As the worst fires in California’s history continue to blaze with no end in sight, the state’s residents aren’t just battling wildfires. They are battling an insurance nightmare. The headlines say it all.
“Los Angeles wildfires rage as California homeowners battle an ‘insurance crisis,’” says a headline from NBC.
“Thousands of Los Angeles homeowners were dropped by their insurers before the Palisades fire,” another one from CBS says.
“The insurance crisis that will follow the California fires,” one says in the New Yorker.
Clearly, something is amiss with the insurance market in California.
I wrote about the problem in these pages in 2023 after State Farm, a leading insurance provider in California, announced it would no longer accept new applications in the Golden State.
State Farm said its decision stemmed from various factors, including increased catastrophe exposure and the high cost of doing business in California. Though climate change wasn’t mentioned in State Farm’s press announcement, media companies seized on its exit to argue that global warming was making parts of the United States “uninsurable.”
While it might be tempting to blame the climate gods for driving State Farm and Allstate out of California, there’s a simpler explanation: price controls.
One of the basic tenets of an insurance market is this: as risk goes up, so does price. This is common sense, but remember, we’re talking about California. Unlike those in the other 49 states, California lawmakers don’t think insurance companies should be allowed to pass the costs of reinsurance, the insurance companies purchase to protect themselves, on to policyholders. So, they passed a law making it illegal.
“California is the only state in the country that doesn’t allow insurers’ rates to be based upon actual costs,” said Rex Frazier, president of the Personal Insurance Federation of California.
By prohibiting companies from adjusting rates to account for rising reinsurance costs, lawmakers impelled private insurers to flee the market. This left many homeowners with a single option: the FAIR Plan, a last resort state-backed program designed to provide coverage for property owners unable to secure insurance through the regular private market.
Over the past six years, as California lawmakers made it harder for insurers to price for risk, enrollment in the FAIR Plan swelled, tripling from 127,000 policies in 2018 to nearly 370,000 in 2024.
If creating a portfolio made up exclusively of high-risk customers who’d already been rejected in the regular marketplace strikes you as a dangerous idea, you’re not alone. Industry leaders warned it was a disaster in the making.
“The numbers are frightening. You should be scared. Everyone should be scared,” Mark Sektnan, vice president of the American Property Casualty Insurance Association, told the Sacramento Business Journal in July. “The FAIR Plan is probably the fastest-growing insurance company in the state.”
This was not a Chicken Little-like warning. California created an insurance structure that drove legacy insurers right out of the marketplace and funneled the riskiest properties into a single program that, as of the summer of 2023, faced nearly $280 billion in exposure.
Now, disaster has struck, and the damage is catastrophic. The latest estimates show the LA wildfires will inflict $150 billion in property damage — 10 times the 2017 wildfires (previously the most destructive in California history).
Precisely how much of this damage fell on homeowners in the FAIR Plan is unknown, but an analysis by the San Francisco Chronicle estimated the FAIR Plan is on the hook for around $24 billion.
This is a problem since FAIR Plan President Victoria Roach last year disclosed to the outlet that the insurance provider, as of June 30, had roughly $385 million on hand to cover insurance claims.
This leaves the FAIR Plan about $23.5 billion short, which is undoubtedly why reporters are already using the word “insolvent” in connection with the program, which is not financially backed by the state.
In other words, the FAIR Plan is likely to be wiped out — even though the leaner plans it offers do not cover personal property and only insure homes for the cost of rebuilding (not their market value).
There will be calls for a bailout, of course. Perhaps Gov. Gavin Newsom (D-CA) will find room in his $322 billion budget to make whole those who dutifully paid their premiums and taxes only to be let down by a dysfunctional government that not only couldn’t extinguish these fires but destroyed California’s insurance market with price controls.
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Then again, perhaps asking taxpayers to pony up to rebuild the mansions of celebrities who lost their homes, including Mel Gibson, Mandy Moore, Billy Crystal, Jeff Bridges, and Paris Hilton, is too risky, even for Newsom.
What’s important to remember is it’s not celebrities who were to blame for the insurance mess or Allstate or State Farm. It was California lawmakers who thought it was sensible to pass an economic policy that has been failing for more than 4,000 years.
Jon Miltimore is a senior editor at the American Institute for Economic Research. Follow him on Substack.
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Publish date : 2025-01-14 03:13:00
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