Why the Los Angeles wildfires were so expensive

The FAIR Plan basically has two options, said Jerry Theodorou, who leads insurance research at the R Street Institute, a free market think tank. In the first, the FAIR Plan could issue an emergency assessment that requires private insurance companies in California to chip in to cover its losses. The last time it did that was in 1994 after the Northridge earthquake near Los Angeles. California Insurance Commissioner Ricardo Lara said last year that the chances of another assessment were “highly unlikely.” The private insurers can then pass some of the costs onto their policyholders with rate increases, but the bigger worry is that this could drive even more insurers to leave California or from certain risky regions in the state.

“People are panicking because it hasn’t been done in a long time,” Theodorou said.

The other choice is to issue bonds, effectively taking on debt. California Assembly Bill 226, introduced earlier this month, would allow the state to issue bonds to help pay for the FAIR Plan. But there are unanswered questions about how this would work.

“It’s not an unusual solution,” Theodorou said, noting that municipalities routinely use bonds to pay for expenses. “However, [the bill] doesn’t give any numbers.”

He noted that California has made some recent changes to stabilize its insurance market and that private insurance companies will likely come out of these fires intact since they can balance their books across their portfolios in the rest of the country. Some may eventually start coming back to California and take a bit of weight off the FAIR Plan.