California Regulator Looks to Open the FAIR Plan’s Floodgates

January 28, 2016

In those periods of respite when the State of California is not rocking and rolling atop its various fault lines, it’s often quite literally on fire. In fact, of the top 10 costliest wildfires in U.S. history, California claims seven and sweeps the top five spots. Last year was no exception. The costs of the Valley and Butte fires have been pegged at roughly $1 billion.

Because of the risk of conflagration, Californians pay top-dollar for fire insurance. For some, the risk is so high that insurance is unavailable through traditional channels. In those cases, such residents have the option of joining what’s called the FAIR Plan. Imaginatively named the “Fair Access to Insurance Requirements Plan,” the plan offers an actuarially sound property insurance policies of last resort. Like many products of last resort, the FAIR Plan is intended to be available when the private market is unable to offer coverage.

But California Insurance Commissioner Dave Jones is dismayed at what he sees as the private market failing to offer affordable coverage. There is particular irony in Jones’ declaration that private homeowners insurance is too costly, given that he has sweeping authority under California’s Prop 103 system to reject homeowners insurance rates for being excessive – indeed, the law requires him only to accept rates that are actuarially justifiable.

Last week, in response to this perceived affordability coverage, he announced changes to the FAIR Plan that both increase access to the plan as well as expand the scope of its coverage. To accomplish the first objective, Jones’ order maintains that:

…for all geographic areas in California, persons seeking basic property insurance through FAIR Plan need not show that they have unsuccessfully attempted to obtain insurance through the normal market provided by admitted insurers or surplus lines brokers, because the Commissioner finds that this erects an artificial barrier preventing or delaying consumers from obtaining coverage.

This part of the order deals with what’s known as a “declination requirement.” The idea is that, for the FAIR Plan actually to function as a market of last resort, a consumer should have to demonstrate that they have tried and failed to get coverage elsewhere. When the market is truly unable to provide reasonably priced products in a region, products that have already been approved by the commissioner, gathering proof of a refusal to write coverage is no problem.

Removing the declination requirement, particularly while also removing any geographical limits, is not unlike opening a flood gate to release a wall of water. We don’t have to guess about how the removal of such an “artificial barrier” ends — there is precedent on the matter.

Florida, like California, had its own FAIR Plan to provide property insurance in the era of redlining. In 2003, Florida merged its FAIR Plan with another last-resort instrumentality that provided windstorm insurance in coastal regions, creating what is today known as the Citizens Property Insurance Corp.

In 2007, then-Gov. Charlie Crist modified – though he did not eliminate – the declination requirement for Citizens. To qualify, all residents needed to do was to provide a quote showing a premium 15 percent greater than what Citizens was offering. Because Citizens enjoyed state subsidies and was backed by assessments on virtually every property-casualty insurance policy in the state, pretty much everyone became eligible for the program overnight. In fact, the change to the declination requirement was in no small part responsible for making Citizens, for a number of years, the largest property insurer in the nation’s third-largest state. It’s only recently shrunk back to the levels envisioned when it was created.

The fate of Citizens is not unlike the problems that could soon befall California’s FAIR Plan. It undercuts competition in the voluntary market that provides policyholders with an accurate understanding of their risk.

In that sense, there is a further irony in the commissioner’s expansion of access to, and coverage provided by, the FAIR Plan, since he recently asked insurers within the state to begin divesting from thermal coal and other aspects of the carbon economy. Obviously he, like we at R Street, believes that there is an increased risk posed to Californians by climate change. Yet when it comes to actually reflecting the increased risk of fires in rates, he refuses to take the steps necessary to allow consumers to better understand the personal peril that climate change poses to them.

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