California's fire insurer of last resort is being forced to provide comprehensive homeowners policies following a regulatory decision that was aimed at helping residents but may instead end up increasing costs and disrupting the market.
In his Nov. 14 order, Insurance Commissioner Ricardo Lara requires the California FAIR Plan to offer HO-3 policies in addition to its current fire-only coverage by June 1, 2020. An HO-3 plan includes coverage for water damage and personal liability, as well as for fires.
The FAIR Plan, established in 1968, is a pool of all insurers authorized to sell basic property insurance in California. The plan only provides fire insurance as a last resort for homeowners who have either lost or are unable to find insurance in the voluntary market.
Anneliese Jivan, president of the FAIR Plan Association, said in a prepared statement that the coverage change is "a misguided approach that runs counter to our shared commitment" and "would have unintended consequences that could ultimately hurt consumers."
One of the consequences Jivan cited was having to hire people who have expertise with different kinds of insurance, which, she said, would result in "increased operating costs that will be passed along in the form of higher rates for all policyholders."
Because it is an insurer of last resort, the plan's rates are usually higher than those in the voluntary market, said Mark Sektnan, vice president of the American Property Casualty Insurance Association.
"There's no reason to believe that the FAIR Plan can put together an HO-3 policy that will be cheaper than the current situation, which is a basic fire policy and a Difference In Conditions policy, and it certainly will not be any cheaper than agency policies that are available," Sektnan said in an interview.
Rates are at the root of the issue for insurers in California, who incurred almost $25 billion in losses from the devastating 2017 and 2018 wildfire seasons.
Rex Frazier, president of the Personal Insurance Federation of California, said building the admitted market by allowing rate increases is the right solution. He said it makes no sense to add more liability to the FAIR Plan while continuing to suppress prices and "create an inhospitable regulatory scheme for the admitted market."
"The solutions here are obvious," he said. "The Department of Insurance approves filings that include the actual cost of reinsurance and modeled losses for the FAIR Plan, but they won't allow it for the admitted market."
Frazier said the question facing admitted insurers in California is what effect Lara's order will have on the admitted market. He said the FAIR plan was never meant to be a first-line insurer and because it is "adversely selected against," it will always be priced higher than the admitted market.
"Finding a mechanism to get more people to go to the plan is the exact wrong direction," Frazier said in an interview. "The focus should be on restoring admitted market business, and given the decade of rate suppression, it's obvious what the problems are and they stem directly from rate regulation."
Total FAIR Plan exposures grew by 13.5% in the six months ending March 31. According to data compiled by S&P Global Market Intelligence, seven California counties logged exposure growth of more than 100% in that time period: Amador, Butte, El Dorado, Kings, Nevada, Placer and Tuolumne.
Lara also ordered an increase in the coverage limit from $1.5 million to $3 million, as well as the option of no-fee monthly payment plans and the ability for consumers to pay premiums by credit card or a transfer of electronic funds, also without incurring fees.