the Fair Plan.

[Adrienne Ma]

The Fair Plan, it's a fire insurance program in California that's known as an insurer of last resort. With traditional insurance companies quitting the state, a growing number of homeowners are turning to the Fair Plan. And that's putting a strain on an insurance system that was already under pressure before the LA wildfires.

[Wayland Wong]

Today on the show, we explain how the Fair Plan works, the role it plays in California's stressed insurance system, and the existential problems it now faces.

[Edward Jones]

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[Adrienne Ma]

Home insurance is typically required for anyone with a mortgage, so without insurance, people can't get a loan to buy a home.

[Wayland Wong]

And insurance premiums are also price signals. A high premium signals to a homeowner that hey, your insurance company thinks this is a risky area. Are you sure you want to live here?

[Adrienne Ma]

But in the last few years, it's the insurance companies who've decided an area is so risky they don't want to be there at all. Faced with catastrophic hurricanes, floods and fires, some insurers have pulled out of Florida, Texas, Louisiana and California. We actually covered this in a previous episode that we'll link to in the show notes.

[Wayland Wong]

Each of those states also has something called an insurer of last resort. California's version is called the Fair Plan. FAIR stands for Fair Access to Insurance Requirements. It's basically only for fire insurance, although it does cover lightning and smoke. The state legislature created the program in 1968.

[Adrienne Ma]

Amy Bach is the co founder and executive director of United Policyholders, a nonprofit that helps people shop for insurance and advocates for consumer friendly regulations. Amy explains that the Fair Plan was created by lawmakers, but it's not a government agency, nor does it use taxpayer money. It's actually privately run by insurance company executives.

[Amy Bach]

It's called an involuntary association. What it means is that if you are what's called an admitted insurance company in the state of California, which means you are fully regulated and in compliance with with our laws and regulations, you must participate in the Fair Plan. By California law, they hold their noses, but we need them.

[Wayland Wong]

And like a traditional insurance company, the Fair Plan makes money by taking in premiums and investing those funds. Now, when it comes to those premiums, Amy says Fair customers tend to pay higher costs for more limited coverage compared with typical insurance plans.

[Adrienne Ma]

A FAIR spokesperson told a local news station in 2022 that the average annual premium was around 3200 dol. And remember, that is just for fire insurance.

[Amy Bach]

As a consumer advocacy organization, United Policyholders, we don't want to see anybody in the Fair Plan because the products they sell are very thin for the protection they provide and they're relatively expensive. You know the only thing a Fair Plan policy really covers is fire. That doesn't cover water, doesn't protect you from lawsuits.

[Wayland Wong]

In California, where it's become harder to get fire insurance in the last few years, more homeowners and businesses have gone on the Fair Plan. Take Pacific Palisades, which has been devastated in the LA wildfires. One community where State Farm dropped customers last year. In 2020, the Fair Plan had about 350 policies in the Pacific Palisades zip code. By 2024, that number had grown to around 1400 policies. That represents $6 billion in exposure.

[Adrienne Ma]

Now, because the Fair Plan is a last resort option and only covers fire, it has just a single digit slice of the California residential insurance market. Ideally, homeowners only stay under the Fair Plan until they can get coverage from a traditional insurance company.

[Wayland Wong]

Meredith Fowley is a professor at UC Berkeley who studies the economics of wildfires. She says there's growing concern that Fair Plan customers are getting stuck in the program.

[NPR]

The whole goal is to get people back into the larger market. But if it's hard for people to find insurance, they're going to have to stay in the Fair Plan. And the Fair Plan just wasn't designed to be a permanent solution for a large swath of the market.

[Wayland Wong]

Meredith also points out that the Fair Plan was designed decades before insurance companies and regulators were thinking about how to price climate risk.

[NPR]

If you think about the standard risk that insurers have been managing, like dog bites and broken pipes, they can look at their data. They can just estimate like, yeah, you know, in the zip code we expect to pay this.

[Adrienne Ma]

Yeah, the bean counters at the home insurance companies have decades worth of historical data to analyze for those common claims. You know, the dog bites and broken pipes that Meredith mentions. Severe weather events are a lot more challenging to predict and price out climate change change risks.

[NPR]

And these catastrophic events, because they're so rare, they don't have like, lots and lots of experience to draw on. Are the Fair Plan rates adequate? It is a real challenge to understand what even is an adequate premium to charge.

[Wayland Wong]

And then there's the matter of paying out. Initial estimates suggest that the LA wildfires could be the costliest fires in US history. This represents an unprecedented stress test for the California insurance industry.

[Adrienne Ma]

So how will the Fair Plan pay out claims? Well, the program does have reserves it can draw on. It also has its own insurance, which is called reinsurance. And if the Fair Plan exhausts those sources and still needs to pay out, it would turn to its members, the private insurance companies.

[Wayland Wong]

These companies would have to pony up an amount that's proportional to their market share in California. If this were to happen, it could mean that even an insurer like State Farm, which has dropped customers, could end up indirectly paying out money to those same customers.

[Adrienne Ma]

We reached out to the Fair Plan, and a representative declined our request for an interview. The president of the Fair Plan, though, did say at a hearing last year that the program was one event away from asking insurance companies to kick in funds. Amy Bach, the insurance consumer advocate, she says this would be another test for the Fair Plan.

[Amy Bach]

If that happens, I'm sure it's going to be controversial. I'm sure that there'll be a lot of negotiating on the math.

[Wayland Wong]

For Cal Beck, our homeowner near Monterey, his annual Fair Plan premium is around $2,400. That's below average for the fair, although his total home insurance costs have gone up. Still, Kale says he can live with it for now.

[Kael Beck]

If you want to live where you can have five dogs and a mini horse in California, you're going to be in fire risk. There's no way around that.

[Adrienne Ma]

Even before the LA wildfires, California's insurance regulator has been trying to stabilize the market and keep companies from quitting the state. One measure requires insurers to up their coverage in wildfire distressed areas.

[Wayland Wong]

Officials have also declared a one year moratorium on insurance cancellations for areas affected by the Palisades, Eaton and other fires. Those homeowners will stay covered for a year regardless of whether they lost their homes. This episode was produced by Corey Bridges with engineering by Neil Tiebald. It was edited by Julia Ritchie and fact checked by Sierra Juarez. Kicking Cannon is our show's editor and the indicator is a production of npr.

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