Assembly Insurance Committee, Wednesday, January 28, 2026
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Assembly Insurance Committee California State Assembly
Follow its sittingsSpeaker 3
Yeah. Okay. Alright. I'm sure you all have the presentation, so we can just move forward. Or do you
Speaker 3
Oh, there we go. Okay. Thank you. Okay. So we're gonna start this morning with a little bit of background on the fair plan just to kinda level set where we've been and kind of where we're going.
Some of you may have heard some of this before, but I always find it's a good idea to, get us on the same page in terms of the current intent of the California Fair Plan and why we're here. So, the Fair Plan, as you know, was established by, statute. We are a involuntary association, so not not really an insurance company. We're an association. Involuntary, meaning all property insurers in the admitted market in California are automatically member companies of the California Fair Plan.
We have a plan of operation which helps us administer the statute and governs us. That plan of operation is managed through the Department of Insurance. So the Department of Insurance regulates us. They work with us and our board, but, ultimately, they have final say on the plan of operation and how we operate. K.
So the Fair Plan is, by statute, the insurer of last resort. That means that we have approximately a 118 admitted carriers in the state. And if insurance isn't available through those admitted carriers, the consumer can go to one of the 132 plus surplus lines carriers in the state. And then if they are unable to find insurance, within the surplus lines carrier, they can come to the fare plan. Obviously, that's not exactly how it's working right now, in part because there's not a lot of choice in the admitted market for consumers, and so they're coming directly to us.
And as madam chair said, when there's nonrenewals going on in the admitted market, we see our growth escalate because we start picking up a lot of those policies. When we were established in in the sixties, we actually were established in response to the Watts riots. So it wasn't a wildfire insurer when we were established. It was riot insurance. It was getting insurance to those urban areas who couldn't get insurance anywhere else.
And then eventually, we were expanded to cover wildfire in brush areas, and now, of course, we're available throughout the entire state. We are not a state agency. We're a private company. We are not state or taxpayer payer funded. We fund ourselves through the premiums we charge, and that's where we're supposed to pay our expenses and our claims from that money.
We don't manage our exposure. So whereas other carriers can say, I have, you know, a lot of exposure in this particular geographic area, so I'm not gonna write more exposure in this area. I'm gonna write over here instead. We don't do that. We take people regardless of our exposure, which means we have areas in the state where we may we may have 50 plus percent of the market in those areas.
We are sorry. I can't I can't read my own stuff on here. So our role is not to compete or replace admitted carriers. So as we become more like the admitted carriers, we start getting in competition with them. And you'll hear us as we go through and talk a little bit about the rates and that our rates by statute have to be actuarially sound.
One of the problems we're seeing right now is that there are geographic areas in the state where it is cheaper to buy a fair plan policy. Now the coverage doesn't match an h o three. For some people, that's okay. They just need to cover their mortgage, and they just need to cover fire insurance. For others, they're buying a differences in conditions policy, which will give them the water theft and liability coverage that they don't get with us.
Those two policies together in many areas are substantially cheaper than buying a policy through an admitted carrier. And so they're coming to us because of price versus availability. Okay. So what do we offer and who's covered? So we offer two policies.
We offer a dwelling policy or residential policy, and then we offer a commercial policy. While we only offer two policy types, that residential policy or that dwelling policy, we do cover renters, landlords, ops obviously, owner occupied. We'll cover vacant properties for up to a year. We we'll cover condo unit owners. So we do cover the range, but just within that one policy.
Speaker 1
Alright. So we're gonna transition to the evolution of the fare plan as first option for many. We we left left this visual because it's still kind of the image that we're seeing today. It is a constant growth for the fare plan. It's starting to taper off a bit, but it's still pretty much a a well high demand policy.
Importance of the actuals actuarially sound rates. So thirty years ago, the legislature recognized the fair plan should have adequate rates. AB seventeen fifty four passed 1996. And the rationale, the historical context is it's pretty straightforward and it still applies today, which is at the time, the fair plan assessed the mark private market $260,000,000. And, essentially, without adequate rates, it ended up to be a a subsidy of non fair plan policyholders subsidizing the fair plan policyholders.
So I won't get into much, but the what you see there is a direct quote from a legislative analysis or committee analysis of AB seventeen fifty four summarizing the assessment issue and the potential subsidy of the Fair Plan policyholders. I actually don't do rates, so I'll turn it back to Victoria to kinda walk you through the the the details of rate making.
Speaker 3
So just a really high level. Right? Actuarialy sound rates is is simple, although the actuaries will tell you it's not simple, but it's pretty simple. Right? It means that we our rates are enough that when we take in our premiums, we have enough to cover our projected expenses and losses.
Losses. And if one if they are, then you have actuarially sound rates. That's a very high level description from a nonactuary. So if we look at kind of the history of the fair plan rates and where we've been so just going back to 2020 because I was at the fair plan before then. So we'll go back to 2020.
You can see in the chart kinda how the rates played out. So in 2020, we filed for a 40.8. These are kind of approximate rates. Right? We we submitted a rate filing with a need for a 40.8% rate increase.
So that's an average increase across the book of business. The rate was approved in 2021, and we were given 15.6%. In 2021, then we filed again. We had a 74% rate need, give or take, at the time. We filed for 48.8% increase, and we received 15.7% in 2023.
So just so you know, our plan of operation states that we have to do a rate analysis and file our rates, whether it's neutral, decrease, or an increase. We have to file once every two years following a rate approval. So in 2023, we got the rate approval from the 2021 filing, and we filed again in September 2023. This one is a little bit different. We did have an 80% approximate 80% rate need.
That was running our book the way we would normally run it, a twenty year look back in our losses and using our net including our net cost of reinsurance as part of our expenses. Working with the department, and we worked with them pretty closely over about a six month period before we actually filed, We used the new net cost of reinsurance model that they have developed for the admitted market, and we used the catastrophe modeling that they've approved for the admitted market. When we applied those factors to our rate need, we came up with 35.8. So that's what we filed at. So we're still working through some questions from the department, and, hopefully, we'll be seeing that rate come through soon.
Again, just to remember, it's a average across the book. We will have insureds that will have a much higher rate increase, and we will have customers who have no rate increase or even a rate decrease depending on where they're located. K? So we talked a little bit about, you know, what's happening in the market. This is kind of the result of that.
So what you see in front of you is a graph from 2022 onto 2026, and you can see the growth from the in the fair plan and where we are. We're currently at about $724,000,000,000 of exposure across the state, and we have just over 668,000 policies. When you look at this graph, it's fiscal year. So our fiscal year goes from 10/01 to 09/30. So the final bar on the right hand side is actually three months increase from the bar before because that was the end of the fiscal year in 2025.
You can see we still continue to grow. I will tell you that in the 2025 or our first quarter of the fiscal year, we wrote 49,000 new business policies. So and, of course, homeowners insurance is very seasonal. Right? Fourth court quarter is traditionally one of the lowest quarters you'll have during the year because most people don't tend to move at the beginning of the school year and during the holidays.
So you kinda see things slow down, and they'll pick up again in the spring. We're not we I will point out we're not growing at quite the rate we were growing at last year, and we believe a lot of that is because we're not seeing the bulk nonrenewals that were coming out from the admitted market, and those policies tend to come to us when that happens. And that's what happened right before the fires. There were nonrenewals going on. We picked up a lot of that Palisades business right before the fires hit in 2025.
Speaker 1
Alright. So this is a snapshot of the past couple years, you know, trying to stabilize the fare plan, fare plan expansion, and then potential new expansion. So I'll start off on the left column just to highlight a b two two six. Madam chair, thank you for the bill. We think it's gonna really help the fare plan mitigate assessments.
It'll give them additional funding source for for bonds and line of credit. In the middle column, you'll see 2025, a couple of bills passed, s p five two five, mobile homes, and the recurring payments. And then the last bullet, the CDI order to expand the fare plan to a $100,000,000 per location commercial Mhmm. Commercial coverage. So that's what's been happening.
So you can see it's a kind of a a push and pull as far as stabilizing the fare plan and meeting their need meeting the needs of the public to to provide the coverage. We will just note for new expansions in the last column there, you see there is a CDI order to require a fair plan to create a homeowner's policy. It's pending a litigation at this point. We would just note that because it it will be a significant change for the fair plan to require them to carry homeowners. And I will pause there and give Victoria a chance to kinda walk you through the mechanics of converting the fair plan in that product.
Speaker 3
Right. So it is with the courts right now, the decision on whether or not the CDI can order us to offer a h o three policy. So, again, today, we cover the catastrophe risk. Right? And then if somebody wants a kind of all the coverages, they need to buy a differences in conditions policy to supplement that, and they'll get their water theft and liability coverage through that policy.
The CDI has ordered us to expand our coverages to do a full homeowners policy. While at some point, you know, if we come to that and we need to write that policy, it's just understanding what goes into that. Right? Today, we have staff and infrastructure based on the coverages we provide. If we go to provide a full policy, we're looking at basically standing up another division of the company.
Right? Because we don't have that infrastructure. We don't have the vendors. We don't have the staff. We don't have claims people throughout the state to go out and underwrite or handle the claims that happen.
So it's a huge undertaking for us. It's not that it can't be done. It's a huge undertaking that will take time and will take money. So on the back of the napkin math, we're saying 30 to 50% increase in our budget in order to write that policy, and a lot of those are sunk costs that we'd have to come up with that money before we start writing any of those policies. Because you can't write a policy if you can't handle the claims coming in, right, and if you can't underwrite it and don't have the vendors in place.
So it just so just to kinda set the tone, that's what would have to happen. It's not something we could do quickly or get out on the street quickly, but it's something that we could do given time, resources, and money. So when we talk about market stabilization, which is always you know, it's one of our goals actually, in the statute, it's one of our goals is to increase the stability of the admitted market. One of the ways we can do that as an organization is to make sure we're as financially independent as we can be to reduce that risk of assessment to the admitted market. The biggest play for that is our reinsurance.
So this is our twenty twenty five reinsurance tower that you see. So this is 03/01/2025, which was a big win for us because as we were negotiating the 2025 Tower, the fires were burning in Los Angeles, which the reinsurers knew they were gonna have to pay part of that loss. But we were able to secure the tower, a $7,100,000,000 tower. What is different about ours there's a lot of things that are different about ours than what the admitted carriers do, but one of the main differences here is that we have what we call a ventilated tower, which means that we have a deductible at each you know, depending on how big the loss is, our deductible is bigger. So we have to hit, in this tower, $1,250,000,000 in losses before reinsurance ever kicks in.
So what that means is if we don't have 1,250,000,000 in cash, we have to assess to even pay the deductible or pay the retention amount. The other thing to note is if we have multiple smaller events that never hit that 1,250,000,000.00, reinsurance doesn't kick in. So then we're we could be at an assessment without even having a large event. And then as we move up the tower, each of these layers then, depending on how high we go, has have additional deductibles that we have to meet. We are working on the 2026 plan right now.
And with that, we're adding new capital. So this is mostly this is mostly traditional reinsurers, which are insurers for insurance companies. There are other markets that play in the reinsurance space, one of which is catastrophe bonds. So in December, we secured a 750,000,000 catastrophe bond, which will come into play if we hit $6,000,000,000 a $6,000,000,000 loss. It's the largest wildfire catastrophe bond ever placed.
We still have interest in it. We're gonna place a second bond with this three one renewal, which will probably be around the 4 or $5,000,000,000 lay layer. We'll add more capacity. Our goal is to fill out as much of that deductible as we can. So, again, reducing the risk of assessment to the market at a time when they have losses and we have losses.
So this in 2025, when the fires hit, of course, we ended up in a position where we did not have enough money to pay the losses. We were estimating about $4,000,000,000 in losses, and we did not have enough capital to be able to pay that. So as we're required by statute and is designed by statute, we went to the admitted market. We ended up assessing for a billion dollars. It was spread across the admitted carriers based on their market share from two years prior.
The that process has to go through our board, and then the Department of Insurance has to approve that assessment. It's not the first time we've had to assess. It's the first time in thirty years, but it's not the first time we've had to assess. We did assessments back in '93 for fires, coincidentally in the same areas, Altadena, Malibu area, and then the following year following the North Northridge quakes. We've actually done three assessments prior to this, and then this is the first one in thirty years that we've had to do.
Once we do the assessment, there is a recruitment piece in regulation for the admitted carriers. We're not involved in that process, so that is between the admitted carriers and the department in terms of filing and approving and being able to recoup their part of the assessment from their policyholders. We don't play a role in that. Although, most of times when they see it in the news, they talk about the California Fair Plan assessing the policyholders of the other state, which is not how it happens. But in a in a roundabout way, it still comes back to subsidizing the Fair Plan from policyholders that are not with the Fair Plan.
There are other ways that we now have found to be able to help us get more financially stable. So echoing comments, big thank you to assembly members Calderon and Alvarez for supporting two two six. That gives us the ability to go and look at additional funding sources through the economic development bank. For us, there was an immediate impact. So we have secured a line of credit, which this bill put the language in that the banks needed to feel comfortable giving us a line of credit.
So we now have a $600,000,000 line of credit. So if we do run into cash flow issues, we can access that first before we have to turn to the industry, hopefully mitigating the risk of assessment, but at least slowing down the need for an assessment. With this language, we're also now talking to the banks about changing that line of credit into a revolving line of credit because this gave them a comfort level. So we appreciate all the work that went into this. So as we continue to grow, of course, there's always that question of how and and when are we going to depopulate at the fair plan.
Right? We continue to we continue to collaborate with the Department of Insurance on the sustainable insurance strategy. There we're always doing that balancing act with the fair plan. Right? We're trying to do populate, but now we're offering a $100,000,000 in commercial coverage because there was a need in the market, and you fill that need with the fair plan.
We're now offering we're gonna be offering replacement costs on manufactured homes, which they couldn't get at the fair plan before. There's it's a balancing act. Right? We try to be there for the customers that need to be with the fair plan, and, unfortunately, there's a lot of them right now, but not be the insurer of choice for consumers. We want them to go back out into the admitted market.
We're working with the department on our rates. Right? So to get adequate rates, that will help. And then we have the clearinghouse, which the legislature passed a few years ago. The way the legislature set up the clearinghouse and totally understand, right, the customer belongs to the broker, and so the broker gets to say whether or not that customer is gonna move from the fair plan.
But it is a barrier to moving policies out of the fare plan because that customer that broker may or may not be appointed, but the company that's looking to take that business. And so they might not be interested in moving it their customer to to a carrier that they don't have business with. Right? Our role in this is to provide the platform, and that's what we do. We provide the information.
It's out there. Member companies can get access to it. E and S excess and surplus lines carriers can get access to it. But all we can do is provide the platform. So let's change gears for a minute and talk about the fires last year, kinda one year later, and where are we, from the Eden and Palisades fires.
We did, we ended up with right around 54, 5,500 claims from the fires. We were still, as of the December, getting a couple of claims trickling in here and there, so new claims coming in. We have paid out around $3,500,000,000 so far in claims. The claims are the vast majority of the claims have been closed. We do have some that are still open, and we're working through those, some that are reopened, some that are reopened because they're gonna rebuild now, and they need the rest of their coverages, their building ordinance and law, their debris removal coverages that we pay as as expenses are incurred.
So they're opening for that. Some are reopening because they're they've gotten new estimates from their contractors, and they wanna come back and reevaluate how much we paid on the claim. And then we have some a few that are still open from the beginning where we're waiting for new contractors' estimates or waiting for the the customers to present compelling evidence to the contrary of what we've already found on the claim. So we do have some of those, but most of the claims are closed at this point. So and we have special teams working on this to get the rest of them closed as quickly as we can and get the money to the customers for their covered claims.
The big question continues to be around smoke claims and how smoke claims are handled at the fair plan. Excuse me. I I just wanna reiterate. We are paying all covered claims, smoke claims included, according to California law and our and our policy form. That policy form has recently changed.
We just got approved by the Department of Insurance for our new language around smoke. It does not change anything that we've been paying for in smoke because we had already changed our claims handling practices, but it makes our form now current with our claims handling practices. Our policy requires direct physical loss, and that's been kind of the open question with the consumers because if you have to clean your house, there's no damage to the house, then it's not a covered claim. If you have to clean your house and there's damage to the house, then that damage is covered. So for example, if you go through and you clean your claim sorry.
Speaker 3
your house and there's a rug and that rug has been cleaned and it smells like smoke, we will come in and we will deodorize the rug. If the rug still smells like smoke after the deodorization, we're gonna replace that rug. So there is coverage for damage, but the the cleaning is not covered. We do cover some cleaning, like if you have smoke and ash in your air ducts. We're gonna pay to have somebody come out and clean your air ducts.
We do not expect people to go crawl through their vent spaces and clean their air ducts. Right? There's also some specialty cleaning that has sometimes has to be done like a piano. So unbeknownst to people like me, you cannot clean your own piano if the smoke and ash get into where the strings are and it's open. You have to have somebody professionally come out and clean that.
So we'll pay for that. We're not gonna pay to wipe down the windowsills from the ash. If you wipe your windowsills down and the ash is ground into the windowsill and needs to be repainted or replaced, we will take care of that. We are sending hygienists out on every claim, so they are going out and testing the lead and asbestos layer levels. They are providing us with recommendations.
Our independent adjusters are going out. They're providing recommendations on what to pay for the claim. Again, if there's something in the house that cannot be cleaned, we will pay to replace it. So it's not that we're not paying for any cleaning, and we're not and we are paying for smoke damage. If there's the house has you know, the stucco on the outside of the house, you know, is damaged to the point where it can't be cleaned, we're gonna pay for that.
If the house inside, there's damage to the electronics because of the smoke and ash, we're gonna pay for that. So it's not a it's not a yes or no question. It's just a how much damage and where is the damage. And if it's covered, we're gonna pay for that. When the fires happened, of course, you know, nobody's kinda especially somebody of our size, we're not staffed internally to handle all the claims that come in in the fires.
So I think we had 2,800 claims come in in two days. Right? So what did we do? So we expanded our claim staff by more than 200 desk examiners. So we went out and contracted with the company, got in 200 desk examiners.
We expanded customer service hours and the days that customer service was available to answer calls and take take in claims. We did participate in the workshops that the CDI put on and in many of the town halls that went on. We went to the FEMA disaster recovery centers, and we held daily webinars for our brokers to help them so they could help their customers manage through the losses and and understand what the process was. As a result, kinda now we go back and with everything. Right?
You go back and you look and you say, okay. What went well? What could we do differently to be better prepared, even more prepared for the next time? And a lot of things that were going on in our claims department and the changes that had been made were direct results to the fires in 2017, '18, and '19 when we went through those fires and we made adjustments in how we're doing it. We're doing that again.
So one of the things, we've worked with the Department of Insurance on is we know the key to this is that the customer has to understand the insurance they bought. And in order for the customer to understand it, we have to make sure the broker understands it. And we have brokers who have a lot of policies with us, and we have brokers that have one or two policies with us. So going forward now, every broker has to take product training so they understand the California Fair Plan policy so they can explain it to their customers and make sure their customers are getting the coverage that they need to get. We've restructured our claims department yet again.
We've pulled our we've we've separated it in half, and we now had to have a head of claims quality. So we pulled that out of the operation so we have more oversight over the claims and how they're being handled. And we are also contracting with some of the same vendors that handled our claims to set up teams that will handle our daily claims. So the next time a wildfire happens, we already have people in those organizations that understand our systems, our processes, our authorities, and can help train those new people coming in, and they have support staff right in their own organization. So we think that will be a big help for us because getting everybody 200 people up and trained and relying on our internal training team was a difficult task for us.
We talked about the policy form, and, you know, we're we continue to focus on ways to help insureds get back out into the admitted market, which is really the ultimate goal here. We are committed to transparency. We've been trying to put more information that is relevant to the consumer out on our website. We have our goal here is to build knowledge and understanding of who the Fair Plan is, how we operate, and kind of what our results are and what we're doing. And so we have things like the plan of operation is now available out there.
We have ZIP code level, PIF, and exposure information available out on the website. We have our financial reports out there, our product forms, who our governing committee member companies are. So we put a lot more information out on the website to give people more education on who and what we are and how we operate. Every year in state of California, the Department of Insurance conducts an audit of every third year, they conduct audits of every insurer in the state of California. We're included in those audits.
We had an audit in 2021 that covered our 2020 fiscal year. We recently had an audit in 2024 and into 2025 that covered our 2023 fiscal year. So we do have the response now from the audit. We have that audit, our team has it now to look at. There were no new items cited in the audit, which was good.
The CDI comes back and their audit team comes back with recommendations for us in terms of what they would like to see us do. They are there are some that are in progress still from the older audit because you can't do everything at the same time, and we're working through those. So we're working on the response right now. I think it's due the February back to the department, and the team's going through now to note the things that we have already done and what we're continuing to work on and where we are on them. So that will be coming out at the February.
So looking ahead, kind of when we look ahead, we look back to the we look as we're talking about about this kind of balancing act. Right? How do we be who we need to be for the customers who need to be with us, but not become a competitor to the admitted market and not become an employ an insurer of choice, basically, for people. I mean, obviously, people have a choice, but we don't want them to want to come to the fair plan because it's cheaper in price, and we don't have you know, we're not getting our rates. We don't want them to come to us because it's easier.
We want them to come to us when they really need insurance, and they can't find that insurance somewhere else. And so we're constantly in that balancing act of trying to depopulate, but trying to make sure that we're here for the customers that need to be with the fair plan. And that's when we look ahead, that's what we look at is how do we manage those two things simultaneously. Simultaneously? And then how do we get back to being the insurer of last resort?
And can we get back to being the insurer of last resort? I think that's really the open question. So thank you for the time to present where we are. Madam chair?
Speaker 2
Thank you. Thank you. It's appreciate that, presentation. So right now, I am gonna bring it back to the members to see if we have any questions. Rick, Assemblyman Zabur.
Speaker 4
Thank you, madam chair, and thank you for the invitation to join you today. I really appreciate your, you know, dedicated leadership to making sure that people in the state of California have the insurance they need. Also wanna thank assembly member here obedient who I know has been really active in this space. I have a couple questions that are based on questions that I'm getting from my constituents related to the last set of fires and and sort of the outgrowth of the moratorium. So I've got a whole host of folks who were who had gotten notices of cancel potential cancellation in the embedded market before the fires.
Mhmm. And then the moratorium was put in place by the governor, and so those cancellations never occurred. So they continue to be insured through the admitted market. Mhmm. They're they're the agents they're talking to now, now that the moratorium is is done, are basically so they're telling them that they're not gonna be renewed.
I don't I think in some cases, I was talking to the chair before. I'm not quite sure whether they've gotten notices already or whether this is just the agents are telling that they're not likely to be renewed. So they're actually looking for alternative coverage. One of the things that they're being told is that they are not eligible for fair plan coverage if that results in some amount of underinsurance in so a lot of these are, you know, Pacific Palisades, Santa Monica area. The the the the values of the homes are relatively high.
And so what they're basically being told is that they are not eligible for fair plan coverage because of the limit at the $3,300,000 limit. Is that accurate, or is that misinformation that their agents are giving them?
Speaker 3
So we don't turn anybody down for amount of insurance. So let's say they need $44,000,000 to replace their home. We will insure it up to the $3,000,000 limit because that's what were filed and approved for us to offer $3,000,000, and then they can work with their insurance agent to buy excess coverage over that to coverage to cover the gap. There are companies that will sell excess, will be the primary insurer, and then there are companies that will usually sell excess above that to get that. But we won't turn them down because their house is more worth more than 3,000,000.
Speaker 4
So if they're being told by their insurance agents that they can't get coverage in the fair plan because they need 4,000,000 in coverage and it's only 3.3 that's available in the fair plan, that's they're being told inaccurate information.
Speaker 3
Is that accurate? That's that's misinterpreted. Yeah. That's not correct.
Speaker 4
Is there anything that you can do to educate these agents? Because I don't think the agents are doing this on purpose. I mean, and I've heard this
Speaker 4
multiple constituents. Is there any way we can educate agents, do more to make sure that agents are not giving folks misinformation on this? Because, obviously, you know, a lot of these folks are basically going to folks that are not in the embedded market, but the alternatives now, and they're astronomically expensive. So from their perspective, being being able to get the 3,300,000.0 in coverage under the fair plan is a positive because then they could possibly get additional insurance above that if they need it. So I guess the question is, what what do you do to educate agents, and is there more that can be done to address this issue?
Speaker 3
So we we do have broker training available that goes through all of that. It is they do get CE credit, continuing education credit, if they take it, but they have to go online and take it. Right? And that's what we're now making mandatory. So over the next year, we are gonna require every broker to take that training to make sure they know that.
We also offer weekly webinars on different topics. So if if I'm hearing from you that that's a topic that's out there right now, we can make a note of that and do a weekly seven weekly webinar and offer that out to all the brokers. You know, how do I write coverage if my replacement cost is more than the $3,000,000? So we can certainly do attack it that way too. But we do weekly webinars for brokers.
We have bulletins that go out at least two or three times a month, and then we have the broker training available to them.
Speaker 4
Thank you very much. I have one other question. Mhmm. A lot of these folks are dealing with issues of the fact that the cap is 3,300,000.0, and in many of my areas, the value of the the value of the home is above that. Obviously, there's a question of how much of that is the rebuild cost versus the value.
But but there there are issues with respect to the cap. One of the questions I get all the time is whether the cap can be raised. And could you just talk about the issues related to raising the cap? What are the what are the issues related to that? What are the downsides?
I mean, what how would that affect you if, for example, the cap was raised to a higher level to cover more homes? You know, what these folks are telling me is they need coverage because of their mortgages. Right. So they you know, the fact that they you know, if they've got a mortgage that's $4,000,000 or 4 and a half million dollars, they need 4 and a half million dollars of coverage. So can can you just sort of talk about what the issues are related to raising the cap?
Speaker 3
It's a question that comes up periodically for us in certain areas like Palisades or some of the areas in Northern California. We'll hear that too. The biggest obstacle for us is getting the rates. Right? If we had actuarially sound rates and could get get actuarially sound rates for a higher limit, we would be willing to consider and work with the department on, you know, potentially going to a higher limit.
Until we can get enough rate on the book, though, for us, it's a it's a question of whether that's financially responsible for us to raise the limits when we don't have enough money today to cover the claims that we could have. And so, again, we're back to that balancing act. Right? What can we do? But once we have actuarially sound rates and bring that rate into the book, then we're in a different financial position than we are today.
Right now, we're still running at a member's deficit, so we don't even have enough cash on hand to cover our liabilities. So to be raising limits, that's that's kind of the issue is the fiscal responsibility for that.
Speaker 4
Is there a way to raise the cap where it doesn't actually harm folks that are actually that need less coverage, for example? I mean, I I think there's you know, in the way I sort of think about it, there is some level of folks that have lower priced homes or folks that have higher priced homes, have more ability to, for example, secure insurance on the outside market. But is but but, you know, we wanna help them. We don't wanna drive people out of the state of California because they can't get insurance in their mortgages. So is there a way that we could raise the cap without actually having a detriment to people that are under the current cap?
Speaker 3
I think the only way to do that is to make sure we have the rates in place to handle it. Just to give you an idea, our average policy is just over $1,000,000. So most of our customers are not in that higher range, but I know for a fact there are geographic areas where they are. Right? But we actually have very few policies that are at that $3,000,000 limit, and we have since at least since I've been here.
It's just not a market we typically have because they will typically go to the specialty carriers or the ENS market to get their coverage. But but if we had to raise the limits, as long as we had the rates to do that, there would be no harm to the people who are already there.
Speaker 4
Got it. Okay. Thank you very much. Really appreciate it. Thank you, madam chair.
Speaker 6
Thank you, madam chair. Thank you for doing this and everything that you and your staff are doing and and for the report. I thought that the report was extremely extremely thorough and helpful. And missus Roche, mister Feliciano, great to see you. Thank you for your continued work on these issues.
And I know that it's been quite a year. Mhmm. And I appreciate everything that you guys have done. And I know we sent some questions very, very late that we we can follow-up on and and have conversations as we always do about ongoing questions. But just two basic questions.
And I do think that one of the things highlighted by the staff report was the 32 recommendations from 2022 from CDI, which I think we can all agree are very very good recommendations, very straightforward. As of now, 17 of the 32 have not been not been implemented. And I I guess my question is how can we how can we help expedite the implementation of those recommendations, some of which are are pretty fundamental and and basic, like more transparency, more governance, reform, adoption of of a strategic plan, plan of operations. So what what can we do to help with that? Is this is this something that that we have a role in, or is it just a matter of slogging through and trying to get it done?
Speaker 3
I like the term slogging through. So we are working through each of them. There are some that we're still in discussions with around, for for example, creating a three to five year strategic plan. For a company like ours, where we're kind of not con in control of our own destiny, it's hard to plan out even a year Mhmm. Because we don't know what's going to happen.
Right? We're at the mercy of the admitted market and what the admitted market does. And then we have, you know, the legislation that comes in, the CDI orders that come, and that kind of determines our plan as we go. Right? So if we have plans for things that we want to do or things we need to do, and then we come the triennial audit comes out and there are things that the CDI wants us to focus on, we have to shift those.
Right? And a plan usually has your growth or your depopulation goals and all that. We're not in control of that. So for us, all we can do is we project out a year where we think we're gonna be, and we continue to project out a year in advance of where we think we're gonna be. But three to five years, we can't I mean, there were two bills passed in September.
We had to shift what we were planning to do to accommodate those two bills and the program we needed to do and the work we needed to do on theirs. All important things that need to be done, but we're not in control of that. So I think that's the on the strategic planning, that's the piece that we struggle with. On the transparency piece, we've done a lot of it. It's whether or not we and on most of those 17, just so you know, there are very few we've done nothing on.
Right? Most of them we've done things on. It's just we're not done with them yet because of all the other priorities we have.
Speaker 6
Yeah. No. I appreciate that. And, obviously, if there's anything that we can do, and if there's anything to follow-up with, please do. But I appreciate that answer.
And and, obviously, it's it's important, every single one of them. And I as I remember Zubur brought up something that I think is really important. And I do think to your point about the rates, I think that his constituents, all of our constituents have given us very, very clear feedback, which is they're willing to pay the rates. Mhmm. The incremental increase that they would have to pay to get coverage, they will pay.
I think everyone is is under the same set of facts here that rates are gonna go up, and that doesn't doesn't exclude the fair plan. So I would just say that if the rates are somehow the hurdle, I think the consumer realizes that to get the coverage, they're gonna have to pay the rates. So I I hope that wouldn't be an obstacle to getting what, the increase in the coverage that mister Zuber was asking about, and I couldn't agree more with him. My last question, then I'll cede, is just on the smoke claim issue. I know that there is ongoing litigation with CDI on the direct physical loss definition.
I think given where the courts came out, which is they sided with CDI and the the fair plan's definition of of direct physical loss was was too limited relative to the standard forms that the member companies were using. Have we have we reassessed? And you you did mention this, but I guess I'm unclear as to where we are on the reopen claims or the open smoke damage claims that were initially denied because of that definition of direct physical loss. Is there now going to be a process of going back based on the new definition that I think you've adopted
Speaker 6
And actually pay some claims out that weren't that weren't paid out before in the smoke in the smoke damaged areas?
Speaker 3
So And thank you. That's complex question. Right? But I'll try and answer as simply as I can. The direct physical loss was not challenged by the courts.
So that definition, even in our new approved language that the department just approved in December, is still part of our language. The part that the court said we couldn't use was we said direct physical loss as determined by sight and smell, and that sight and smell test was taken out of the language. We have already we had already changed as soon as that court case was decided, we changed that language. We did go back and look at closed claims to make sure that we followed the law and the new claims handling standards. So we have gone back and looked at the closed claims.
We've had a few that have been reopened asking, hey, based on this, we think this should have been covered, and we're looking at those on a case by case basis. But we have gone back and reviewed the ones that we closed to make sure that we applied the right standards to
Speaker 2
Do we have any other questions from members? No? Okay. I actually have a couple questions. What is the average length of time policyholders stay in the fair plan?
Speaker 3
It varies by the wildfire hazard. They tend to stay longer in the lower wildfire hazard areas. So, and this is prior to 2024 because we got so many new customers in. We kinda took reserved that out. The average customer staying with us for about fourteen years.
Over the entire book, I think we're at about seven or eight years is the average time a person stent stays with the fair plan. We have some that have been on the books for thirty years. We have some that leave after a year.
Speaker 2
But you do do you have you seen policyholders actually leave the fair plan? Or
Speaker 3
Not as many in the past three years as we had prior. We've always had a pretty high retention rate with about 80%, between 7080% of our customers renewing their policies each year.
Speaker 2
Okay. So you talked a little bit about the the brokers and the clearinghouse program. What what are obstacles you see to that program, or and how could that be improved?
Speaker 3
So I think that from our standpoint in looking at it, what we're hearing and what we're seeing is that while the information is available to a member company let's say I'm a member company and I have captive agents. Right? So you have to be appointed with us. You have to be a captive agent with us in order to write our business. And I have and Armand has policies that I wanna write.
I go to Armand and I say, I wanna access these policies. Armand's gonna say no. Right? Because Armand's not appointed with my company, and so he's not going to want to give those policies up because they're gonna go to somebody else. Conversely, if I'm a captive agent, so I'm with, you know, one of the big companies, I'm a captive agent, and Arman comes to me and says, I wanna take your policies.
I'm gonna be like, no. I'm I can't write policies with you. I'm writing policies with the company a, and that's where I'm gonna stay, and I want my customers to stay with me. So at some point, there might be a point where we wanna say, hey. If they've been with the fair plan for, I don't have much time, right, maybe it's time to give the consumer the choice of where to go versus having to work through the broker because the broker has limited access to to other policies.
Right? I won't say they're not doing their job because they're probably doing their job, but they only have a a, you know, so many so many companies they work with. And so maybe at some point, it's time to give the consumer more choice to say, you know, oh, there's these other companies out here I could go. I just need to go to different people to get that insurance.
Speaker 3
In certain geographic areas, the fair plan is more affordable. So we have examples from some of our brokers in low and moderate risk. We haven't really seen it in the high risk, in the most high risk areas. Right? But in the low and moderate risk areas, we've seen examples where people can buy a California fair plan policy plus a differences in conditions policy, and their premium will be less than half of what it would be to go to an admitted carrier.
So there are we've had brokers tell us that some of the mortgage companies are telling people, you know what? Tell them to go quote the Fair Plan. It's gonna be cheaper. You won't have to pay as much in insurance. Right?
We've had realtors telling people you know, and I it's in the news. Right? It's not news to anybody. When when I think there was an article a few weeks ago that said people get insurance for $700 a year with the fair plan. It's a pretty good deal when you think about it.
And so there are it's usually in pockets of geographic areas where we see it.
Speaker 2
Yeah. I asked because I wonder how can we tell our constituents to go and find insurance in the with the admitted market if what you're saying is true, and I and I believe that it is. So it it, you know, it creates a challenge for
Speaker 2
How does the fair fair plan compare to, fair plan, you know, something similar in other states? Like, say, Florida, for example, or some of the other states.
Speaker 3
So we even though I mean, Florida has always been the biggest until recently. We took over that great role as the largest fair plan. So there's 34, give or take, states that have some type of beach plan, fair plan, wind and wind pool, that sort of thing, residual market. Everyone is set up differently by their state. There are some where they have restrictions on premium, where it'll say the fair plan has to be 10% above the median price of insurance in that ZIP code So they're always keeping the fair plan higher.
States like Florida have, their kinda clearing house happens before they come to the fair plan. Before they come to Florida assistance and at renewal, they run those policies through a a quote, through a comparative quoter of the admitted carriers in the state. And if any of those admitted carriers, would take that policy, they tell the customer they can't come to the fare plan as long as that premium is not more than 20% higher than what Citizens offers. So they have a 20% margin. If the premium's more than 20% higher than what Florida Citizens is offering, they can come to Florida Citizens because of the premium.
But if it's lower or within that 20%, they can't come to the to Citizens or they won't be renewed. So each state is run a little bit differently, but most of them have some kind of safeguard against that.
Speaker 2
Oh, okay. Thank you. And what is the fair plan's role with deep or, you know, depopulating, and how long do you think that will take?
Speaker 3
So the because our hands are you know, we can't we follow the statute, and the statute says we have to make the information available, but that the companies have to go through the broker. The only thing we can do is make that com that information available. So we have it on a secure website. Companies have to sign up to use it. We have about in the whole state, I think we have about 15 companies that have signed up to access the clearinghouse.
We don't know if policies are leaving because of fair because of the clearinghouse. We know of about 200 that brokers have said they moved because they got contacted through the clearinghouse. Mhmm. But we're relying on the brokers. There's no way for us to tell if any of that those policies are moving.
Speaker 2
Okay. As the fair plan continues to grow and your charts so accurately shows that it is growing, are any additional changes or reforms needed to the fair plan?
Speaker 3
I think the big one for us is the clearinghouse. Right? It's because if if we can make it easier for others to depopulate us.
Speaker 3
You know, our role to put the policies out there is easy. Right? But in order for people to get access to that information and not not be stopped by the broker at some point, I think the clearinghouse is the biggest thing we can do that and to make sure we get our rates.
Speaker 2
Okay. Thank you. Mhmm. I'm gonna do you have any questions, this gentleman, Rodriguez? Okay.
Thank you so much. I really appreciate you being here. I'm gonna open it up for public comment now. Please come forward.
Speaker 5
Terry McHale with Aaron Reed and Associates. I just wanted to mention that two years ago, was at the previous hearing when then send when then assembly member doctor Jim Wood asked if the fair plan would pass muster with Wall Street, and the answer was no. And at that point, everybody was concerned because the exposure was half what it is today. It was a little over 300,000,000,000. Today, the exposure on the fair plan, $726,000,000,000, whereas my friend Mike Knutson would say, 3 quarters of 1,000,000,000,000.
3 quarters of $1,000,000,000,000. What happens when we get to the trillion? And what we're learning today is that the fair plan is competing with the admitted market, that in places they can sell it cheaper than the admitted market. That is wrong. It is exactly what we did not want to happen with a fair plan.
It is something that absolutely must be addressed. What can we do about it? Well, unfortunately, as we look at the new legislation being in introduced, we're making it more onerous for the admitted market to be in California. We're making it more difficult for insurance companies to compete in this state. And if we don't get careful real quick, we're gonna have a sword of Damocles over us that will not stay in place.
Let's be reasonable. This is a debacle. This is wrong. We need to take care of the admitted market. We need to wanna depopulate, and I'm not knocking the two people who are in charge.
I think they have a lot in common with captain Smith in April 1912. I think that they do an extraordinary job under extraordinarily difficult circumstances. But we need to get reasonable, and we need to get reasonable fast. Thank you very much.
Speaker 7
Thank you. Mark Zechmann with the American Property Casualty Insurance Association. I think captain Smith was the captain of the Titanic who kept pushing the boat faster and faster even though he knew icebergs were available. So I think that's actually a very nice analogy. I wanna thank the committee for continuing to hold these hearings.
I think they're both educational and provide oversight. I can't emphasize enough in the frustration of our members that they can't compete with the fair plan. You cannot depopulate the fair plan when somebody can go to the fair plan policy, maintain the fair plan policy for thirty, forty years because it is cheaper. When you saw the rate increase sheet that the fair plan put up, it's very clear why they are competitive because their rates have not been adequate for years. Up until now, even though the law has said they've not been able to include the cost of reinsurance up until assist.
Talking about the assist, the final model was adopted in August. Companies are starting to file plans. Two companies have approved plans, and other companies have suggested they will write more. So, hopefully, we'll be able to slow down at least the nonrenewals going into the fair plan, but the depopulation of the fair plan is gonna require adequate rates in solving the the agent issue. Thank you.
Speaker 8
Good morning, madam chair, members of the committee. Allison Adey on behalf of the Personal Insurance Federation of California. We're grateful for the productive conversation this morning and are encouraged to see that the rate of growth is slowing in the fair plan. We would like to see this move more towards a decrease, and the depopulation is essential to the sustainable insurance strategy. We remain incredibly concerned with the competition between the fair plan and the admitted market, primarily based on inadequate rate coming from the Department of Insurance for the fare plan so that they are showing their actual costs and risk across the market.
We would love to see more progress in these areas as we move forward. Thank you very much for your time.
Speaker 9
Hi. Good morning. My name is Elisibido Seguera, and I'm with the California Alliance for Child and Family Services. We're presenting more than 200 nonprofit agencies that support children, youth, and families across the state. Thank you for the very helpful overview of the Fair Plan.
As we explore solutions to address the ongoing liability insurance crisis impacting children and youth serving organizations, particularly foster family agencies and short term residential therapeutic programs, we are interested in how elements of the fair plan model could help stabilize coverage and reduce premium costs. Unlike housing insurance, we don't have any admitted insurers in California offering liability insurance. So we welcome the opportunity to work with the presenters and the legislative leaders here today on solutions that address the crisis and prevent further closures. To date, at least 25 FFA sites have already closed, placing additional strain on counties and probation departments that rely on these providers to place children in safe license settings. Thank you for the opportunity to comment today.
Speaker 10
Good morning, chair members and representatives from Fair Plan. My name is Peter Ansula. I'm here on behalf of the California Farm Bureau. I'd like to express appreciation to the committee's continued, work on this area. We have a lot of members that have been at the forefront of the nonrenewal experience going back years.
We actually sponsored legislation with DOI a couple years ago, s p five zero five, to create the commercial clearinghouse inside the fair plan. Unfortunately, we still have a large number of agricultural policies in the fair plan, and we're not seeing them exit through the commercial clearinghouse or the residential side. We were hopeful that the commercial clearinghouse would give some of our members relief to see policies in a combined way to go back to the admitted market. So we still have a broken market in terms of access being written, policies being written in those rural communities. And now I think we've we're getting great transparency from the fair plan about levers that can be implemented to help the clearinghouses work better.
You know, we have a lot of members, due to the nature of agriculture and the way that they maintain their properties, have a naturally low wildfire propagation risk. That doesn't come out in their ability to exit the fair plan and go back in the admitted market. So I think that there's a lot of creative ways that those clearinghouses could work to reflect the real risk on those parcels as opposed to the business structure of how those policies are in the Fair Plan. Thank you.
Speaker 11
Madam chair and members, Dan Dunmoyer with the California Building Industry Association. We represent the homebuilders in the great state of California. First foremost, thank you, madam chair, for continuing the focus. Sorry. I'm too tall.
The continued focus on I'm gonna fix that. I know I'm supposed to touch it. Thanks. Thank you for your continued focus, madam chair, on the fair plan. As somebody who's been in this space for decades, I just wanna kinda bring back some history.
When the fair plan grows as policymakers, this should be a massive neon red flag. It means the regular market's broken, and I believe miss Roach explained that brilliantly. As somebody in the homebuilding side, we are one of the major purchasers of insurance for homes, specifically for apartments, legally defined affordable housing, and also for condominiums. The good news is thanks to the leadership, miss Roach, the commissioner, we now have adequate coverage or more adequate coverage on commercial risks. But two things you should be aware of.
Right now, our legally defined affordable housing has capped on increases of rents, makes sense. HUD puts those on, but the cost of insurance has gone up 500%. So our affordable housing, builders are being crushed by the current marketplace. It's still not working. The other thing is condos are coming back a little bit more, thanks to some of the Fair Plan expanded coverage, but let's go to the core issue here.
The admitted market is not working. And if the Fair Plan doesn't have adequate rates, it will continue not to work. So as was describing, miss Roche, the commissioner and the Department of Insurance needs to raise the rates in the Fair Plan, which is painful. As mister Harbetian said, consumers are willing to pay more if they get adequate coverage, and they will if the if the market works again. Quickly on the SIS, the sustainable insurance strategy, two carriers are back.
We need another 20. When we go to sell homes, it's the fourth I, principal interest tax and insurance. We still have very, very few choices for our customers to get adequate coverage at an adequate price, and that needs to change. Last thing I just wanna mention, as you look at legislation this year, and this has been the balance all the way back to 1991 with the Oakland Hills fire. And it was senator Nick Petros who recently passed away who had to balance this issue out.
His comment was after as a representative of Oakland Hills, was he was moving to expand unlimited coverage for all types of risk in California. As he studied it more, he moved to disclosure versus mandates to offer more coverages. Why? Because the price of insurance will skyrocket for everyone else in the state. So this committee will look at bills this year to expand coverage.
For those of us, it means fewer homes will sell. So we ask for your wisdom and your balance as you look at those issues to make sure that you take into account the victims of the fire, but also maintainers and purchasers of insurance and those millions of Californians who will maintain insurance, hopefully, in the admitted market. So just some thoughts from the builder perspective. Again, madam chair, thank you for bringing this issue forward.
Speaker 3
For us, it's prior to now with SIS, it's always been the issue of we can't include all of our expenses, but because we couldn't include reinsurance costs. Even though the statute allows us to purchase reinsurance, the department would not allow us to pass any of that cost onto the policyholder. With our current rate filing, at least a portion of that expense is included. That's why from the 80 to 35.8, we can't include all of it, and we can't even include the majority. But we can include part of it, and that's included in that 35.8.
So it'll get us closer. It won't get us where we need to be, but it'll get us a lot closer than we have been.
Speaker 2
Okay. Thank you. Alright. That concludes the assembly insurance hearing on the fair plan. Thank you so much for Thank you.
Your testimony and for coming every time I ask you. Appreciate it.
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