Structure of the California FAIR Plan and the financial challenges

The California FAIR Plan (the FAIR Plan) was created to provide insurance for high-risk properties that are difficult to insure through private carriers. It is a private association made up of property and casualty insurers, and catastrophe reinsurers, but it operates under legal requirements set by the state. Insurers doing business in California must contribute to the FAIR Plan based upon their market share. However, as insurers are withdrawing from California due to the increased risk wildfire claims, the FAIR Plan’s exposure has grown significantly in scope resulting in serious financial challenges.

To address these challenges, the FAIR Plan, the insurance of last resort, relies on reinsurance, assessments, and new legislative efforts - such as Assembly Bill 226 known as the FAIR Plan Stability Act - to remain solvent. Below is an overview of the key aspects of the FAIR Plan’s 2025 reinsurance structure, the associated financial challenges, and the tools to address those financial challenges.  

Retention threshold

A retention threshold refers to a specific dollar amount that the FAIR Plan is required to pay for a claim before reinsurance attaches. Currently, the FAIR Plan is required to pay $900 million per wildfire event for reinsurance to attach.

As of April 2025, the FAIR Plan has paid out approximately $1.2 billion in claims related to the Palisades and Eaton Fires, which triggered reinsurance coverage.[1] The FAIR Plan estimates its total loss from the Palisades and Eaton fires at approximately $4.1 billion. For this reason, on February 12, 2024, for the first time in 30 years, an assessment was ordered by the FAIR Plan requiring insurers to cover the fees based on their market share (assessment explained in Section 5 below). 

Reinsurance layers and coverage

The reinsurance program provides an additional $2.63 billion in coverage above the $900 million retention. Once the initial $900 million threshold is met, the next $350 million in claims is fully covered by reinsurance for claims, subject to certain conditions. After this first $1.25 billion ($900 million Fair Plan + $350 million reinsurance), claims payments are shared between reinsurers, the FAIR Plan itself and/or private insurers. This cost-sharing works on different percentages and layers of responsibility, akin to how co-pays and excess layers work in the usual insurance context.

The total coverage caps out at $5.78 billion across catastrophic events annually, which is the upper limit of coverage when co-insurance is included. This cap is based on a modeled probability of a 102-year event.

Major insurers’ responsibility to write wildfire risks—sustainable insurance strategy

To help stabilize the market and reduce dependence on the FAIR Plan, new regulations in 2024 required large insurance companies to start offering comprehensive coverage in wildfire-prone areas as a condition of writing business in the state more generally. These regulations aim to require insurers to write policies in fire-prone, underserved areas, equal to at least 85% of their market share throughout California. However, it will take time for these measures to have a significant impact due to phased implementation. Insurers are required to start increasing their coverage by 5% every two years until they hit the 85% mark.

Assembly Bill 226

Assembly Bill 226 (AB 226), known as the FAIR Plan Stabilization Act, was passed the chambers in the Assembly with a unanimous voting on April 1, 2025, and the urgency clause was adopted. AB 226 is headed to the Senate to become law.

Under AB 226, the FAIR Plan will be authorized to:

1. Request financing from the California Infrastructure and Economic Development Bank (IBank);
2. Issue bonds and borrow funds to pay claims and increase liquidity;
3. Arrange lines of credit or loans backed by FAIR Plan revenues, not by state funds;
4. Impose assessments on participating insurers to repay such financing, subject to the Insurance Commissioner’s approval.

AB 226 gives the FAIR Plan flexibility to manage catastrophic wildfire losses without becoming insolvent. It also clarifies that any such financial instruments (bonds, loans) are not debts of the State of California, ensuring the burden does not fall on taxpayers.

AB 226 includes an appropriation clause, meaning it allows funds to be made immediately available to the IBank for these purposes.

The Insurance Commissioner Lara sponsored the Bill and it gained bipartisan support as well as the FAIR Plan’s.

Assessment

As noted, the FAIR Plan also has the authority to issue market assessments to property insurers doing business in California. An “assessment” is the Fair Plan’s right to—subject to the California Insurance Commissioner’s approval— require insurers licensed to sell property insurance in California to contribute funds to cover FAIR Plan losses based on their market share from two years prior. The last time an assessment was issued was in 1994.

The FAIR Plan has requested an assessment in response to the Los Angeles wildfires requiring the insurers doing business in California to pay $1 billion based on their market share. On February 11, 2025, Commissioner Lara approved the $1 billion assessment in Order No. 2025-1: Approving the California FAIR Plan Association’s Request to Issue. The FAIR Plan does not control how insurers manage the costs associated with the assessment. The assessment is, however, is expected to lead to increased premiums or reduced coverage availability in the private market because insurers may adjust to offset their increased liabilities from FAIR Plan contributions.  Bulletin 2025-4 lays out the full requirements for the recoupment from policyholders.

Financial strains

As of April 2025, the FAIR Plan has received approximately 5,000 claims related to the Pacific Palisades and Eaton fires in Los Angeles. 

With a reinsurance structure requiring a $900 million retention before coverage attaches, and co-insurance obligations for the next $4.85 billion, the FAIR Plan faces severe financial strain.  At least $1.2 billion has been incurred on claims received to date, and the FAIR Plan will likely be liable in the co-insurance structure, or with respect to subsequent events.

Hence, AB 226 is expected to pass to remedy the situation and prevent insolvency. Currently, the coverage the FAIR Plan provides caps at $3 million per house, which is inadequate given the high values of the houses in Malibu and Pacific Palisades. The Sustainable Insurance Strategy published in 2024 aims to expand its commercial plan with coverage up to $20 million per building, with a total aggregate of $100 million per location, and is expected to be implemented by mid-2025. The assessment and AB 226 may help reach the objectives of the Sustainable Insurance Strategy.  

Market implications

Insurers can pass a portion of the FAIR Plan assessments to policyholders through temporary supplemental fees, subject to specific conditions. Insurers may recover up to 50% if the FAIR Plan assessment for amounts up to $1 billion, provided the payment was not covered by reinsurance or other reimbursements. For assessments exceeding $1 billion in a calendar year, insurers may recoup 100% of the amount above $1 billion, again contingent on no reinsurance or reimbursement. Insurers must file a “rule change” application under Proposition 103 and obtain prior approval from the Insurance Commissioner. The filing must occur within six months of the assessment notice.

In Bulletin 2024-8, the Commissioner explained the procedure through which the FAIR Plan’s member insurers may request prior approval under Proposition 103 to seek recoupment from their policyholders for FAIR Plan assessments. An updated guidance was given to the insurers in Bulletin 2025-4, clarifying that the 100% recoupment percentage only applies to that portion of the assessment above $1 billion. This will likely result in increase premiums for private insurance policyholders. However, any surcharge would require the approval of the Insurance Commissioner, and homeowners cannot be surcharged for commercial losses. Since the assessment was ordered for $1 billion, the policyholders are on the hook for 50% of the costs associated with the assessment, also known as recoupment, with prior approval of the Insurance Commissioner under Proposition 103, and with the condition that the assessment is not covered by reinsurance or other recovery mechanism.

The Consumer Watchdog challenged the insurer’s ability to recoup FAIR Plan assessments via temporary supplemental fees levied on policyholder. The Proposition 103 intervenor process will allow a time period to litigate the issue on the recoupment method via a supplemental fee.

On February 15, 2025, the Commissioner issued a press release regarding a request for an “emergency interim rate increase” under Proposition 103 and scheduled an in-person meeting on February 26, 2025 with the insurer, in intervenor Consumer Watchdog group, and his staff to address the matter, as well as consumer impact and transparency in the decision making process.

This insurer covering 20% of the California market, made the request stating that the Los Angeles fires had worsened its financial situation as it awaited the Insurance Department’s decision on rate requests it submitted last summer. The insurer expects to pay more than $7 billion worth of claims from those fires. Commissioner Lara’s department reached to an agreement at the February 2025 meeting for an increase in average %17 for homeowners—down from %22 the insurer originally requested; %15 for renters and condos and %38 for rental dwelling, if approved by administrative law judge Karl-Fredric Seligman, will go into effect in July 2025.

Conclusion

The FAIR Plan’s 2025 reinsurance structure is designed to help manage the financial risks associated with escalated wildfire risks in California. However, the FAIR Plan’s reserves are likely inadequate to cover the remaining claims  after the reinsurance is exhausted and in case of any disaster in the summer of 2025. The tools available or proposed to prevent insolvency will likely avoid insolvency, but is expected to result in further increases to policy premiums.

 

[1] “Approximately 45% of the wildfire claims are reported as total losses, 45% reported as partial losses, and 10% reported as Fair Rental Value only, which covers lost rental income due to a covered peril like fire”. https://www.cfpnet.com/update-from-the-california-fair-plan-6/ access date: April 17, 2025.