The Shrinking of the CA Private Insurance Market, and the Growing Reliance on the FAIR Plan

The recent catastrophic wildfires in communities around Los Angeles are expected to exacerbate California’s insurance struggles. The California Fair Plan, the state’s insurer of last resort, designed to offer basic property insurance to homeowners who are unable to obtain coverage from private insurers. Typically, homeowners turn to the FAIR Plan because private insurers refuse to underwrite their property, deeming it too high risk, such as living in wildfire-prone areas.

The large damages incurred due to the Los Angeles wildfires, threaten the FAIR Plan’s ability to pay for the claims filed by its policyholders using its current funds. To make up the shortfall, the California Department of Insurance (CDI) approved the FAIR Plan’s request to charge private insurance companies $1 billion to help pay claims. Under last year’s CDI insurance reform, insurers are now able to pass on half of this cost to their policyholders, meaning nearly all Californians with a homeowners or renters insurance policy will help bail out the FAIR Plan. As FAIR’s cash surplus continues to diminish, homeowners are still increasingly turning to the FAIR Plan for coverage. Between September 2024 (prior fiscal year-end) and March 2025, active FAIR Plan residential policies increased by 23%. California’s growing reliance on the FAIR Plan is indicative of a deeper issue within its private insurance market.

The insurance availability and affordability crisis has been many years in the making. As more homeowners enroll into the FAIR Plan, that increases the expected cost of being assessed for private insurers. This creates a strong incentive for insurers to exit the California market. Concerns about the solvency and stability of the FAIR Plan were raised by industry and lawmakers long before January 2025. The L.A. fires have forced policymakers to confront these challenges head-on.

Many factors have contributed to the crisis that now faces homes across California. This article will focus on the property insurance market and the fundamental issue that is driving that market’s failure—the mispricing of climate-driven wildfire risk. Mispricing has led to the inability to absorb catastrophic losses, making it increasingly difficult for private insurers to provide coverage while remaining solvent. In consequence, more homeowners are turning to the FAIR Plan, further straining scarce resources and destabilizing the insurance market.

The intended purpose of the California FAIR Plan

The California FAIR Plan was established in 1968 by the state as an insurer of last resort. If a homeowner or business cannot find an insurer in the private market (also known as admitted lines) who is willing to underwrite their property, they can purchase a FAIR Plan policy. This plan is intended to be a temporary solution for homeowners in need of insurance, especially since it offers less coverage than a standard homeowners insurance policy. The FAIR Plan is not backed by taxpayers, but instead, by a private pool of all admitted insurers selling property and casualty insurance in California. In order to do business in the California admitted lines market, a private insurer must agree to cover a share of the FAIR Plan’s total claims when doing so is needed to protect it from insolvency.

FAIR is primarily funded by premiums paid by FAIR Plan policyholders. If the FAIR Plan runs out of money and reinsurance to pay claims from policyholders, it can issue assessments on admitted insurers to pay the remaining bill. Each insurer’s share of the bill is based on its state market share from two years prior. Prior to 2025, FAIR’s last assessed the industry in 1994 and 1995 following the Northridge Earthquake. The threat of future assessments is a significant concern for many insurers in the state. Bearing a larger share of an assessment can potentially wipe out multiple years of profits or even lead to bankruptcy. Several national insurers have created California subsidiaries to keep its books separate from their business in other parts of the country.[1] Whether operating through a subsidiary or not, each insurer manages its market share and sets aside reserves to manage expected cost of assessments.

FAIR Plan’s precarious position and outlook for 2025

As wildfires are becoming more frequent and severe, the private market has taken more losses in recent years. In addition, wildfire losses and the possibility of FAIR assessments have driven private insurers to restrict underwriting policies and non-renew on existing customers. In 2022, seven of the twelve largest insurers in California paused or reduced writing new policies in the state. After having their policies cancelled or nonrenewed, many homeowners were unable to find another admitted insurer to underwrite their properties. In some cases, homeowners can be priced out of the admitted market and cannot hold onto their admitted policy. In consequence, many homeowners have turned to the FAIR Plan, which cannot refuse to cover eligible homeowners as long as they properly fill out applications and pay the premiums. The figure below shows the growth of the FAIR Plan by ZIP code, comparing data from the years 2020 and 2024.

CA FAIR Residential Policies by ZIP Code

Darker ZIP code regions on the figure represent higher concentrations of FAIR Plan policies. As the figure illustrates, the period between 2020 and 2024 saw significant distributional growth in the FAIR Plan. The FAIR Plan’s total exposure went from $115 billion in 2020 to $433 billion in 2024. Like admitted insurers, the premiums the FAIR Plan charges are regulated by the CDI. But the amount of exposure FAIR underwrites is not regulated in the same way as the exposure of admitted insurers. For instance, there is no hard statutory limit to how much exposure the FAIR Plan has on its books. The FAIR Plan cannot deny coverage to anyone who is able to pay the premium. Consequently, all FAIR policies are, by design, for properties that are uninsurable in the private market and are exposed to high risk. As expected, the FAIR Plan is exposed to large concentrations of high-risk properties. The predictable result is that the FAIR Plan's cash reserves were wiped out in January 2025.

The recent $1 billion assessment will put FAIR Plan’s position at under $400 million by July 2025. It is not clear if the FAIR Plan can remain solvent in the coming 2025 wildfire season and beyond. Additionally, there is uncertainty regarding whether the FAIR Plan will be able to continue levying assessments as private insurers increasingly restrict underwriting or exit the California market completely. In response, state lawmakers have proposed legislation with the aim of stabilizing the insurance market.

Mispricing risk is the fundamental problem destabilizing California’s insurance market

One proposed response to the current crisis is the FAIR Plan Stabilization Act. The bill is intended to mitigate disruptive assessments on insurers by enabling the FAIR Plan to spread costs over time through leveraging debt. The key bill provision authorizes the FAIR Plan to access more capital by issuing bonds or establishing credit lines. However, the ability to issue bonds does not guarantee that those bonds would generate adequate funds for the FAIR Plan’s reserves. Like other financial instruments, the bonds need a sufficiently large enough return to attract investors to purchase them. It is not clear how much interest the FAIR Plan will have to pay to bondholders to generate enough funds.

Even if FAIR can sell a significant amount of bonds, these bonds face a form of “basis risk”, meaning there could be a mismatch between the actual financial need of the FAIR Plan at a specific moment and what the bond structure allows for. In other words, when a catastrophic event occurs, the bonds may not provide enough capital to prevent insolvency and the need for assessments. To more reliably stabilize the insurance market, California should also address the fundamental issue that has been plaguing its insurance industry—the mispricing of risk.

Insurance in California is a highly regulated industry. Any rate changes, either from admitted insurers or from the FAIR Plan, must be approved by the CDI. Insurers can request any rate change they deem necessary, but increases of 7% or more require public hearings which lengthen the approval process. This pricing friction has prevented insurers from setting actuarially sound rates. Consequently, private firms operating in California struggle to generate the necessary revenue to accumulate sufficiently large pools of capital to cover catastrophe claims. To avoid insolvency, many insurers choose to reduce or stop underwriting, pushing more homeowners towards the FAIR Plan. However, the FAIR Plan’s underpricing of risk, coupled by the inability to fully manage the risk on its books^[2], has created insolvency issues that spill over to the remaining insurers in the state, causing them to consider scaling back underwriting as well. In summary, regulatory interventions in California’s insurance market have resulted in mispriced insurance premiums, shifting costs from one policyholder to another, and will additionally shift costs from current to future policyholders via the issuance of bonds and other debt instruments.

State legislators and regulators should focus on availability and solvency

In order to truly confront the insolvency and insurance availability issues in the private market, state legislators and regulators need to address the mispricing of climate risk in the insurance premiums. Insuring against catastrophes requires a long-term planning horizon, which necessitates setting rates commensurate to climate risk in order to build sufficient capital reserves to cover infrequent but severe catastrophes. This approach would be more sustainable than a series of piecemeal and ex-post remedies that do not resolve insolvency issues at their core. As longer wildfire seasons and larger wildfire size are predicted to continue, the urgency to set adequate rates accelerates. Focusing on insurance availability and financial solvency is fundamental to promoting market stability for California residents.

Stabilizing the California insurance industry will not fix everything, but it’s a good start

Removing the barriers that keep California insurers from setting actuarially sound rates can solve the availability issue, but it will not address all problems, particularly affordability. Insurance is a vehicle to transfer risk from one balance sheet to another, but it does not make fire risk disappear. If insurers could set actuarially sound rates, all else being equal, premiums would be expected to increase, particularly in areas with higher fire risk. There are several ways to make premiums more affordable. One way is to approve building more homes in relatively safer areas. Another way to lower premiums is to decrease the level of risk for homeowners by implementing policies that can build fire resilience at the home, community, and landscape level, such as creating a defensible space around homes that is cleared of flammable material. Without making these changes, solving the insurance market’s issues will not resolve everything, but it is a good start. After all, a necessary condition for affordability is availability.

Nam Nguyen joined the Climate and Energy Policy Program as a Stanford Postdoctoral Scholar in June 2024. As an economist, his work focuses on wildfire policy challenges in California and the western US that inform interventions that support improved availability of homeowner insurance.

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[1] For example, State Farm Mutual is the parent company of California-based State Farm General Insurance Company

[2] By statute, FAIR Plan cannot deny coverage.