California's property insurer of last resort told lawmakers it is not financially prepared to cover the costs of a major disaster in the state.
The plan now faces potential losses of $311 billion, compared with $50 billion six years ago, Victoria Roach, head of the California FAIR plan, said at a state legislative hearing on Wednesday.
“We don't have a lot of money,” she said. “Our prices are not enough. If we have a big event, we will look to the voluntary market – which is already in a risky situation – to cover our losses.
The state-sponsored plan has grown rapidly as private companies including State Farm General Insurance, Hartford Financial Services Group and Allstate Inc. have backed out, citing the double whammy of increasing natural disasters and state limits on insurance premiums.
The plan now covers about 370,000 homeowners, more than double the number five years ago. By next year, its listings could expand to 500,000, increasing potential losses, Roach said.
The warning came a week after a Bloomberg Green investigation revealed how state-backed insurance plans in California and other disaster-prone states are largely unprepared for the rising costs of wildfires and hurricanes.
Roach said the plan has a surplus of about $200 million. They do not make their finances public, nor are they subject to the same types of reserve requirements that apply to private insurance companies.
“We're one bad fire season away from complete bankruptcy — it seems like a big gamble,” said Assemblyman Jim Wood, a Democrat from Sonoma County. “If this were Wall Street, I'm not sure you'd be able to get away with this.”
The plan cannot raise consumer premiums to an amount that covers the deficiency because state restrictions prevent it from factoring the cost of reinsurance into its rates, Roach said.
Roach's testimony also paved the way for state Insurance Commissioner Ricardo Lara, who is pushing to allow private insurers to consider future climate risks and the cost of reinsurance when they set premiums, as long as they agree to provide a certain share of coverage in wildfire-prone areas. Regions. Current rules only allow them to take historical data into account and prevent them from setting premiums on the basis of reinsurance.
Lara's office on Thursday released a 16-page draft regulation that includes a proposal to allow modeling of wildfire exposure. He said the changes would bring private insurers back into the market, relieving pressure on the FAIR plan.
“It is clear that we can no longer look only to the past to help guide us toward the future,” he told reporters.
