Insurance for a FAIR Future

As wildfires, floods, and storms continue to ravage communities across the United States, property damages—and claims on homeowner insurance policies—are mounting. The resulting financial losses have led insurers to raise premiums and to pull out of some markets altogether, leaving homeowners scrambling for coverage. Consequently, many property owners who are unable to obtain policies in the private market are forced to use their state-run Fair Access to Insurance Requirements (FAIR) plan, the insurer of last resort. 

As disasters become more frequent and severe, however, FAIR plans in high-risk markets are facing a troubling downward spiral. As they absorb more high-risk policies, and as climate-related losses continue to add up, FAIR plan payout obligations increase. When large-scale disasters strike, the plans may not have sufficient cash reserves to pay out all claims. To meet shortfalls, they may levy assessments or surcharges on private insurers or on FAIR plan policyholders, and potentially also on private insurance policyholders (for example, the Florida FAIR plan’s “hurricane tax”). In turn, regulators in some states may permit insurers to pass those costs on to policyholders through surcharges—effectively spreading the financial burden of catastrophic events across all private insurance consumers. This pass-through cost acts as a disincentive for long-term risk reduction and permits insurers to benefit unfairly from their access to a state market by privatizing profits while socializing losses. 

For example, earlier this year, the California Department of Insurance approved a $1 billion assessment on private insurers to cover Los Angeles wildfire claims on the state’s FAIR plan, with insurers allowed to pass through up to 50 percent, or $500 million, as a temporary supplemental fee on private insurance policies. After that initial assessment is split 50/50 between California policyholders and the insurer, the policyholders are on the hook for all remaining FAIR assessments for any losses that happen for the remainder of the calendar year. When imposed on policyholders, surcharges make insurance less affordable, driving more policyholders into the FAIR plan. When imposed on private insurers, assessments make the business of insurance in the state less profitable, leading more private insurers to raise premiums or withdraw from that state entirely—thereby forcing even more homeowners onto the FAIR plan. The cycle repeats, and FAIR plans become further weakened.

As climate-driven disasters become more frequent and intense, we must ask how insurance systems can be modified to support a more resilient built environment—one where insurance remains both financially viable and widely accessible. 

In Insurance for a FAIR Future, we propose a reimagining of FAIR plans to preserve them as safety nets and also as instruments for driving hazard mitigation and climate adaptation.

The main considerations we address are:

• Barring insurance regulators from the recoupment of assessment costs from policyholders
• Incentivizing risk reduction via hazard mitigation and climate adaptation measures
• Addressing inequitable access to insurance
• Improving FAIR plan balance sheets
• Authorizing FAIR plans to sell catastrophe bonds as a form of reinsurance
• Providing potential additional product offerings

FAIR plans are already under immense pressure from extreme weather, and the situation will only deteriorate if current trends continue. We must rethink and restructure these programs to preserve the availability and affordability of property insurance in high-risk areas. This means promoting resiliency measures, accurately pricing risk, maintaining FAIR plan financial solvency, and protecting those most at risk.

Communities exposed to climate threats need more than just insurance—they need robust support for hazard mitigation and adaptation to safeguard their physical and financial security. While reducing greenhouse gas emissions remains a long-term imperative, in the short term to midterm, we must be strategic and forward-thinking in how we design and govern FAIR plans to ensure they fulfill their purpose in the face of a changing climate.