After the Wildfires, a Predictable Bailout
California’s high-priced state-created insurer of last resort can’t handle claims from the Los Angeles fires. Lawmakers knew this was coming, but did nothing.
SACRAMENTO, Calif. — As I’ve written for years here at The American Spectator, California has incinerated its insurance market by imposing price controls on insurers. Instead of risking their capital reserves by selling home policies that are inadequate to cover potential claims, the state’s largest insurers have been pulling out of the market. Insurance companies are in the business to write insurance, so it’s an indictment of our regulatory system that they don’t want to do business here.
As property owners struggle to find insurance policies, they’ve increasingly had to rely on the FAIR Plan (Fair Access to Insurance Requirements). The state created this industry-funded system in 1968 after the Watts Riots when insurers became reluctant to write policies in high-risk areas. It’s now the system of last resort for homeowners in areas at risk of wildfires. It offers high-priced, barebones coverage that is better than nothing, although just barely.
The whole situation reminds me of a humorous postcard I saw when I first moved to Southern California. It depicted LA’s four seasons: fires, mudslides, earthquakes, and riots. I didn’t realize that it was actually a clever depiction of the constant challenges faced here by insurance companies. Other states have insurance struggles, too, but our state’s ongoing crisis is directly related to the Proposition 103 system voters enacted in 1988.
At the time, insurance rates were soaring, but it wasn’t the result of market failure. The California Supreme Court’s Royal Globe decision in 1979 “gave an accident victim the right to bring a claim for punitive damages against another person’s liability insurer if the victim felt that the insurer had engaged in unfair claims settlement practices,” according to a 2001 RAND report. As a result, payouts, litigation, and premiums soared by 26 percent.
California voters, who are often tasked with sorting through mind-numbingly complex issues at the ballot box, faced a suite of insurance-related initiatives on that year’s ballot. Frustrated by rising prices caused by that court decision rather than insurer “greed,” they approved the worst of the batch. Prop. 103 created a prior-approval rate system that gave the insurance commissioner — now an elected position — the right to approve or even roll back rates. The court eventually overturned Royal Globe, but the damage was set in stone.
Lawmakers have known for years that the system was headed for disaster and that the FAIR Plan wouldn’t be able to handle major wildfire events. Only recently have officials — in the midst of the spiraling crisis — finally approved some decent reforms that, say, let insurers include rising reinsurance costs in rate decisions, speed up the rate-review process, and allow insurers to use forward-looking catastrophe models to set prices. Then Los Angeles turned into a fireball, well before we had a chance to see if these changes would work.
Insurance expert (and my R Street Institute colleague) Jerry Theodorou explained in a Feb. 3 column that the number of FAIR Plan policy holders increased 41 percent from September 2023 to September 2024, yet the plan only “has approximately $200 million of surplus, and $700 million cash on hand. This may not be enough to pay all its claims. The plan is skating on thin ice financially, as it must pay $900 million in losses before receiving up to $2.63 billion in support from reinsurance…This means that the FAIR Plan would have to find more money.”
Sure enough, the Washington Post reported the following this week: “California’s home insurance plan of last resort has run out of money to pay the wave of claims stemming from the Los Angeles fires and will receive a bailout of $1 billion.” The money will come out of the hide of the FAIR Plan’s membership, which means it comes from the insurance companies that are already trying to exit our struggling market.
Again, this shouldn’t have come as a surprise to state officials, despite any blather about “perfect storms.” The 100 miles-per-hour Santa Ana winds combined with unusually dry tinder — largely the result of California’s inadequate brush-clearing and water policies — were a perfect storm of sorts. But it’s a storm that anyone could see coming for years.
As I noted in my testimony before a U.S. House subcommittee last week that looked at regulations that exacerbated the wildfires: “Because of the regulation-driven contraction of our insurance market, many homeowners in the L.A. area didn’t have coverage or were reliant on … the FAIR Plan. There’s much talk of that barebones system facing possible insolvency. Rather than addressing the insurance emergency, the governor and lawmakers found time for a performative special legislative session about so-called oil-industry price gouging.”
In recent months, we’ve read many news reports about the situation. “The FAIR Plan continues to grow in size as consumers find themselves without coverage. As a result, we have doubled in size in the last three years. As those numbers climb, our financial stability comes more into question,” said the FAIR Plan president in March 2024. That led to hearings and some reforms that address some aspects of the plan’s financing, but it was only a matter of time before yet another wildfire season would press it to the breaking point.
It’s about priorities. Our state officials give short shrift to basics such as insurance, water, brush clearance, building regulations, and whatnot and use climate change as a handy excuse for their inaction. There’s probably no other option but the above-mentioned bailout, but it would be nice if California’s leadership was proactive for a change.