California FAIR Plan’s Financial Challenges Amid Wildfire Risks
The California FAIR Plan, a private association of property and casualty insurers operating under state regulations, provides insurance for high-risk properties that are difficult to insure through private carriers. As insurers withdraw from California due to increased wildfire risks, the FAIR Plan’s exposure has grown significantly, resulting in serious financial challenges.
Reinsurance Structure and Financial Strains
The FAIR Plan’s 2025 reinsurance structure includes a retention threshold of $900 million per wildfire event. As of April 2025, the FAIR Plan has paid out approximately $1.2 billion in claims related to the Palisades and Eaton Fires, triggering reinsurance coverage. The total estimated loss from these fires is around $4.1 billion. To address these costs, the FAIR Plan has ordered its first assessment on insurers in 30 years, requiring them to cover $1 billion based on their market share.
Legislative Efforts to Stabilize the FAIR Plan
Assembly Bill 226 (AB 226), known as the FAIR Plan Stabilization Act, was passed unanimously in the Assembly on April 1, 2025, and is headed to the Senate. AB 226 authorizes the FAIR Plan to request financing from the California Infrastructure and Economic Development Bank, issue bonds, and arrange lines of credit to pay claims and increase liquidity. The bill also allows the FAIR Plan to impose assessments on participating insurers to repay such financing, subject to the Insurance Commissioner’s approval.
Market Implications and Future Outlook
The FAIR Plan’s financial strain is expected to lead to increased premiums for private insurance policyholders. Insurers can pass a portion of the FAIR Plan assessments to policyholders through temporary supplemental fees, subject to specific conditions and prior approval from the Insurance Commissioner. The Sustainable Insurance Strategy published in 2024 aims to expand the FAIR Plan’s commercial coverage up to $20 million per building, with a total aggregate of $100 million per location, expected to be implemented by mid-2025.
The FAIR Plan’s 2025 reinsurance structure and legislative efforts like AB 226 are designed to manage the financial risks associated with escalated wildfire risks in California. However, the plan’s reserves are likely inadequate to cover remaining claims after reinsurance is exhausted, and potential future disasters. While these measures may prevent insolvency, they are expected to result in further increases to policy premiums.
