By Michael Loney

Feb 10 - (The Insurer) - The California Fair Plan has paid more than $700mn to policyholders from the Palisades and Eaton fires wildfires so far, moving it closer to the $900mn deductible on its reinsurance cover.

The independent, not-for-profit catastrophe insurer of last resort said that it continues to receive, manage and pay claims related to the southern California wildfires.

As of 4 February, the Fair Plan had received 3,485 claims for damage caused by the Palisades Fire and approximately 1,314 claims for damage caused by the Eaton Fire.

The claims vary according to the type and amount of coverage and loss. The Fair Plan said that new claims, including total loss claims, continue to be reported daily.

“The Fair Plan has paid more than $700mn to policyholders, including advance payments, to cover claims related to the Palisades and Eaton fires,” it stated.

Approximately 45 percent of the wildfire claims are reported as total losses, 45 percent reported as partial losses, and 10 percent as fair rental value only, which covers lost rental income due to a covered peril, like fire.

The total loss figure is expected to increase greatly from the around $700mn figure as of 4 February.

The Fair Plan said that it has a total potential exposure of over $4bn for the Palisades Fire and $775mn for the Eaton Fire, according to the CAL FIRE incident maps.

The plan added that it is important to note that “exposure” does not equate to the number of claims made or the anticipated claims and expense payments related to those claims.

The Fair Plan can access the first $350mn in available reinsurance for anticipated claims payments and related expenses above the $900mn deductible.

It can access additional layers of reinsurance based on losses incurred and outstanding reserves up to a $5.78bn limit, which includes varying percentages of co-reinsurance, similar to co-pays, subject to certain conditions.

To access all layers of available reinsurance, the Fair Plan is responsible for paying up to approximately $3.5bn, including the $900mn deductible, and copays.

The Fair Plan said that it has not yet asked the California insurance commissioner for an assessment in response to the Southern California fires.

By statute, the Fair Plan, with the approval of the California insurance commissioner, has the right to assess all admitted insurers licensed to sell and selling property insurance in California to help pay for its losses.

AM Best commented last week that the large wildfires losses are likely to lead to pricing increases in reinsurance for the Fair plan, but that any impact on the broader property catastrophe reinsurance market “remains to be seen”.

“Pricing and terms of reinsurance for the California Fair Plan will be critical to ensure the plan is adequately funded and able to properly support the policy holders," AM Best said in a report.

Fellow rating agency Moody’s last month highlighted uncertainty around the Fair Plan’s financial capacity to handle claims.

It said public financial disclosures suggest the plan likely lacks sufficient funds to cover large claims through its surplus and reinsurance alone, making insurer assessments likely.

“The plan has disclosed that reinsurance first kicks in after claims reach $900mn, which is more than double the cash surplus on hand. It also disclosed total policy exposure of $4.8bn to structures in the Pacific Palisades and Eaton fire zones, though this does not represent an estimate of eventual claims,” Moody’s said.

It added: “The plan's reinsurance structure is unique in that claims above the $900mn attachment point are not fully covered by reinsurance, but rather are shared between the Fair Plan and the reinsurers.”

To address potential Fair Plan deficits, Moody’s suggested the state could issue bonds to help finance claims, referencing proposed legislation (AB 226) that would establish a pathway for bond financing.

Also last month, Fitch said that the expected assessment on carriers “will likely lead to increased premiums or reduced coverage availability in the private market as insurers adjust to offset their increased liabilities from Fair Plan contributions.”

“Under regulation passed late last year, state regulators will split the first $1bn beyond what Fair is able to cover evenly between assessments on insurance companies and policyholders. After that, the insurance companies can pass on 100 percent of additional costs to policyholders as higher premiums,” Fitch said.

As previously revealed byThe Insurer, the Fair Plan’s reinsurance program is structured across eight layers with more than 60 participants across the US, Bermuda, Lloyd’s/London and international markets.

In its commentary, Fitch noted that many insurers have reduced policies in the market in recent years due to higher losses and regulatory pricing restrictions.

The Fair Plan’s policy count increased by 41 percent in the 12 months to the end of September 2024 to more than 450,000.

“Reduction of Fair market share will only be successful if private insurers are not restricted from adequately pricing for wildfire risk,” it said.