Expanded insurance coverage for homeowner and condo associations in California is the centerpiece of another round of changes planned for the state's insurer of last resort.
The California FAIR Plan Association, according to a July 26 agreement with the state's Department of Insurance, said it is starting work on the regulator's plan to expand insurance coverage for farms, builders, businesses with multiple buildings and homeowners and condo associations.
Deputy Insurance Commissioner Michael Soller told S&P Global Market Intelligence that the goal is to create a "high-value commercial plan" with limits up to $20 million that will "close the gap for folks like homeowners associations and condo associations that ... don't have enough coverage."
"If businesses had to go to the FAIR Plan [in its current form], they would have to either add on coverage or go without the coverage beyond the current limit [of $20 million]," Soller said in an interview.
Coverage and timeline
The proposed change would allow for up to $100 million of coverage for businesses with up to five buildings.
The FAIR Plan Association has 30 days from the day the plan was published to submit a plan that creates the new "high-value" commercial coverage option.
Upon approval from the California Department of Insurance, the FAIR Plan will need to submit a filing for the new coverage within 120 days. After the filing is approved by the regulator, the FAIR Plan will have another 120 days to make the policy available to consumers.
The new initiative is a step toward "restoring the FAIR Plan's financial stability and ensuring consumers have access to the coverage they need," Mark Sektnan of the American Property Casualty Insurance Association said in a news release.
"While some details still need to be finalized, we appreciate the department's commitment to implementing reforms that will bring balance back to the insurance market and increase access to coverage for all Californians," Sektnan said.
Financial solutions
Soller said the proposal from Insurance Commissioner Ricardo Lara includes plans to address the financial health of the FAIR Plan and how extreme events are handled, such as the aftermath of the 1994 Northridge earthquake. He said the FAIR Plan had to issue an assessment to its member insurance companies after it had paid out all of its premium and other funds after the quake.
"When that happened, we saw 93% of the insurance companies leave the marketplace almost overnight," Soller said, adding that under current conditions, California residents would potentially be "on the hook" for 100% of the costs of such an event.
Under the proposal, once the FAIR Plan's reserve funds are exhausted and reinsurance and catastrophic bonds have been triggered, insurers must half the cost of losses up to $2 billion in total FAIR Plan claims — $1 billion for residential claims and $1 billion for commercial claims. The remainder could be recouped from policyholders, but only with the regulator's approval.
The FAIR Plan also will have to adhere to new transparency and reporting requirements, such as informing the regulator, the governor and the state legislature about policy counts, the amount of premium collected in wildfire-prone areas and market shares.