Nearly 5,000 San Diego homeowners have turned to the state’s fire insurance provider of last resort, the California FAIR Plan Association.
State lawmakers created the FAIR Plan in 1968 to help provide fire insurance where other insurance companies were not. At first, that meant inner cities facing redlining and turmoil, like the 1965 Watts riots in Los Angeles.
Most of the homes the FAIR Plan insures are still in urban areas in and around L.A., according to 2017 data from the association’s most recent rate filing.
But rural and suburban homeowners are increasingly coming to rely on the FAIR Plan because of growing wildfire risk. Other insurance companies are dumping customers in fire-prone areas  or dramatically increasing prices.
Across the San Diego region, about 4,700 homeowners had FAIR Plan insurance in 2017.
The FAIR Plan’s share of the home insurance market remains relatively small. It covers about 130,000 of the state’s 8 million insured homes.
Now the Fair Plan, along with the wider insurance industry, are a sort of canary in the coal mine for how California deals with wildfire risk.
The FAIR Plan funds itself through the rates it charges, and those rates are supposed to cover all the risks and potential claims. If it runs into problems paying claims, the state’s insurance companies have to step in to help.
That makes the FAIR Plan fundamentally different from the National Flood Insurance Program, which was created the same year but is subsidized by the federal government. That’s resulted in affordable insurance in places where the risk is high.
Insurance is simply a way for people to share risk by charging people accordingly. In California, the private insurance industry argues it has trouble doing that  because of state regulations meant to keep down rates. As a result, the industry says because it can’t charge a lot, it has to insure fewer people.
According to an industry trade group, the Personal Insurance Federation of California, insurance rates over the past decade have risen nearly 50 percent nationally but only about 8 percent in California.
Rex Frazier, the head of the trade group, blames state insurance regulators .
“The sacrifice that is made is that you start achieving rate levels that don’t bear a relationship to reality,” he said.
The reality he’s referring to is that 10 of California’s 20 most destructive fires have occurred in the past five years. In the past two years, state homeowners insurance companies paid out over $1.70 for every dollar they collected, according to state figures.
But how lawmakers react to that remains to be seen.
When insurance is too freely available, it creates perverse incentives, like homes built in flood plains.
When insurance is hard to come by or too expensive, homeowners yowl. Just when they need insurance the most, insurers have decided to cut and run.
Former state Insurance Commissioner Dave Jones said some of the recent focus on home insurance ignores larger questions, like whether to put a community in a fire-prone area in the first place. Those decisions take years – developers plan a project, get approval, start construction and then sell the homes. The last thing anyone is thinking about is insurance.
“By the time you get to insurance it’s too late,” Jones said. “It’s already all there.”
He suggests an impact fee for developers to make certain that they’re providing adequate fire protection, even if that means new fees on home construction.
“That imposes the cost on the developer and makes it part of the calculus of whether it makes sense economically to do that development,” Jones said.
For now, planners are green-lighting thousands of new homes in risky areas of San Diego .
Ending that may be politically unpalatable for now, especially since government bottom lines rely on growing property tax revenue and solving a housing crisis.
Eventually, some people wonder if insurance will become a backdoor penalty on homeowners in those areas. Almost every mortgage in America requires borrowers to have fire insurance, so if insurance becomes so expensive it offsets the relatively inexpensive price of backcountry homes, it could move the market.
“At some point people are going to have to say it’s not worth the risk or it’s not worth cost and move someplace else,” said Tammy Nichols Schwartz, an insurance industry consultant who used to work for the California FAIR Plan.
Some customers certainly view this as punishment, but insurers tend to view the rates another way.
“It’s in the customers’ best interest that they charge the right premiums so they won’t go under like Merced,” she said, referring to Merced Property & Casualty, which went bankrupt after last year’s Camp Fire.
While there may be a temptation to help keep prices low, the governor’s Commission on Catastrophic Wildfire Cost and Recovery said this year that the “state should not act to suppress prices in high-wildfire risk areas.”
The commission also recommended that state lawmakers force insurers to provide coverage to homes if they meet future safety standards created by Cal Fire and the state’s Department of Insurance.
Insurance companies have a history of pushing for better fire protection by offering lower rates to homes in communities with more fire hydrants or better fire trucks, but right now major companies are not necessarily giving similar incentives to individual homeowners that have homes built with new fire-resistant features or that homeowners have retrofitted or cleared brush away from.
Perhaps insurance companies have found it’s easier to stop insuring risky homes than helping to ensure homes are less risky.
David Saah, a professor at University of San Francisco who studies wildfires, said the problem isn’t the computer models, it’s the companies’ business model.
“Right now, a lot these insurance companies don’t do things like that because it’s costly and it hits their bottom line,” he said.
Max Moritz, a wildfire specialist at the University of California’s cooperative extension, has another idea. Make sure that the FAIR Plan isn’t providing any sort of backstop to new developments that are too risky for other insurance companies to cover.
“There is no reason why the FAIR Plan should cover a new home,” he said.