Let's Think this Through

A California State Court ruled that the California FAIR Plan’s homeowners form is unlawful and fails to meet minimum coverage requirements. How long has the form been in place? One year? Two years? Decades? And the California DOI never raised any questions?

The California FAIR Plan, with an evidently inadequate policy, meaning their coverages and therefore their claims are less than normal, or were until this ruling, still effectively went broke after the fires. (My definition of broke might differ from the technical definition of “broke” in that they had to assess carriers ("California FAIR Plan gains approval from $1 billion assessment from member firms," Reinsurance News, February 12, 2025), and assessments happen when a carrier does not have the money in the bank to pay claims. To me, that means they’re broke.) Does the California DOI have regulatory review authority to verify insurance markets have the financial wherewithal to be a solid market for its population?

Several years ago, the FAIR Plan requested a large rate increase, and the California DOI wouldn’t allow it. They did allow a 16% rate increase and then investigated it for not having enough reinsurance. Maybe it couldn't afford reinsurance?

This does not include the 2023 lawsuit by a consumer group, which claimed that a $500 million assessment to consumers was unjustified. I guess the fires proved the consumer group wrong. Maybe?

And the list of incompetencies is incredulous to me. We have two huge and powerful government-run organizations, both designed to protect consumers, that seem to have failed. To blame high insurance rates on global warming or greedy corporations is akin to the street corner magician performing the ball-and-cup routine. What is the best way to cause people not to focus on incompetence? Blame global warming and greed.

Let’s think this through. Global warming has been so severe in Sacramento (California’s capital city) that the DOI’s employees were unable to read and review the FAIR Plan policy. The air conditioners were not working. Sweat was blurring their vision. And greedy insurance companies kept them from buying towels to wipe the sweat, the sweat blurred the ink on the forms they were reading, the printers were overheating, and their computer screens were suffering similar heat stress. That must have been what happened.

Global warming also prevented acknowledging that 2 + 2 = 4. I’ll admit, I don’t know how global warming causes people to fail at math, but that’s the best I can come up with. The FAIR Plan is not a greedy corporation but a nonprofit owned by the state of California. If their actuaries say they need $500 million more, and assuming the state pays actuaries enough to employ quality actuaries, it is likely a safe bet the plan requires $500 million more. Besides, even without actuaries, insurance math is not that hard. At a basic level, all you need to know is the surplus ratio, which is equivalent to whether you can add 2 + 2 correctly. It seems like some people in California add 2+2 and get 1.

And as for greedy insurance companies pushing consumers into the FAIR Plan, it must be global warming that is warping the insurance executives’ brains to do something so devious. If I am a greedy company, which implies I want to make a lot of money, then, of course, my first thought is to make a lot of money by forgoing sales, i.e., revenue. I will also make a lot of money by not writing insurance policies. Instead, I am going to cause consumers to buy insurance from some other entity in order to enrich myself.

Writing insurance in better areas with fewer claims is smarter, reasonable, and makes sense. But in California, I get assessed if the FAIR Plan cannot pay claims so even the better areas are not as much better as if I just left the state.

Thinking this through, it appears that the various entities, including the DOI, have a tax scheme in mind. By losing money, the tax savings are so significant that insurance companies make money. Hmmmm. That worked when tax rates were high and cattle were the key ingredient. Taxes are high in California so maybe that variable exists. Are these entities suggesting people are cattle? I don’t know.

Insurance companies can certainly engage in considerable financial engineering. I study their financials in depth, and without question, a little more regulation in some spaces is welcome. But at the end of the day, all insurance companies are the same in the sense that they have $X of premium and $Y of investment income to pay for all their claims, salaries, IT, taxes and fees (carriers pay considerable taxes even if they lose money and do not pay income tax).

Furthermore, all responsibly run insurance companies set their rates so that their revenues and investment income exceed their outgo by a minimum of 5% and then bank that 5% difference in surplus. That surplus growth is banked to pay for large claims, catastrophes, and to enable the company to grow. Ah! But growth is bad, greedy, awful, and enriching of shareholders. I know.

Basic math follows the same rules, regardless of culture, religion, or political affiliation. Insurance companies need profits with which to grow surplus, or else they cannot write more homes. In other words, they need to grow surplus because it is surplus that pays for the catastrophic claims. The less surplus they have, the less they can responsibly insure. It’s no different than the size of a home someone can buy if you have a $5,000 down payment or a $100,000 down payment.

Not only do insurance companies reasonably not want to write in certain areas due to losses, but if they have a severely limited amount of surplus, like the FAIR Plan evidently lacked, they must be choosy as to where to spend that surplus. Should they deploy it in an area more or less likely to burn?

I am not defending insurance companies. But by blaming insurance companies rather than addressing the horrendously incompetent regulatory approach, nothing gets solved. Another state is developing its FAIR Plan. They issued a release stating that because they are not profit-motivated, consumers will be better protected. That is malarky because insurance companies have not made money, even after adding investment income, on homeowners in that state over the last ten years. It is a miracle carriers still write in the state. To suggest the state can make insurance affordable by not taking profits when insurance companies are already not taking profits is silly.

The path forward involves shining a light on the facts and the math, and then not denying the reality of the math. However unpleasant the equation may be, it is reality, and effective solutions are founded on reality.

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