California’s property insurance market has been in turmoil for years now, with insurers fleeing the state or reducing their exposure due to rising claims costs and huge losses from wildfires. The situation has left many homeowners struggling to find affordable coverage. Now, proposed changes to the state’s insurer of last resort, the FAIR Plan, threaten to make things even worse.

The FAIR Plan (Fair Access to Insurance Requirements) was established in 1968 to provide basic property insurance to homeowners who can’t buy it through the voluntary market. It was always intended as a last resort for the riskiest properties. But as the voluntary market has shrunk, more homeowners have turned to the FAIR Plan out of necessity. The FAIR Plan now insures over 200,000 homes in California, quadruple the number from just five years ago.

In response to this increased demand, the California Department of Insurance has proposed rule changes to raise rates and tighten eligibility for FAIR Plan policies. The goal is to stop the plan’s mounting losses and huge rate subsidies from other insurers who are required to participate. However, consumer advocates argue the changes go too far and will block access to insurance for tens of thousands of homeowners.

Key elements of the proposed changes include:

– Raising rates: FAIR Plan rates would increase an average of 20%, with even larger hikes in high-risk areas. This comes on the heels of a 18.4% rate increase approved last December.

– Tightening eligibility: Applicants would have to provide proof they were turned down by at least two insurers before qualifying for the FAIR Plan. Currently they only need one denial.

– Limiting policy sizes: FAIR Plan dwelling coverage would be capped at $3 million. Currently there is no limit. This impacts owners of higher-value homes.

– Reducing contents coverage: FAIR Plan contents coverage would be reduced from $1 million to $500,000.

Increasing deductibles: Minimum deductibles would rise to $10,000 for dwellings and $5,000 for contents. Currently they are $1,000 and $500.

Advocates say these changes would significantly reduce options for homeowners already facing a severe lack of affordable coverage. The proof of two denials could knock out many applicants who can only find one insurer willing to reject them. The coverage limits and deductible hikes also reduce protections.

However, the Department of Insurance argues the reforms are necessary to stem losses and stabilize the FAIR Plan. The plan has reported an operating deficit every year since 2015, with shortfalls reaching $24 million in 2020. Wildfire payouts now make up over 60% of claims. FAIR Plan premiums collected only cover about 57% of losses – requiring subsidies from other insurers to keep the plan afloat.

Consumer groups counter that the voluntary market’s pullback is largely responsible for the FAIR Plan’s struggles. They say raising rates and limiting eligibility will just shift more homeowners to the plan. The state must address the underlying problems driving insurers out of California before making access to coverage even harder.

Potential solutions put forward include:

– Finding ways to lower wildfire risk through prevention and mitigation efforts. This would reduce claims costs over the long-term.

– Establishing a catastrophic wildfire fund that spreads risk across all insurers. This would ease the volatility of mega-fire loss years.

– Allowing the FAIR Plan more flexibility to manage risk, like limiting exposure in the highest hazard areas.

– Attracting more private market competition through regulatory and tax incentives.

Without long-term reforms, changes to the FAIR Plan are unlikely to stabilize California’s dysfunctional property insurance market. While the plan needs to take steps to reduce its growing deficits, cutting off homeowners desperate for coverage should not be the solution. California must take a balanced approach that protects access to insurance while bringing costs under control.

The fate of the proposed FAIR Plan changes is still uncertain as regulators weigh feedback during a public comment period that runs through early August. But the situation highlights how precarious things have become for homeowners in wildfire-prone parts of California. With no easy options left, the state faces immense challenges to restore stable and affordable coverage.

Call us 877-239-0067 or visit our HO Insurance Quote page if you are looking for homeowners insurance in California.