One additional complication is that private insurance companies are forced to contribute to the state’s backstop Fair Access to Insurance Requirements (FAIR) plan. The FAIR plan is basically a high-risk insurance pool that offers last-resort, bare-bones coverage, chiefly for fire losses, to property owners who cannot obtain a policy in the regular market. It was established in 1968, in the wake of urban riots and brush fires, when the California Legislature required insurance companies offering property policies in the state to create and contribute to the plan. It is not taxpayer-financed, and plan premiums are statutorily required to be actuarially sound.

As private insurers increasingly refuse to renew policies, more California homeowners are turning to FAIR plan policies. FAIR plan premiums have been too low to cover the losses its customers have incurred with the result that the plan is $332 million in debt. In other words, the plan is not actuarially sound. This means that the California Department of Insurance is likely to impose a special assessment on private insurers to make up for the FAIR plan’s losses. Private insurers cannot pass along the costs of the assessment to their policyholders. As California’s largest property insurer, State Farm would be on the hook for the largest share of any such special assessment. The way to lower or eliminate the amount that a private insurer could be assessed is to limit the number of policies it sells or simply leave the market altogether.

[If you price-cap it, it will disappear. It’s really that simple. The FAIR subsidies just increase the incentives to get out of the state. — Ed]