Last-Resort Insurers Becoming First Choice for Homeowners

Many states have Fair Access to Insurance Requirements (FAIR) Plans to provide home insurance to property owners who can’t find coverage in the voluntary insurance market. These plans are meant to be last-resort options, as they often offer less protection than standard homeowners policies.

But rising rates and shrinking markets in states across the country are driving many homeowners to view their states’ FAIR Plans as the first-choice option for home insurance. For example, California’s FAIR Plan carried 320,200 policies in August, a large increase over the 126,700 active FAIR Plan policies in 2018.

“In many cases, last-resort plans are the only option for consumers, as the private market is not available to them,” said Mark Friedlander, director of corporate communications at the Insurance Information Institute (Triple-I). “Typically, Fair Access to Insurance Requirements (FAIR) Plans offer less coverage for a higher rate than a private market policy.”

Consumers without options

The rise in the use of FAIR Plans comes as many conventional private insurers have left the markets in certain states.

State Farm and Allstate have ceased doing business in California, as have a number of smaller insurers.

Florida faces similar challenges, with Farmers recently announcing it will stop writing home insurance policies and 14 other insurers currently in liquidation in the state.

“While escalating climate risk is a key factor in generating growth of FAIR Plans in several states, there are several other factors at play,” Friedlander said. “For example, Florida’s property insurance crisis was driven primarily by man-made factors — years of rampant legal system abuse and claim fraud, which drove nine insurers into insolvency since 2021.”

Many of the insurers in liquidation failed before Hurricane Ian hit Florida in September 2022; Ian resulted in the second-highest insurance losses from a single storm in U.S. history — an estimated $60 billion.

A dwindling pool of insurers is also affecting California, Friedlander noted.

“The California FAIR Plan has seen rapid growth over the past year due to many of the state’s top insurers placing a moratorium on writing new policies,” he said. “This is because California insurers have been unable to charge adequate rates for wildfire risk due to tight restrictions from Proposition 103. California’s insurance commissioner has vowed to make significant changes to the regulatory environment, enabling insurers to price risk appropriately.”

A growing trend or means to an end?

California and Florida grab most of the headlines, but other states are struggling to maintain the usage of last-resort policies as well.

Louisiana’s last resort insurer, Louisiana Citizens Property Insurance Corp., has grown dramatically in the aftermath of the 2020 and 2021 Atlantic hurricane seasons, which resulted in record losses. The natural disasters forced many private insurers into insolvency, while others withdrew from the state or placed moratoriums on new business in hurricane-prone parishes.

What’s next?

The plight of insurance consumers isn’t lost on politicians.

In Florida, Gov. Ron DeSantis’ newly unveiled budget includes measures to cut taxes, fees and assessment for policyholders for a single year. It will also create a permanent insurance premium tax exemption for flood insurance policies. In all, the $114.4 billion budget aims more than $500 million at alleviating the state’s insurance crisis.

The Florida legislature has also passed extensive tort reform over the past year, which has led to five new insurers being approved to write residential policies in the Sunshine State.

In California, Insurance Commissioner Ricardo Lara announced the state’s Sustainable Insurance Strategy in September. The plan calls for an increase in private policies written in distressed areas and a continued transferring of residents from the state’s FAIR Plan to plans of private insurers.

For insurers, the plan calls for updates to timelines and procedures for rate review requests as well as requiring the state’s FAIR Plan to create a safeguard against a catastrophic event bankrupting California’s insurer of last resort.

And in Colorado, the state legislature passed a bill to establish its own insurer of last resort plan in response to a more restrictive private market caused by escalating wildfire risk. 

It’s the first new FAIR Plan to be established in the U.S. in 41 years, according to Friedlander.