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

0:01NPR.

0:11This is The Indicator from Planet Money. I'm Wayland Wong. And I'm Adrian Ma. Kale 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. 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.

0:43Wow, you have a mini horse? Yeah, his name is Willow. And he's raised with dogs, so he pretty much just sleeps on the porch. So life is pretty grand for Willow the mini horse. But Cale had a pretty big snag about a year after buying the house. His home insurance company said it would no longer cover him for fires. His insurers said one problem was too many overgrown shrubs and trees on the property. So Cale got a wood chipper and cleared the land himself. But then, he says, his whole zip code was deemed too risky. Cal couldn't get fire coverage from any insurance company. If you don't have fire insurance, your mortgage will drop you.

1:20So we had to get on a fair plan. 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 L.A. wildfires. 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.

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2:33And 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? 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. Each of those states also has something called an insurer of last resort.

3:06California'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. Amy Bach is the co-founder and executive director of United Policyholders. It's 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. It's called an involuntary association.

3:44What 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. 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. A fair spokesperson told a local news station in 2022 that the average annual premium was around$3 ,200.

4:25And remember, that is just for fire insurance. As a consumer advocacy organization, United Policy Awards, 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. And the only thing a fair plan policy really covers is fire that doesn't cover water, doesn't protect you from lawsuits. 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 L.A. wildfires.

4:57This was 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. 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. Meredith Fowley is a professor at UC Berkeley who studies the economics of wildfires.

5:33She says there's growing concern that fair plan customers are getting stuck in the program. 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 also points out that the fair plan was designed decades before insurance companies and regulators were thinking about how to price climate risk. If you think about the standard risk that insurers have been managing, like dog bites and broken pipes, they can look in their data and they can just estimate like, yeah, you know, in the zip code, we expect to pay this.

6:08Yeah, 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 risks 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. And then there's the matter of paying out. Initial estimates suggest that the LA wildfires could be the costliest fires in U.S.

6:46history. This represents an unprecedented stress test for the California insurance industry. 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. 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.

7:22We 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. 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. For Cale Beck, our homeowner near Monterey, his annual fair plan premium is around$2 ,400. That's below average for the fair plan, although his total home insurance costs have gone up.

7:57Still, Cale says he can live with it for now. 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. Even before the L.A. 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. Officials have also declared a one-year moratorium on insurance cancellations for areas affected by the Palisades, Eton, and other fires. Those homeowners will stay covered for a year, regardless of whether they lost their homes.

8:35This episode was produced by Corey Bridges with engineering by Neil Tebalt. 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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