As California fires become more destructive and insurers face increasing risks, homeowners find themselves more dependent on the California FAIR Plan for insurance coverage.
In this new insurance landscape, there is uncertainty whether private insurers will be called to step in to take over policies from the state-backed program, known as a takeout program.
While California is currently placing barriers to takeouts, such as forcing insurers to provide coverage in high-risk wildfire areas, the situation may shift as more homeowners find themselves relying on the FAIR Plan.
What is the California FAIR Plan?
The California FAIR Plan (Fair Access to Insurance Requirements) is a state-backed insurance program designed to offer basic coverage to homeowners in high-risk areas, particularly those prone to natural disasters like wildfires.
- As private insurers pull policies from this state due to the increased risk and rising costs of reinsurance, many homeowners have no choice but to turn to the FAIR Plan.
- While the program serves as a vital safety net, it’s intended to be a temporary solution.
- The goal of each state’s FAIR Program is to transition policyholders back to the private market, reducing the burden on the state and ensuring long-term coverage options for homeowners.
California Insurance and Fire Risks Today
California has faced devastating wildfires, most recently in Palisades.
As of January 14th, 2025, 20,438 acres have burned while 5,316 structures are destroyed. This event has so far accumulated to be the third most destructive wildfire event in recent history.
In the insurance landscape, this event has caused massive losses, pushing major companies like State Farm to pull back from offering new policies in the state.
As a result, the number of Californians turning to the FAIR Plan has skyrocketed, more than doubling since 2020. As of this year, the FAIR Plan covers nearly 452,000 policies, a stark increase from previous years.
What Are California Insurance Takeouts and How Do They Work?
A takeout occurs when a private insurer acquires policies from a state-backed program, like the California FAIR Plan.
The purpose of a takeout is to transition policyholders from public coverage to private insurers, which helps reduce the burden on state programs while providing insurers with new customers. States with high-risk areas, such as Florida and Texas, have seen routine takeouts as private insurers compete to offer coverage to policyholders.
Takeout Benefits
Private insurers benefit from takeouts as they gain access to a pool of pre-vetted, high-risk customers.
- While these customers may present a higher financial risk, they also offer insurers the opportunity to diversify their portfolios and increase market share.
- Takeouts are especially beneficial for startup insurers, who can quickly grow their customer base without incurring high marketing costs.
- By acquiring policies from a state program, the startup can also demonstrate their risk management capabilities and build credibility with investors.
California’s Approach to Takeouts
California’s approach to insurance regulation has historically been more cautious when it comes to takeouts.
While insurers are required to offer coverage in high-risk areas, such as wildfire zones, the state has made it more difficult for insurers to quickly take out policies from the FAIR Plan. This includes regulations that force insurers to increase their coverage in high-risk areas by 5% every two years until they reach 85% of their market share. This policy is to ensure insurers continue to serve the most vulnerable areas of the state, but it also limits the ability of private insurers to take on these high-risk policies at a fast pace.
Insurance companies that have stopped providing home coverage to hundreds of thousands of Californians in recent years as wildfires became more destructive will have to again provide policies in fire-prone areas if they want to keep doing business in California, under a state regulation announced in early January.
This regulation could result in a rise in premiums for homeowners as insurers pass on the costs of reinsurance, a practice that has previously been prohibited in California. This action could significantly hike premiums without enough to address the underlying risk issues. The ultimate goal of these measures is to encourage insurers to return to the high-risk market, allowing more homeowners to exit the FAIR Plan and transition to private insurers.
Can Takeouts Overcome Current Barriers?
While California’s current regulatory framework is designed to encourage insurers to return to the state’s high-risk areas, it also presents barriers to the traditional model of takeouts.
Reinsurance
By requiring insurers to provide coverage in fire-prone areas and allowing companies to pass on the costs of reinsurance, policyholders in California are very likely to see premium costs increase. As a result, these new requirements may eventually lead to a shift in the market as more homeowners must rely on the FAIR Plan and are unable to afford their premiums.
Rising FAIR Plan Policies
For private insurers, the rise in FAIR Plan policyholders may provide an opportunity for takeouts to become more common in California. As more homeowners face difficulties with the FAIR Plan and the FAIR Plan reaches limitations, insurers may increasingly seek to enter the market by offering better policies with more comprehensive coverage. This could lead to a competitive environment where insurers seek to take on policies from the FAIR Plan in an effort to expand their market share.
WaterStreet & Takeouts
While California’s new regulations and increased wildfire risks may initially thwart the potential for significant takeouts, the growing number of homeowners relying on the FAIR Plan could eventually lead to more opportunities for private insurers.
Here at WaterStreet Company, we have successfully supported our clients in over 15 takeouts since 2005 through our Policy Administration Solutions.
Reach out to WaterStreet Company today to request a consultation and demo.
