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

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.

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Kael and his wife purchased a fixer-upper in 2020, but their idyllic life was soon disrupted when their home insurance was revoked.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

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

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.

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.

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

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.

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.