California E&S Insurance

There is a second level to this that is more “inside baseball” and that has to do with the California FAIR Plan (CFP). Right now the CFP has something like $400 billion in liabilities (property value insured) and like $500million in cash reserves. CFP has $5 billion insured just surrounding Lake Arrowhead for example. If that whole area burns, the CFP will be short $4.5 Billion. How does this affect companies like State Farm? Well, part of CA insurance regulations say if you want to be an admitted (regulated) property insurer, you have to participate in the CFP assessment pool. The way that works is, if State Farm has 20% of all homes in CA, which they do, they are then responsible for 20% of CFP’s shortfall in the above Lake Arrowhead example. So State Farm would have to cut a check to the CFP for $900 Million with no warning and collecting no premiums for the risks. Executives are scared shitless about this assessment and it is why most large companies are trying to downscale their book of CA property business. This is creating a death spiral because as they downsize their books, the only place left to go for many homes is the CFP which then makes the risk of a large assessment even greater.

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