Will California wildfires take down the state's backstop insurance plan?

With the Los Angeles wildfires causing an estimated $17 billion in insurance losses – and potentially up to $150 billion in economic losses, the California FAIR Plan Association (FAIR Plan), the state's insurer of last resort, is also taking a big hit, climate insurance risk analysts are saying.

FAIR Plan president Victoria Roach had said in September that the association was "one disaster away" from collapse. The Los Angeles wildfires are that disaster, said Benjamin Keys, professor of real estate and finance in the Wharton School at the University of Pennsylvania, in a January 10 briefing hosted by the Global Strategic Communications Council, a global group addressing climate, energy and nature issues.

The FAIR Plan, originally established in response to the fire damage from the Watts Riots in 1965, has seen its exposure increase ninefold since 2018, from $50 billion to over $450 billion, according to Keys. If the plan collapses, or drains its capital cushion, that is likely to lead to an assessment on insurance policyholders in the state, Keys added.

"The ways in which these FAIR plans work are really a band aid that is supposed to be very temporary as people transition from one insurance policy to the other," he said. "And it's expanded well beyond their intended use."

The California Department of Insurance (CDI) had just put in place its Sustainable Insurance Strategy reforms at the end of 2024, which allow insurers to now use wildfire catastrophe models and include the cost of reinsurance in their policies. CDI and its commissioner, Ricardo Lara, have said that the reforms will bring back insurers who have left the state or dropped policyholders, and help keep insurance affordable. 

Jessica Scranton

Susan Crawford, senior fellow in the Sustainability, Climate, and Geopolitics Program at the Carnegie Endowment for International Peace, said the reforms are a response to the insurers leaving the state.

"There is frustration in California from insurance companies who say, we know what's going on, we're trying to get off the markets," she said in the January 10 briefing. "It is the regulator who is keeping us from charging actuarial rates there."

If an assessment is needed to save the FAIR plan, putting that burden on insurers instead of policyholders could drive more insurers out of California, Crawford observed.

"From the insurance industry's perspective, the market remains quite constrained, and they want to be able to raise prices to better match their risk," she said. "That's a time will tell story about sustainable assessments, because if there's a need for an assessment against those private insurers by the state insurer of last resort, more insurers will want to exit no matter what."