Assembly Standing Committee on Insurance

So today's hearing is a sequel to the hearing we had last year on The California FAIR Plan. And so my hope for today is that everyone leave this hearing knowing the purpose of The FAIR Plan, the current state of The FAIR plan, and for us to get an idea of what the future holds for The FAIR Plan. Unfortunately, since our last hearing, the number of FAIR Plan policyholders has grown significantly.

So if a homeowner or business receives a non renewal notice, it's fair to say that their next stop is often The California FAIR Plan. I'd like to thank The California FAIR Plan for being there as our safety net. Thank you for stepping in when needed and taking California's riskiest properties. Our homeowners and businesses need to have more insurance choices and should ultimately, hopefully be returning to the admitted market.

Fortunately, the Insurance Commissioner announced his Sustainable Insurance Strategy late last year and is in the process of implementing historic reforms. The goal of the Sustainable Insurance Strategy is to stabilize California's insurance market. Reforms include depopulating The FAIR Plan through residential and commercial clearinghouse programs. I look forward to hearing about how the residential clearinghouse program is working and how The FAIR Plan will use these programs to depopulate. At this time - well, actually, I don't have any new Members here. Would you like to make a opening statement?

Any of you? Mr. Gipson? All right. Welcome. So at this point in time, I'd like to welcome Victoria Roach, President of The FAIR Plan, and Armand Feliciano, General Counsel of Public Policy Advocates.

Good morning, Madam Chair and Members of the Committee, we appreciate the opportunity to testify today and provide the status of The FAIR Plan. Our goals today include the following. Number one, provide historical context and discuss the evolution of The FAIR Plan. Number two, provide data that we believe is going to be helpful for policymakers and stakeholders as we discuss the status of The FAIR Plan. And finally, just really answer questions and concerns you may have about the expansion of The FAIR Plan. And so with that, I do would like to turn it and introduce Victoria Roach, The FAIR Plan President.

Thank you, Armand. Good morning, Madam Chair. Members of the Insurance Committee, I'm Victoria Roach. I'm of The California FAIR Plan. I've been in my position for about two years now, and I've been with The FAIR Plan just over four years, but have 35 years in the insurance industry working in the voluntary market prior to coming to The FAIR Plan.

As we go through today, as Armand has stated, we'll give you some historical background talk about what Madam Chair asked us in terms of the current State of The FAIR Plan and where things are going and what we're working on today. I want to assure the Committee that we remain committed to our mission. Our goal is to be available and present an option for California consumers who cannot find insurance in the voluntary surplus lines market.

So if we move to the first slide, I'll just give a little bit of history on The California FAIR Plan. The FAIR Plan was established by the Legislature in the 1960s following the Watts riots, when people in the inner cities could not find insurance. We were then expanded to cover brush areas. And finally now we offer in the entire state anyone who can't get insurance. Our goals are very simple as stated in the Legislature, simple in terms of easy to understand.

Our goals are to stabilize the market, to assure availability of the market, and to encourage maximum use of the market. We are a residual market, which means we are the last resort. So there's 118 plus insurers in the voluntary market in the State of California. Now, I won't say there's 118 plus insurers available to consumers today, but there are insurers in the State of California. That's supposed to be where consumers go first.

If they can't find insurance there, they're supposed to go to one of the 132 surplus lines carriers in the state. And finally, if they can't get insurance there, they come to The California FAIR Plan. Unfortunately, as you know, with the current state of the market, I think this is oftentimes reversed because there's not a lot of options out there for people. And so instead, The FAIR Plan is quickly moving to be the first resort for a lot of people.

We're one of the largest riders in the state right now in terms of new business coming in, and we'll go through some of those numbers. So you can see where we stand compared to where we were a year ago. So if we go to the next slide again for context, as a reminder, we are not a state agency and we are not tax nor state funded. We are a not for profit organization.

Our goal is to collect money premiums so that we're able to pay our losses on our operating expenses, but not to make a profit. We are regulated by the Legislature. There's statute that regulates the setup and what The FAIR Plan is responsible for. But we are not part of the same regulation as the insurance companies and so therefore we are not subject to Prop 103.

We are an Association, meaning we're made up of all carriers in the voluntary market who are licensed and have property business on their books. They're part of the Association of The FAIR Plan. It's a non voluntary Association. So that means they share in our profits but primarily in our losses. If we have losses and can't pay, we turn to the voluntary market to help us pay for those losses and we'll talk a little bit about how that works. We do accept properties regardless of wildfire exposure.

So we can't manage our exposure the way another insurance company can manage their exposure and say we're just too exposed in this area. We can't afford these kind of losses in this area. We're going to insure over here instead. We don't have the opportunity to do that. As the insurer of last resort, we make sure we're available to consumers no matter where their home or business is located. And again, we're funded primarily through the policies that we sell to our policyholders.

Let's move on to the next slide. So where are we today and where are we focused because of the way the current market is set up. So again, we're committed to ensuring that people have options and the option is California FAIR Plan right now for a lot of customers coming in. We are committed to ensuring that we're meeting consumer needs. We're in constant conversations with stakeholders, legislators, the Department of Insurance to look at what are the consumer needs and how do we best meet those needs.

How do we support a fragile insurance market? Right. Our goal is not to continue to grow and to take on more risks, but how do we provide the stability so the market can stabilize, so that the risk can go back out into the voluntary market where they belong. And again, that's done through collaboration with people like yourselves, the CDI and other stakeholders in the industry. Next slide. So let's look. This is the key slide. Here's our number. Slide. Right. What are we doing?

As of the end of December, we had about 350,000 policies. We're probably up around 370,000 policies today or 375,000 policies today. We continue to grow at a very rapid rate. We're still receiving nearly 1000 applications every workday. So that translates to about 20 to 22,000 applications a month for insurance that we receive. In May, so before the market started really restrict, we had about 9,000 registered brokers with the California FAIR Plan. Today we have almost 55,000 registered brokers, licensed CSRs and producers in our system writing business.

It's been a tremendous increase in a very short period of time. To address that, we've greatly increased our staff, as you can imagine, to try to meet the needs of the brokers and consumers that are coming to The FAIR Plan. Those numbers continue to grow. Last month alone, in the month of February, we wrote over 15,000 new business policies in one month. I think that's - pretty sure that's a record for us and the business just keeps coming in.

That's a mix of personal lines and commercial, but the majority of our business remains to be personal lines. Although we have doubled in commercial policies, it's still a small portion of our business, but continuing to grow. If you look at the next slide, this talks a little bit about what I was talking about in terms of concentration of risk.

So the picture at the bottom shows at The FAIR Plan, we take all comers, basically, as long as they meet the very basic of underwriting guidelines, regardless of where they're located, we will insure them. Even if we insure the four dwellings all the way around them, we're going to insure that risk. No matter what the wildfire score is, the voluntary market has a little more leeway in kind of picking and choosing.

So when we look at this, what it translates to is we have, as Madam Chair talked about, a high risk pool. A high risk pool should translate to higher rates because our risk is higher and our concentration of risk is higher. So you will hear people talk about the high rates of the California FAIR Plan, and I will tell you that in the highest of wildfire areas, our rates are high. I won't say they're higher than everybody else, but they are high.

We have several areas within the state that our rates are still lower than the voluntary market, which presents a different problem. And as the market stabilizes, we'll need to address that problem so that people are comfortable moving from The FAIR Plan back out into the voluntary market. The key that I'll focus you on, on this page is the final bullet point here. So as of December 31, we had over $311,000,000,000 of exposure throughout the state.

So when you look at the number of policies and you think, okay, 373,000 and change policyholders, but then you look at the exposure in the state. These are huge numbers, especially for a residual market, and they continue to grow. So that was at the end of December. We grew another $10 billion in exposure in January and another $15 billion of exposure in February. So the numbers just continue to climb, which is a concern.

As those numbers climb, our financial stability comes more in question, and we then get closer to an assessment of the market. Should we, knock on Wood, have a catastrophe because we can't support those numbers? Right. Again, we're a not for profit. We don't have a lot of money sitting around. Our rates are not adequate. And we'll talk about that in a minute. But our rates are not where they need to be.

And so if we have a major event, we're going to look to the voluntary market, who is already in a precarious situation, and we're going to look to them to help us cover our losses. The more we grow, the more we expand, the more that becomes a reality. So let's look at this next slide. Just gives you an idea of where that growth is. And when we talk about concentration of risk, this gives you an idea. These circles in the blue, it's a quarter circle.

It's the bottom corner or the bottom quadrant of the circle. It's 7 miles from the tip of the center of the circle to the outside of the circle. We look at it, those risk concentrations in that blue area in that southwest corner, because that's how the wind blows. So that's how the fires traditionally move. So we kind of look at our concentration of risk like that. These are the five highest concentrations of risk in Northern California and the five highest concentration of risks in Southern California.

They're not the 10 highest in the state. Just to be clear, we're trying to break the state up and look at it. Our highest concentration of risk continues to be an Arrowhead. I think the last latest number I saw was $8.5 billion of risk in exposure in Lake Arrowhead. I want to point out that we do not have the full market in Lake Arrowhead. We're at about a 50% market share, looking at the number of properties.

So there are other insurers who insuring properties in Lake Arrowhead, but that 8.5 billion represents about half of what's out there. The other thing to take into consideration is when you look at areas like Big Bear City, Big Bear Lake, if you know the geography of the state, which I'm getting very familiar with, those are on top of each other. Right?

So, God forbid, we have a fire in one area, it's going to spread to these other areas and the winds in those areas will pick that up and the dry forest conditions and those fires are going to spread. So even though the concentration we're looking at kind of by location, a lot of those, when you look at them, are on top of each other. In terms of areas, we are growing substantially in Northern California.

I will say in the last month or so, it's leveled out a little bit. We're getting just as much new business in Southern California now. But the first few months of the tightening market, we started getting a lot of business coming in from Northern California. And you can see that here. Truckee has grown 42% in exposure year over year from 2022. So if we move to the next slide, is this yours or mine? This is mine. Right, sorry.

So when we talk about financial stability, right, we're looking at reducing that risk of assessment. We're looking at the ability for The FAIR Plan to pay for its own losses, or the majority of those losses in time of catastrophe, so that we can serve the needs of our consumers and protect the stability of the voluntary market at the same time. Our rates again are filed and approved by the Department of Insurance. We are, by statute, required to have actuarily sound rates.

So what that means is the premium that we're taking in should be enough to cover our expenses and our projected losses. As part of our mission to create stability in the market and reduce the risk of assessment, The FAIR Plan goes out every year and buys reinsurance.

So we go out and buy insurance so that if we have losses that we don't have the money to cover, we have insurance we can go tap into before we have to go to the voluntary market and ask for money. As you can imagine, reinsurance for us in the market is expensive, and it's one of our biggest expenses.

We have been in discussions with the Department of Insurance because today they do not allow us to include that net cost of reinsurance in our rates, which means our rates are never actually sound because all of our expenses are not included in that rate making. I will tell you, we are deep in discussions with them right now about how do we change that, how do we make it work so that we can include the net cost of reinsurance in our rates?

We've provided them a lot of data that they've asked for. We've had meetings to talk about our reinsurance structure, so we're hoping to move that forward soon to be able to get our rates closer where they need to be. We are authorized by statute to buy reinsurance. It's just whether or not we can include it in our rate making, similar to the private market and discussions they're having with the Department. With that, I will turn it over to Armand to give a little bit of background.

Next slide, please. So the Legislature did step in in the mid 90s regarding The FAIR Plan rates, assessments, and the issue of subsidy - subsidizing The FAIR Plan. A little context. In the mid 1990s, The FAIR Plan did assess the voluntary market. I think the amount was $260 million.

The Legislature responded to AB 1754, and I won't read the whole quote, but I think the last sentence really provides the rationale for that Bill at the time, which is The FAIR Plan should have adequate rates to make sure they're financially solvent. And number two, talks about the indirect tax that The FAIR Plan, the assessment from The FAIR Plan, and how that could be an indirect tax to everyone else subsidizing the market for The FAIR Plan.

And just to put a little context around that, when we talk about $260,000,000 in the 90s, that was against our exposure at that time was around $22, $23 billion. Compared to our exposure now is $320 plus billion. So when you look at the size of the assessment, kind of keep that in mind. Right.

Next slide, please. So the next slide is really just to kind of put it in context, a snapshot for everyone else to look at, sort of the stabilization, The FAIR Plan expansion, and the market ramifications. So you'll see there on the left side, we put AB 1754 because that established by law that The FAIR Plan needed to have adequate rates. And the middle bullet there on the left side, that's the effort, what they call the clearinghouse legislation passed in AB 3012 and SB 505 last year.

Again, the concept there, when you hear the clearinghouse, it's a mechanism to depopulate The FAIR Plan. And then obviously, the third bullet, the big one, is the California Department of Insurance Sustainable Insurance Strategy. The FAIR Plan is working diligently with Commissioner Lara and his team on that. And you can see the sub bullets depopulating The FAIR Plan rates, reinsurance and anything else. Catastrophic modeling are the key components in trying to stabilize The FAIR Plan rates, at least for 2024.

In the middle column, you'll see The FAIR Plan expansion, SB 11, 2021. It was all publicized and documented that farms couldn't get insurance, so The FAIR Plan stepped in. That's part of their coverage structure now. 2022, they increased the limits, dwelling limits to $3 million. And then last year, the issue of $20 million per location. Again, context for Members of the Committee. We heard a lot about HOAs and developers not being able to get coverage for this.

Last year there was an agreement between The FAIR Plan and CDI to do $20 million per location. Obviously, that issue is back this year. I think we've heard from the builders that they need 20 million per building. So that issue is pending. I would note that The FAIR Plan did submit to Department last Saturday a proposal to begin that discussion on that issue, and Victoria is happy to expand more on that. And then there's a pending litigation. Obviously, we can't discuss it's pending, but it's the expansion of The FAIR Plan to cover homeowners insurance. I will now go back and the market ramifications.

Yeah, we've talked a little bit about this. We're going to continue because this is like the big issue. Right. So as we continue looking at meeting consumer needs, and that translates to expanding coverages, expanding limits, it moves us closer to assessment. And as we get closer to assessment, it further undermines our own financial stability and the stability of the market. When we get to a point where we have adequate rates, that will help.

It's not going to solve the problem, but that will help because at least we'll have the rates coming in, commiserate with the risk we're taking on. And then beyond that, you have to talk to the voluntary market as to what does that mean to the voluntary market and to other policyholders in the state.

We've already seen a lot of that where they don't have a lot of choices today, and a lot of them are coming to The FAIR Plan that would have never come to The FAIR Plan before. As a point of reference, in September, which was the last month of our fiscal year. So September of 2023, 40% of the business that came to The California FAIR Plan was not in a wildfire area.

So the new business coming in and the growth we're seeing, we're still seeing growth in the wildfire areas and in the moderate and high wildfire areas, but we're seeing a lot of growth in the no or low wildfire hazard areas right now. And we believe that just to be a factor of the market and that there's not a lot of options out there for people. So if we go to the next slide, we'll talk a little bit of what's happening internally at The FAIR Plan.

The first thing is in November, we launched a new application technology system. So we replaced our computer system anybody who's worked for an insurance company or any large company that's gone through a complete overhaul of their computer system knows that does not come without its own challenges. The decision to do this was one we made a couple of years prior. We had been working with the Department of Insurance and talking about how do we modernize.

How do we become more able to handle the changes in the market. We needed a new computer system. Thankfully we have it, because I'm not sure what would have happened if we were trying to write all this business on our old system. But again, it has come with its own set of challenges. We continue to make progress in that area and as I said, we successfully issued 15,000 policies, plus last month, more than 12,000 policies in January. So we are putting business through.

We're not completely done with the transition, but we're getting there. We've been holding educational webinars, town hall meetings and events for brokers, agents and consumers and other stakeholders. We've substantially increased our staffing and our training and resources internally and to the brokers so that we can manage through this process. As I said, we have a lot of new brokers and licensed CSRs and producers writing business with The FAIR Plan who have never done that before.

We implemented ZestyAI, which is our wildfire risk scoring tool that allows us to better take into consideration the individual property risks versus location risks when we're doing ratings. So if people are using materials that are more resilient to fire if they cleared the vegetation away, depending on the geometry of their roof, they're going to get a better rate even if they're in the high wildfire area. So it gives us a better tool to use to rate those risks.

We've launched additional policyholder payment options, so we now have a monthly pay plan. And we implemented online credit card payment options and more to come as we work our way through this. So if we go to the last slide. So where are we today? We are really collaborating with the Department of Insurance on the Sustainable Insurance Strategy. So what really affects us, one is depopulation of The FAIR Plan. Armand talked about the clearinghouse that we put into place.

Obviously, clearinghouse doesn't work for companies to take policies from us if they're not writing policies in the state. But the idea is that we make our book of business available to voluntary and surplus lines carriers so they can go in and look and pick the policies that they're willing to write to move them out of The FAIR Plan. The FAIR Plan has no control over it. We can't push policyholders back into the voluntary market.

It is something that when the market stabilizes, we're going to have to look at. There's an inherent obstacle to overcome, if you will, with the way the legislation is set up for the clearinghouse. So we provide the policy information where we give them the risk information and then we give them the broker information. And the company has to go to the broker of record because it's their customer, to quote the business and quote the policyholder.

Unfortunately, if that broker is not appointed with the company, who wants to take the business, that creates something the broker and the company have to work through. So it's not an easy, I just am pick State Farm. I'm not State Farm. I can't come in, I can't grab 10,000 policies and say, hey, these are all in low risk areas. I'm willing to write these. I'm going to write these. That's not how it works.

Because then they go to the brokers, and the brokers may or may not be state farm brokers or appointed with State Farm. So they've got to work through those issues. So even before the State of the market changed, we had very limited success with this. I think it needs more time and attention to figure out how that will work when the market stabilizes. Again, adequate rates, including the net cost of reinsurance.

We're in very deep discussions with the Department about that now to get our rates to an adequate level. Catastrophe modeling, same thing. Um, and then all of this. Right. The, the goal of this is to lead us towards FAIR Plan sustainability. We need to be available to the market when we need to be available. We can see that right now, but we also need to be available as the market stabilizes to make sure that we are a stabilizing force in the voluntary market and not something that causes concern because of the risk of assessment.

So I think that brings us to the end of our presentation here. Thank you for your time and questions at this point.

Thank you so much. We appreciate you being here. Now I'm going to check with my colleagues and see if you have any questions. Assemlyman Wood.

I have a number, but I'll do my best to not monopolize the time here. First of all, just what I heard last regarding the clearinghouse. As one of the people who worked on creating the clearinghouse, I'm disappointed to hear that there are challenges with that that I'm just now hearing about. So if the miscommunication didn't get back to me, I will check in my own staff.

But I do recall that one of the reasons it was written the way it was was brokers and the agents wanted it written a certain way. So now that it's not working, maybe we need to, obviously need to go back and revisit that. I was struck by what you said about FAIR Plan rates maybe being lower than what commercial market rates were. But isn't that kind of comparing apples and oranges? Because FAIR Plan doesn't have full coverage that a commercial plan might have.

So I'm curious, can you elaborate a little bit more on that?

Sure. That's an excellent question. And again, I'll preface this with anecdotal information. Right. We're getting information from the brokers who are telling us this. Right, because we don't have any way to compare our rates. What we know is brokers are telling us that in some areas, the FAIR Plan policy, plus the differences in conditions, policy is still cheaper than what the voluntary market is offering homeowners for in those areas, and I would believe those are the higher brush areas that we're talking about there.

But we've seen that what we're seeing today, or what the brokers are telling us, again, even before the market tightened up as much as it is, is that because rates are higher than they have been for a lot of the voluntary market, we have lenders and or realtors who are telling people, go to the fair plan, it's cheaper. And I guess for some of these people, the issue is just getting insurance for the loan, and the fair plan insurance is sufficient to secure the loan.

And so because of the rates, they're willing to take the less coverage and come to the FAIR Plan. That's what we're hearing from the brokers.

Interesting. I believe I heard you say that with regards to reinsurance, that you're currently not allowed to use those costs in your rate.

Correct.

So my understanding is that with the insurance commissioner's plan, he's looking at that, changing that. But they're not looking at changing it for the fair plan. Or are they? Because.

No, they are.

They are.

All right. I just wanted to be sure. That would be a huge oversight if that weren't happening.

Okay.

Exactly. Yeah, we've had those conversations. Right. If you give it to the voluntary market and their rates go up and ours don't, then you get into that same issue. But no, we're having discussions about that with them.

And then just not anecdotal, because I've talked to people who are experiencing this and I recognize you've had it challenges. But I'm hearing from some people that it's sometimes taking, they're on hold for, you know, are on hold for all day to get through to somebody that is sometimes taking two plus months to get a policy written. Is there some relief on the horizon for people who are.

Because now if you are trying to close that real estate transaction or you are desperate to have any coverage at all because your carrier has told you you're canceled, the amount of angst and anxiety that people are facing is pretty alarming and there's literally nowhere for them to turn. So when will we get. It's not anecdotal.

No, that is not anecdotal.

And so when will we see some relief in that? So that people certainly in high risk areas and not just high risk areas. You talked about everybody. There are other, my in laws were on the FAIR Plan because their insurance, and they live in suburban Los Angeles area.

Right.

So in an area, it's a suburban area that doesn't have a huge high fire risk where they happen to be. So when can we tell our constituents that this is going to improve?

So I have good news on that front. I can tell you we've already started to make the turn. I will not tell you that everything is perfect because it's not. But our average hold time over the last 15 days is 11 and a half minutes. So people are not sitting on hold that long. The phone calls might be taking a little bit longer.

So once they're on the phone, because we've grown from 18 customer service reps to 75 people answering the phones, we get on average about 2200 phone calls a day. So we do have a lot of new people on the phone still who are still learning. And it takes time to get everybody trained up, but we are processing work faster. The majority of our policies, our quotes are issued within five business days, which is our SLA, I must say, a lot of them.

And again, we watch the numbers daily now we turn around a lot of them overnight now. So I think there's a combination of things that happen, right? There's issues with the system brokers learning the new system, our internal people learning the new system. And just this, I don't know how to say it, barrage, demand surge. That's better than barrage, but demand surge all kind of culminating at the same time. But the numbers are every day are looking better.

I will tell you that we've had customers or brokers who've come to us and raised issues around escrow closes. We do get those issued when we find out about them. I've got a number of them that have my personal email address, text messages, whatever they need in order to get a hold of me. And I know that some of the constituents have raised issues to your level. They've been going through Armand, getting the policies issued that way.

That's really dying down because now we're really getting on top of the work. But we still have work to do. But every day it looks better.

And then just a final question. So I represent an area that has a lot of agriculture, particularly wineries, and they obviously are struggling. And so when you talk about your commercial plans, does that include agricultural type businesses such as wineries and vineyard property, that sort of thing?

When we presented our proposal to the department for the $20 million per structure and the higher limit in commercial, we did not limit it to just condo association. I'm not sure where we'll end up at the end of all this, but we did not limit it when we sent the proposal in.

So agricultural properties, the same coverages that.

We offer today for the buildings? Yes, they would be included.

They would be covered.

Okay.

Thank you, Madam Chair.

You're welcome. Assemblywoman Ortega, did you have a question?

I have a lot of paperwork up here. Thank you for your very detailed presentation. I was here at the last hearing that we had a year ago and looking at the analysis that was presented to us today. There's a question here about whether or not the FAIR Plan is still the insurer of last resort. And your opening statement with the number of increased policies that you now have, the answer is clearly no.

Right.

And in terms of constituents calling my mayor in my city and I do not live in one of the wildfire areas, but called me and said I can't get insurance, it's clearly an issue. The long wait times. So my question is more about what are we hearing from the insurance companies and their commitments to get people off the FAIR Plan onto the private market, it's still a question that I haven't heard answered.

Yeah, I hate to not answer a question, but I'd have to direct you to the trades and the private insurance companies because I can't answer for them in terms of what their plans are. So we're really focused on making sure that we're providing the coverage we need to provide today and that we're ready to help the insurance companies take the policies back into the market when they're ready.

And I guess another question that I've been getting a lot from consumers is about their reductions. If they're doing wildfire updates to their properties, if they're doing everything that they're supposed to be doing, will they be allowed to get off the FAIR Plan and return to the regular market when there is someone to take them?

So I think that question again goes back to the voluntary market. What I'll tell you is we are tracking that we were one of the first companies to provide a discount to consumers who are making those changes. So if they're doing what they need to do for defensible space or the structure, we're providing a discount to them on their wildfire premium.

For the time they're with the California Fair Plan, we are adding that to our clearinghouse database so that when the companies are ready to take business from us, they'll know which of those customers have already done what they need to do to protect their home, because we do think it'll be a factor. But again, the specifics of that would have to go back to the private market.

Thank you.

Mr. Gipson.

Thank you very much, Madam Chair. And thank you for your presentation. I have just a few questions. Dr. Wood asked the question I was going to ask around the wait time because I also heard that it was a long wait. So can you walk me through when a person calls for insurance, just for my own edification, they receive someone on your end, receive the call, and then there is what takes place.

So it's loaded question. So it depends on what they're calling about. Right. So I think the first thing is that a broker can submit on behalf of a customer. They can submit an application online and that application then is reviewed. If everything is there and there's no questions about the application, they will get a quote, right? We will issue a quote. Once that quote is issued, the customer can pay and the policy gets issued.

So we bind the business, but we do it a little bit differently. Than other insurance companies because we require the application before the quote. They get the quote. Once they have the quote, they're allowed to bind the business. They can pay, and then we'll bind the business the next day.

And that rate won't fluctuate. That rate won't change.

That rate does not change once that quote is locked in. Okay. And then if they have to call because they have a question, which again, we get about 2300 calls a day. So a lot of them have questions. They get to a customer service rep, and it really depends on the question. So one of the things we're doing right now, as Assemblymember Wood asked about kind of where are we going with this? One of the things we're doing now is upscaling

some of those people answering the phone so they can be one and done on the phone so they don't have to send that somewhere else to be handled once somebody calls in.

So am I to conclude that everyone who calls is in fact received an insurance policy? Is there a time in which someone is rejected? And if so, why?

Usually if somebody's rejected, it's because we haven't gotten all the information we need to have. So whether it's because a broker didn't send in the photos that we needed, or usually it's things like a high valued home where we didn't get a replacement cost estimate to compare the coverage against. But for normal purposes, we have very few underwriting guidelines that will prevent somebody from actually getting a quote and being able to issue a policy with us.

So with our last rate filing, we worked with the department to really pare down the reasons why somebody couldn't get insurance with the fair plan, knowing that we're the insurer of last resort, we should be available to people who need insurance. And so what we did is we changed our rating structure to say if the home is insurable, but the home is not in good condition, and it's something that the homeowner has control over, so it's not where it's located.

We might surcharge the customer and charge them a higher rate until they get that condition fixed, and then once they get that condition fixed, their insurance premium will go back down. So you're talking about really the extreme circumstance if somebody is rejected by the fair plan.

Okay, going to the rates, you may mention that the legislature set the rates. Did I hear you correctly?

The Department of Insurance approves our department.

And how often are those rates set, change, decrease, increased?

According to our plan of operations, we have to submit a rate filing at least every two years. So the last one we submitted was in August of 2021, and the rate filing was approved in September of 2023.

And that rate filing was to increase.

That was to increase 15.7%.

Is that the highest that you've asked for, increased?

Yeah, we had an increase in 2020 of about the same 15.6. And don't quote me on the numbers, because I'm doing off the top of my head. But that was, I believe we asked. The ask to the department was about 35%, and they gave us about 15 and a half. This time in 2021 when we filed right after that, the next year we filed, we filed for a 48% increase. Our rate need at the time was around 70%.

We asked for 48.8%, and we got approved to 15.7%. A lot of that is because exactly what we're talking about, the net cost of reinsurance is not allowed, catastrophe is not allowed, and we're not allowed for the cost of capital in our rates. And so those get pulled out and then some back and forth negotiations with the department. So that's where we are.

We have not filed again because we're waiting to get approval to file with catastrophe modeling and net cost of reinsurance in the rate filing, and then we'll file again for increase. For an increase. And then, just to give you context, right, we file, it takes us about 90 days to do a filing. So if they gave us the okay now, it would be three months from now when we actually filed.

Then however long it takes the department to go through and approve that filing, and then takes us another 90 to 120 days to implement any kind of filing. So any change we make takes about 14 months from the time we start working on it to the time it actually hits in our system. And that's depending on how long that back and forth with the department goes for approval.

Just going back to, I guess, the call center, you had 18, you increased it to 75 people. And the wait time is with the 75 people is at 11 minutes.

It is.

And if it goes over, does a caller have opportunity to say that, put your number in, because some companies put your number in and call you back and place you in a queue. When someone is ready, the phone rings and there's a person on the phone.

So I'll be honest with you. That's an excellent question. We are in the process of looking at new phone systems because our current phone system is pretty antiquated, which is also part of the problem with these longer wait times, because just like, if we had been on our old system, we were on our old phone system. All of a sudden, we got this demand surge of phone calls, and our system couldn't handle it.

So some of what you were asking about in terms of people were on the hold all day, it's because the calls never even came through, and we didn't know that at the time. But the call system was hanging up on people. It was putting people into a never ending loop. Not that we had the staff that we could have answered them all, but they couldn't get through if they tried.

So now we're at a better point, but we're looking at doing a switch over to a new phone system that will allow us that callback option and or the chat option so people could chat in and get answers to their questions versus having to wait for somebody to answer the phone and give them their answers.

Great. My final question is, is your call center located in California?

Is, our call center. Employees are remote, so most of them live in California. But it's remote. They're all remote. They work out of their homes.

Thank you.

Thank you very much. Thank you for the presentation. First, I will acknowledge what I've told a few folks who have talked about insurance. I'm in insurance 101 still, so a lot of basics, and some of the questions I'll ask you might be very basic for my colleagues. So I apologize if that's the case. Let me start with asking you about the are you able to share the assets that the plan currently holds?

So right now, our surplus is about $200 million.

That's after the revenue from annual policies. And because you're at a nonprofit, has the surplus grown or is it maintained?

It has grown. So when I started with the FAIR Plan, even when I started as the President two years ago, because I like to take credit for it, we were actually at a deficit. So we didn't have any surplus. We were at a deficit. While I take credit for it, a couple of years, knock on Wood, of very small catastrophes, and no large catastrophes has allowed us to grow that surplus.

I was going to ask that because you're a non for profit, and so you're not really intended to have a surplus, which in the private sector is a profit.

Right.

And it's because you haven't had any claims that have been substantial.

Right.

Okay. Let me ask you about the process that you have to go through, because you described the 14 month process, which is very similar to what the private market expresses. Explain to me where I might be misunderstanding that you are not under the provisions of Proposition 103, yet you seem to go through the exact same process that those that are under Proposition 103 are going through.

So we are not under Prop . 103. We're an association. We have a separate statute that created the FAIR Plan, but we still report or are regulated by the Department of Insurance. So because we're still regulated by the Department of Insurance, they require us to file. Hasn't my understanding, and this is before my time, is it hasn't always been like this, but they require us to file our rates with them, and we go through a similar process that the voluntary market goes through.

But because we're not Prop 103, there's no intervener process or any of that. It's just negotiation back and forth with the department.

So would you say that that's more of a practice and it really is a regulatory requirement of yours or a statutory requirement?

So I'm going to say that goes beyond my knowledge, and I'd have to get back to you because I'd have to check with my legal department.

Okay, so historically, you've been a much significantly higher cost than the, what do we call it? Voluntary market is what is referred to as private. But I heard you describe in the questions and in your presentation that you now sometimes compete with the private voluntary market. Yet it seems like you've requested increases that perhaps could have kept you at that traditional rate of three times higher, but you obviously haven't received those requested adjustments. So you talked about reinsurance as being one of the main reasons.

What are the other reasons to why you haven't been able to receive the adjustments that you believe were adequate when you submitted your initial rate request?

So I would say their net cost of reinsurance is the primary. The next one is the cost of capital. Because we're not for profit, we don't include any cost of capital because there's never been kind of the, we haven't been in a position where we've been trying to grow our capital layer, which we're talking about now, because that capital layer is what keeps you financially stable, is being able to pay your losses when they come.

So the cost of capital has not been part of our approved rates and then catastrophe modeling. So when you're a catastrophe insurer in particular, and you're looking at your losses when you have a number of years where there's big losses, but if all you're doing is taking, say, the past 20 years, and you're averaging over that, right, when we were a small company without a lot of exposure, and we didn't have these huge catastrophes.

And you look at 20 years of losses and you say, that's what we're going to use to project current future losses. Were that really looking at catastrophe modeling and what's projected, what's really projected with your current book that also plays into your rate. So those three pieces are the pieces primarily that keep our rates.

But help me understand about the catastrophe modeling, which I know is a significantly higher number, but in your current, the policies that you've issued, you have a known liability of over 300 billion. That's not with catastrophe modeling, is that.

No, that's just our true, that's how much insurance we have on the books right now.

And so I guess I'm trying to understand who drew the line where at what point, to say that it's okay to have a $320,000,000,000 liability with a 200 million at this point, which is your highest point, $200 million in assets, and that that would be a normal, okay. Business model and not actually allow you to have a higher annual policy revenue that would help you get a little bit closer? Is there a decision at some point in terms of what that amount was?

So I could get you more information on the history behind how this works. But what I would tell you is I don't think anybody thinks it's a good model right now. Right. Given where we are with the market. I think it was different when we had $50 billion of exposure in 2018. People were a little more, it was a little bit easier to digest it. Right. It's the way we're structured. It's how our plan of operations is set up.

It's policy from the department, it's legislation, it's all of it together that creates where we are. Right. So the legislation itself says that the voluntary market participates in our profits and losses, which, if you think about it, means that if we have surplus, technically that's profit. So do we hold on to that or do we give that back to the voluntary market? So right now we're holding on to it because I think everybody agrees financial stability of the FAIR Plan is the key. Right.

For us, we have to be financially stable in order to help assure the stability of the market. So I don't know that there's one answer to it. I think it's all the pieces together.

Okay.

Let me ask you about three things that are in your presentation that I'm trying to understand. This clearinghouse idea to help transition FAIR Plan policies to the voluntary market. What exactly is it. And where does it stand today? I know that at least this was recent with last year's bill, but Dr. Wood seems like he has some legislation now, four years ago. So where does it stand?

The clearinghouse, conceptually, the conceptual part of the clearinghouse is basically we provide a platform for the voluntary market and the ens market to be able to come in and say, I'm willing to write these policies. They don't need to stay with the FAIR Plan. They are in areas we're writing business. We can pick up more exposure, if you will. Cherry pick. Right. I'm going to go through and say, here's 10,000 policies that I can offer insurance for. Right. That's the idea of the clearinghouse.

Our role in it is to provide that data so the companies can come in and do it and take the policies. It's a reasonable model. Right. That sounds reasonable. Put it out there. As we were talking about before, I think one of the concerns that we haven't figured out, or the industry hasn't figured out yet is how do I actually take those policies from a broker if that broker is not appointed with the company, who's willing to write them.

And understandably the brokers are concerned because that's their customer and that's their business and that's their account. But if that broker doesn't have another market to move it to and they're not appointed with the company, who's willing to write it. Right. And it's got to be more than the one or two. Right. We're talking about coming in and taking blocks of policies. That would be ideal. I think that's the intent. I think we just need to look at logistically how that would work.

Assemblymember. If I could just add on to that, just to kind of put visually how that looks.

So here's the FAIR Plan. I'm the voluntary market, the agent on the other side. There has to be a negotiation between the two of us. They're the platform. But by law, the way that's written, and there was an agreement on this.

When it passed, that negotiation has to take place. They can't force someone to get off the fair plan.

Those two parties have to negotiate.

Okay, I see. This should be a quick question. Where are you in the process? A month long process of the 20 million per building as opposed to per location.

So we've been in discussion now for a while with the department about what does that look like? So as I spoke about before. Right. Our concern is as we continue to look at expansion of coverages higher limits, it creates more financial instability for the FAIR Plan. And we have to be careful to protect the policyholders today and make sure that we're not getting closer to a risk of assessment.

Does that mean that you're hoping that in those conversations you achieve a rate that is more aligned with.

It is a $20 million building as part of an Association, I'm just going to be honest, that's not a residual market risk, that's a specialty risk. Right. But we understand that there's a need right now that can't be filled, and we've got to figure out how to fill that need. So we put together a proposal for the department that has a lot of components to it. And in the department's defense, they just got the proposal this weekend.

I'm not even sure they've had time to open it yet. But they do have the proposal. It includes things like an upper limit. Right. We can't issue a policy for a building. We issue a policy for a risk. So one condo association is one risk, and there has to be an upper limit to the policy so that you don't have unlimited exposure for that risk. The rates, as you've stated, that's part of it. Right.

We need the cost of capital and that cost of reinsurance and catastrophe modeling in those rates. The other piece we need is we need to make some changes to our policy language to make it more attractive to excess carriers to write that next layer of coverage.

So if we're not offering enough that there's an excess layer of coverage available to the condo associations to pick it up, we're looking to change our language so that we're the primary and then the excess carrier will carry excess on top of that. And then we need to look at our underwriting guidelines because we need to match it so the excess carriers are going to be willing to write policies on top of it. We've had a lot of discussions whether they're carriers.

We've talked to brokers, we've talked to excess carriers. We've talked to surplus lines. So we've had discussions over the last couple of months with a lot of groups to kind of come up with this proposal of here's how we believe we can meet the need of the market while not further creating instability in the financial, financially for the FAIR Plan. And so that's what we've given to the Department.

Thank you. My final question is, without giving details, I am assuming a lot of response to this question could be what you just shared.

So I don't need the specifics, but I think it has to be asked, given that last fall, the declaration of the emergency, the executive order, excuse me, and the sustainable insurance program in your role and your participation in that, without the need to give specifics, are you able to participate in that in a way that the fair plan will have a role in that, as expected, or are you running?

I want to make sure that at this point in time, are we running into some concerns that we should be aware of?

At this point, we have regularly scheduled meetings with the department and we're in regular discussions with them about the parts of that plan that apply to us. So I think our next step now is to hopefully turn some of this into action. But we've been very engaged with them. We've been working collaboratively with them on the sustainable insurance strategy, everything that applies to the FAIR Plan.

Well, I personally would appreciate updates as that goes forward to make sure that that is continuing. Thank you very, Madam Chair.

Assemblymember Patterson.

Thank you very much. Thanks for coming in today. And we had an opportunity to speak with each other in my office and appreciated that time. The other day I met with speaking to a group of oncology nurses and I joked with them, but it was quite serious that in my job, I'm hoping to put them all out of business and go in another field, hopefully as we address things regarding cancer.

And when it comes to the FAIR Plan, I don't want to put you out of business, but I would like to reduce your book of business, particularly from my district. I would say there are two issues that I get a lot of calls on. The top two issues, and one of them is people losing their insurance and having to go to the FAIR Plan.

And we talked a little bit about what the rates are in different regions of the state and what feedback I'm getting is that their cost of their insurance is going up exponentially when they transition to the FAIR Plan. And obviously happy to provide individual details, but philosophically, I understand the need to have sustainability in the business model. So that makes a lot of sense. And I feel the same way about the voluntary insurance as well.

But just to ask a couple of questions about the rates and, and things like that and just the exposure. My district, which is Placer and El Dorado counties, we have experienced very large fires in the last couple of, well, not last year, fortunately, but prior to that, Caldor Fire started right outside my district and it really impacted El Dorado County, as you know, as well as other counties.

The Mosquito fire list goes on and so the prospect of having a big fire, unfortunately, in my district or right outside my district is not out of the question of that happening someday. So in the event that, by the way, an entire community burned down right outside my district, Grizzly Flats, and I went there and I saw the devastation that happened as well. And we've been trying to help as much as we can.

So it's not outside the realm of possibility that there would be a massive fire with a lot of losses to the fair plan, especially as people are losing their insurance or the cost is becoming unaffordable. And so my question is, if there were losses of an extraordinary amount in a fire where people are covered by the FAIR Plan, a lot of people, billions of dollars, $5 billion, how would you address that? And what would that mean in terms of the assessments to the voluntary market?

Okay, so I have to think about how to answer that. The way the assessments work is if there was, God forbid, a large fire and we're talking, you said $5 billion, we'll use that as the number. Right? $5 billion. The way it would work is we'd use whatever capital we have on hand to cover the losses as they were coming in. We work with modelers who then look at our footprint and tell us what our exposure is in that area and where the fire is moving.

And so we start to try to play out the scenario of what is it going to look like? What are our losses going to be? When we get to a point where we say, we don't have enough money, right? This is going to run into the billions of dollars, and we don't have billions of dollars. My financial person comes to me and says, hey, this isn't going to work. We don't have enough money.

And I say, okay, let's go to the accounting committee, which is a cubcommitee of our board, and we go to the accounting committee and we say, we think we need to assess. And here's what we think we need to assess. The accounting committee says, okay, I take it to my board. My board says, yes, send us a bill. Then we take it to the commissioner. And the commissioner has to sign off and say, yes, we believe you need to assess.

So there's the checks and balances in that to make sure that we're not asking for more money than we need. But it's really a timing game, right, in terms of figuring out when we're not going to have enough money to pay those losses and then going out to get that money.

So it's obviously hard to extrapolate what a $5 billion in a loss would look like. But what does that mean to the carriers in the voluntary market? I mean, what does that actually look like for them?

So we do have reinsurance. So that's part of the equation, too. So when we look at how much we have to pay, we're also looking at how much our reinsurers have. Our reinsurance, though, works a little differently than, say, other insurance companies. So typically, you would buy X amount of reinsurance, we buy X amount of reinsurance, but there's not as much reinsurance available for the wildfire risk.

So although we have reinsurance, and our tower goes all the way up to four and a half $1.0 billion, we don't have four and a half $1.0 billion of coverage before we have to assess. So as we're going through the tower, each kind of layer of insurance that we purchase, part of that is co-reinsurance, which would be covered by the voluntary market, because we don't have money to cover that.

So we could get to $1.0 billion and have to assess the voluntary market for that. And when we assess today, once we go through that process, then the voluntary markets have 30 days to send us the money. The way we determine how much to bill each company is, we look back two years. So at the start of each fiscal year, we're going two years prior, and we're looking at what the market share was for each company for that time period.

And we say, okay, so company X had a 10% market share. We're going to send them 10% of the $5 billion bill, or whatever the bill is. So that's how it works. And then they have 30 days to send it back to us. The companies can get write out credits, so they know exactly what market share or what percentage that they're responsible for, because we send that out to them.

But they send us back a list and they said, hey, here's all the policies that we already write in the wildfire areas. They get credit against that, and then we reallocate that percentage. So their full market share might be 10%, they might only get 9% of the assessment if they write enough in the wildfire areas, and so then they get a bill for that percentage.

The companies who aren't writing business today, or even companies that have pulled out completely and are non renewing policies, are still part of our Association for two years. So because we go back two years, it's possible that a company who's pulled out of California completely still gets a bill.

So just for clarification on the market share, is it generally speaking, did you say it's market share in California or market share of where the losses were?

Market share in California. Okay.

Yeah. So just a common. Is that just last week, unfortunately, I was informed that my carrier is leaving California altogether. And so I might be a customer soon for all I know. But the prospect of big losses like this in a community like mine, where I think people are very dependent on the fair plan and how that disincentivizes potential assessment of large losses, where that could happen, that could happen in my district. The fair plan has such huge exposure.

If there's a big fire, the amount of assessments that go out and how that kind of disincentivizes even more for those companies to maybe offer insurance in California at need. Obviously, everybody knows this. We need sustainable business models here in California. That's kind of the primary thing. But I can't stress enough, I know my colleagues all know about this. I'm sure everybody's getting calls, and I don't know to what extent everybody is. I know that probably everybody's a little different.

I've asked around a little bit, but the amount of calls that I get regarding people having to move to the FAIR Plan and what that cost is in my district is daily. I'm not personally thinking about, hey, let's come up with something that we're going to do 2026 and maybe 2029 once regulations maybe or someday are promulgated. I mean, this is like people can't afford to live, and this is a major component of that. I think for me, there's a huge sense of urgency.

I'm still the new guy here in this committee. This is literally my first committee meeting here. But it is something that every day comes up in my office. So thank you for your time and answering my questions.

Absolutely.

Assemblymember Wood did you have another question.

Thanks for letting me take another bite at the apple here. So, listening to the questions that Mr. Assemblymember Gipson raised makes me think we're on track here to maybe get to 500,000 policies, not too distant future.

It's not unlikely. We're growing at about a rate of 27% year over year. I think our projection for this fiscal year, which ends in September of 2024, our projection was 404,000 policies. I'm pretty sure we're going to go beyond that. But that was our projection, given where we were in July of 2023, when we made those projections.

So you're covering about over $300 billion in assets. How much cash on hand do you have?

So again, surplus is about 200 million. Cash on hand is somewhere in the neighborhood is 700 million.

So a tiny percentage of what your exposure is and how much reinsurance do you buy.

So our tower goes up to 4.8 billion. The actual amount of reinsurance is about two and a half $1.0 billion that we purchased.

And how does this compare to other carriers?

We usually look at other residual markets versus other carriers because we're a single peril of wildfire in our reinsurance. So we compare to other residual markets across the country. Most markets will carry between 100 year or a 250 year event. So 100 year event means that the fire for us, which is about $5 billion, is an event that's going to happen every 100 years. That's likely to happen. Right. So we now have gone to 100 year event, which we've never had that much reinsurance before.

Last year, by comparison, we had about $1.7 billion. And this year we're at like two and a half $1.0 billion that we've purchased. Ours is low compared to other residual markets based on the exposure that we have. Again, because we have a lot of co reinsurance in that $5 billion tower where our deductible or retention is 900 million, which is more than the 700 million I told you we have on hand. But it has to be one event too.

So we could easily be in assessment territory if we had three small fires, right. Because we're not going to hit our reinsurance. So we'd have to assess to get through those three fires. But I think to give you kind of context too, because we're talking about, well, God forbid we get a fire in Lake Arrowhead, right? $8 billion.

If you look at the paradise fire that happened and you look at about 45 miles south of that area, if that burned today, that same fire footprint, that fire map, that happened in paradise, if that burned today, about 45 miles from there, we would have over $6 billion in losses. It gives you any sense of kind of what we're looking at.

Yeah, I guess I starting to think about the increasing number of policies, the number, how the reinsurance works. I just feel like. I guess I'm concerned that we're like one bad fire season away from complete insolvency is what it feels like to me. Unlike the commercial carriers, you can assess the commercial carriers for that. And that's obviously a really unusual model from my perspective.

But I'm careful how I characterize this, but it feels like a big gamble in many ways, quite frankly, if this were on Wall Street, I'm not sure you'd be able to get away with this.

I had a member of the voluntary market told me if I could pick a company to reinsure, you would not be the one. I agree with you because you're right, it's a gamble. Right. And we are one event away from a large assessment. There's no other way to say it because we don't have the money on hand and we have a lot of exposure out there. And there's two parts to doing this, right.

One is that we get the rates, so at least we're in a better financial position than we are today. And still again, even if today they told me, charge whatever you want, it's still 2025 at best, before I start charging that rate, and 2026 till I really get that rate into my system. But that's a big piece of it. And then the other piece is reducing the exposure, getting people back out into the voluntary market. And they have to play together. Right.

In order to do that. And unfortunately, today there's just not a lot of options for people and where to go.

I can understand the concerns of the admitted carriers, even the non admitted carriers, to write policies in California knowing the risk and then knowing the risk of all the assessments that they could be subject to based on potential losses here like that. I think if this was on Wall Street, I don't know that.

It. I don't see how it would stand muster.

No. If we were a regular insurance company, first of all, we couldn't grow at this rate because we couldn't afford to grow at this rate. So you're absolutely right.

It's a significant concern. I'll think of another thing, too. Commercial carriers, traditional carriers, have a really hard time getting their rate filings done in a timely manner for a number of reasons. I think there's still 90 plus filings that have been sitting out there for months and months and months. Do you have the same challenges getting your rate filing sent to and you are the carrier of last resort?

Suppose. Well, not anymore you're not. You're the carrier of only resort for so many people, period. We're actually the first resort in some cases. So are you having the same difficulty in getting timely filing rate filings?

We are part of that, I will say, is because we're working off of things that happened 30 years ago that nobody has any documentation around. Right. When we were really the carrier of last resort and a small carrier, part of it is when we did our last rate filings. The Department took the opportunity to go through everything we do versus just the rate filing. So it was not just the rates, it was the underwriting guidelines, it was the processes. It was reinsurance.

It was all of it. And so when you start kind of going through all of that, so it took 25 months to get our rate filing approved. What we're doing now is we're trying to work with them and do a lot of pre work. That's why we did the proposal for the $20 million per structure to say this is how we think it would work. The reinsurance. We've given them some initial analysis of.

Here's where we think the numbers would come in, and this is what it would look like if we were to add the net cost of reinsurance into our rates. So we can do a lot of pre work, and we're hoping that together we can work on that. So when we do the filing and it goes in, it's a much smoother process.

So I hear from commercial carriers, variety of them, not just a single, and we hear from the insurance Commissioner that one of the reasons the rate filings take so long is that they're submitted incomplete information, the applications are incomplete. What I hear from the carriers is that they'd like to submit complete applications if they could only get access to the tools that the insurance Commissioner uses, but they're not allowed to do that. Is that something you've experienced as well, or is this pre planning part of the.

I think the pre.

Is your process unique and different than what's happening?

Ours is a little bit different than them, although we do use the same rate templates and such that they use. We use that not because we have to, but because it makes it easier for the department. So we've done some meetings with them around our last rate filing to say, can you show us what levers you pulled, what you did to go from 48.8 to 15.7 so that when we do the next filing, we can identify those same issues up front?

So we're not doing this back and forth. So we're trying to do some of that work with them now. But I would agree it's not a very smooth and easy process. I think, like I said, they're definitely working with us to figure out where we fall into that. And so when we talk about 14 months, we're talking about a four month turnaround in approval from them, and we're hopeful that we can get there by doing this pre work with them.

And one final question. Easy, simple, probably yes or no. Is consumer watchdog an intervener in your process?

They are not, because we're not subject to Prop 103.

Okay. Thank you. Thank you, Madam Chair. I appreciate it.

Thank you. Do we have any other questions? Go ahead Assemblyman Jones-Sawyer.

Hi, and I'm sorry I'm late, but there was a bunch of stuff I needed to take care of. I'm from Los Angeles, and I used to be the Director of real estate for the City of Los Angeles.

And I used to stay up nights because the Department of Water and Power, which had a vast number of land and resources, and the City of LA, too, had land that was in areas that had a lot of brush clearance or brush fires, and they wouldn't clear it, and they would have actuarials come in and they would do a cost benefit analysis of, let's just say it would cost the City of Los Angeles $50 million in a budget year where they didn't have the money to do the clearance.

And then someone would say, well, if there were a fire, your exposure would only be $5 million and $10 million, and they would take the loss of life, the loss of property, all that exposure. I would imagine what would probably make your job easier, if we did a lot of preventative things, like brush fire clearance, like stabilizing hillsides, like sprinklerization. There's a plethora of things that we can do that cost, but if we did it.

If we did the same kind of actuarial kind of analysis, it might show that if we invest x amount of dollars into prevention over a period of time, it could save, I don't know if anybody's ever done that. How much money would it save us in potential damage in life and limb and property? And with that savings, could we lower or get insurance companies to come back if we're proactively trying to reduce their exposure?

And whenever I hear, I've been going through reading this, I'm going through a lot of this, there doesn't seem to be a lot of discussion about what we can do proactively to reduce our exposure to catastrophic. Where it's like, it's going to happen, shit's going to happen, so let's let it happen. Well, we should be a little more proactive. I believe in doing that.

And have you thought about that, looked at that and thought about a way that we can stop or hinder or ameliorate a lot of this if we were able to? And I know we don't have money, but this could be money that is well spent. I mean, unbelievably well spent if we did it.

Yeah. So I think there are a number of groups working on those issues, right. Both government groups and private groups. The home hardening discount we provide is at an individual risk level. Right. So it's not going to provide, as Assemblymember Patterson was talking about, a brush fire sweeping through a city or a suburb. Right. It's not going to prevent that, but it will prevent when you're out in rural areas or you're in those suburbs and the fires are around you.

What we find is we get the one off fires because the embers are floating through with the wind and they're catching homes on fires. IBHS is an organization who does a lot of that research, and they're the ones who develop the current requirements for the discount where they said, if you do these things, your house is really less likely to be the one that those embers catch on fire. And I encourage you, if you haven't, to go onto their website.

They have some really compelling videos on there about how they've done their research and how this plays out. If I have a Stucco House with a stucco roof, my belief is it's never going to burn. Right. Because it's a Stucco House with a stucco roof. My house, Stucco House. Stucco. I mean, tile roof, but it has a Wood gate. Right. They'll show you how that Wood gate is. The gate that's going to catch on fire. Right.

So that's one area and that's why we provide the discounts, because not only is it less of a risk for us, but we're encouraging people to take those measures on their homes. Then the fire safe council has community level discounts. So they'll tell you as a community what you need to do to reduce the risk of wildfire for your community. And then, Cal Fire is a big one. Obviously, they have a lot of information out there. So there is information out there.

I think there's a lot more that needs to be done. But there is some information out there. But even our customers will tell you it takes money. Right. Even if I'm an individual homeowner and I want to make changes, it takes money for me to make those changes. But I agree with you, it's an investment we're going to need to make.

And I just leave you with that. There was a time where when it comes to autos or auto insurance, people resisted seatbelts.

Yes.

And I don't know if there's been a cost benefit analysis on the number of lives and amount of money and how much money insurance companies have saved from that. There's airbags. I don't know if there's been analysis on what that. Exactly what you're saying. Are there materials that would make it unbelievably resistant to the embers that you're talking about or fires so that it would prevent it from spreading, especially at the speed at which it does? I mean, the speed in which a fire.

These wildfires are unbelievable and there's got to be a way we can build barriers or we do a way to slow that up knowing that it will happen. Just assume it will happen. Just like we assume we will have a car accident and we made better cars and we've done whatever we need to do. So I would love to work with somebody on that. I don't know who it is to be able to do that.

Thank you. Assemblymember Alvarez.

Yeah. I'd like to schedule a follow up with you to talk more details on this. But is there a number that I know you told me you'd go back and maybe do some research on this, on historical. But is there a number that you try to reach in terms of how much revenue is being generated on an annual basis per policy? I mean, at this point I did rough 300 $1.0 billion liability, half a million policyholders in order to cover the complete.

Of course it doesn't work this way, but if you cover the complete liability. That's a $600,000 per policy, which obviously, again, doesn't work that way. But is there a number that you hope to get to or that your actuarial analysis demonstrates that would be a more. Obviously, every extra dollar is better because it makes the market or makes the liability less risky. But are you trying to get to a specific number? Has there been direction given in the past to get to a specific number?

That's the first question you can answer, yes and no, and we can talk more about it later. And then the second question is, without, again, really mimicking or trying to become a voluntary insurance product when you do have the profits or at this point, you said 200 million in excess. Is there a way to. I don't know what you're doing with that, if it's held in cash or if it's invested in some way. But is that something that you have the authority to do or not? And have you ever seeked the opportunity to do that?

Okay, so for the first part of the question, there's no specific number. It's every time we do a rate analysis, we go back. That's when we come up with the number to say, in 2021, if we really wanted to insure the actuarily sound rates, we were at 70% increase. Right. And then we asked for the 48.8. Right.

Now we're doing the same analysis to see where we would be, and I don't know what that number would be yet, but we'll go back to the Department with, here's what we believe we need. Right. It's never going to be enough because you're never going to think everything's going to go right, but it'll be enough that we think we can build that capital layer, the capital layer itself that you're asking about in terms of kind of building the.

We've just started having those discussions with our board because that's a decision we're going to have to make and talk with the Department about, because the way the statute is set up is what is the right capital structure for us in order to make sure that we're still abiding by the legislation. And the statute says that they share in the profit and losses, but that we're at a financially stable position so that risk of assessment is lowered.

Thank you again. We'll follow up. Thank you.

Yeah, absolutely. Thank you so much for being here today. We really enjoyed your testimony and appreciate you taking time to answer all the questions that. Thanks for having me. Okay, so at this time, we are going to open it up for public comment. You could please state your name, affiliation, and provide a brief remark. Thank you.

Hi, my name is Mike D'Arelli. I'm the Executive Director for the American Agents Alliance. We represent tens of thousands of insurance agents that sell auto and home insurance, representing thousands of policyholders in your districts. And I want to tell you, it's worse than I think you know you're going to hear from a lot of angry consumers and insurance agents. Increasingly, we have nothing to sell. Carriers are not available. This is now the market of first resort.

Victoria, she's doing God's work, but she's like a snake that swallowed an elephant. And it is really know markets have just dried up. Safecoat travelers, Kemper, State Farms, gone farmers has a limited appetite. Allstate. The bottom line is we need to get carriers adequate rates. Even the market of last resort. They take 25 months to get a rate approved. They needed 70%. They asked for 48, they got 15. They're still rate inadequate hemorrhaging. It's a ticking time bomb.

And as policymakers, you need to keep your boot on the throat of the Department. I'd be having joint hearings every 30 days. I'd put teeth in it. I'd want consequences. And things need to change because statistically we are going to have a major event and meltdown. The numbers don't lie. But whatever you do, we need the private marketplace to step up, to take the load off the market of blasters, Ort. And until markets start writing at adequate premium, there is no solution.

So I wish I had better news. We need to stay engaged. And I would act vigilantly. Take the gloves off Prop 103, whatever needs to be changed to be providing an efficient processing of rate filings. Carriers can get their rate. They're not lying to you when they're telling you what their experience is like in the state. I would take them at their word and stay on this because this is critical.

We have nothing to offer consumers, and it creates a further problem, because when we can't offer consumers something, it's expensive. But we need consumers to have choice, and there needs to be competition between carriers. That's how the consumer wins. So thank you for your time. Appreciate it.

Hi, Madam Chair, thank you for giving me the opportunity to speak for a moment. I'm Members of the Committee. My name is Carl Sussman. I've been a broker for 30 years. Pause to look shocked and say, you must have been a team, something, and I wanted to just share with you a couple of quick things about the California fair plan, since that's primarily what we're here for today.

And I've narrowed it down to three things. I call them the three T's that we need to try and focus on. One is training. As you've heard, the number of agents that are offering the Fair Plan has ballooned up into the 50,000 range. And these are people that have probably never written, probably would not have written a policy in the past at all.

So all of a sudden these people are writing policies. The likelihood of them doing it correctly is pretty low or impossible without training. So we need to try and find a way. I would suggest maybe a certification program. If you write with any other insurance company, you have to show the carrier, you know their product, you know how to quote it, you know what it covers.

I would suggest maybe the same thing for the fair plan. The next thing is technology. As you know, Fair Plan has switched to a new system, and that's been painful, and hopefully we're going in the right direction now. It's a horrible way of putting it. It's the perfect storm. The carriers aren't writing the fair plan has to write more. More brokers are coming and a new system. So it's been very challenging. So focusing on technology, and I'm thrilled to hear about the new phone system coming.

That would be. We'll take it. That's where we are now. Right? We're that excited because the phones are getting upgraded. That's where we are. And finally, the last t is for transparency. And as brokers, again, to your point, since this is where we go now, this is the marketplace right here for us to have more information from the fair plan, maybe a list that says, hey, these are the things that we're working on technology wise. Hey, these are the things that we're working on.

We're going to be upgrading the phones. These are things that are going on just to sort of keep us in the loop. It's hard when you're out there because we're the face to the consumers. We're the ones with the licenses that have to explain to the consumers why they're getting non-renewed, why they have to go with the Fair Plan, and more information from Fair Plan would be helpful for us to do that. Thank you.

Hi, Kim Stone with Stone Advocacy on behalf of Consumer Watchdog. Consumer Watchdog feels that the answer to the insurance industry's withdrawals and non-renewals that have pushed nearly four or potentially even higher percent of Californians into the fair plan is not to force everyone else in the standard or voluntary homeowners insurance market to pay even more for their coverage. We think that the best way to put the fair plan on solid financial ground is to get policyholders back into the voluntary regular homeowners insurance market.

Potential way to do that is to have legislation requiring insurance companies who offer home and car insurance in California to do so to every Californian who meets home hardening guidelines, kind of like the health insurance required mandate. That way you could depopulate the Fair Plan and reduce some of that risk. Please don't force homeowners, renters, condo owners across the state to pay for excess claims for the small percentage of homes in the riskiest parts of the state insured by the fair plan.

Renters and lower and middle-income homeowners with comparatively low fire risks should not be on the hook for rebuilding more expensive homes or even second homes in high fire risk areas like Lake Arrowhead or Truckee. We are very concerned about a potential assessment to consumers. For example, a complete loss for fair plan policies in Lake Arrowhead could amount to a $975 surcharge on every other insurance policy.

And in the unlikely event that all top five fair plan cities suffered event at the same time, that would be $3,700 per California insurer per Bill. We urge the Committee not to force struggling families with little to no wildfire risk to pay billions to bail out the insurance company for abandoning California neighborhoods. Thank you.

Good morning Chair, Members. My name is Peter Ansel. I represent the California Farm Bureau. I appreciate the Fair Plan coming and telling us where things stand today for farming and ranching members in the state, insurance has become a massive cost issue. It is driving small farmers out of business in the state. The latest US Census on AG showed that small farms across the country, and in particular in California, decreased by over 20%.

So we're losing our small farms and ranches, we're losing the diversity in the food. We grow at a fast rate, and the cost of insurance is a big driver of that. As Assemblymember Wood pointed out, the winery folks are operating their businesses with substantial exposure. So figuring out how to increase per structure limits is really important.

But as Assemblymember Jones-Sawyer pointed out, investments to mitigate fuel risk is the most important thing we think we can do to one help depopulate the number of policies that are existing in the fair plan and then stem the costs for people that are outside the fair plan. The state is making substantial investments in that fuels mitigation work.

Cal Fire usages receive a couple $100.0 million. It's budget season now, so please lean into the investments the state has made in fuels mitigation. The state's made a commitment through the wildfire task force to get to a half million acres treated, with the feds doing another half million for a total million acres a year.

A few years ago, former Governor Brown came out with the Veneto declaration saying we need to be doing 5 million acres of fuels mitigation a year. So I think you're right, Mr. Jones-Sawyer, that driving those connections between our fuels mitigation investments and the reduction in risk, that that should show up in rating plans

It should show up in the depopulation pace and scale out of the fair plan. And there is a direct connection there. So I encourage you to keep on this issue, but also drive those related issues and those funds and fuels mitigation that will help solve this problem. Thank you.

All right. Good morning, Madam Chair. Seren Taylor, on behalf of the Personal Insurance Federation of California, really want to thank all the members, the staff, and the Fair Plan for the thoughtful discussion today. This is a critically important issue that if left unaddressed, it has far reaching implications for the health of the California insurance market and our ability to restore a healthy and competitive market. As you all discussed earlier, the fair plans at risk exposure has increased from 50 billion to $310,000,000,000 today.

And over that time, inflation has increased the replacement cost for fire damaged homes. As Ms. Roach talked about, the fair plan rates have not kept pace with that growing risk with the low level of capital, which, again, I think Mr. Alvarez, Mr. Wood, and everyone was talking about the $200 million of capital, the reinsurance coverage, that's far below that of similar entities, it's reasonable to expect insurers will reduce their exposure to this unfunded risk by pulling back from the California market. Right.

This is sort of the gamble that Dr. Wood was talking about. Treating this assessment as free reinsurance for the fair plan simply places the financial burden on insurers for properties they've already indicated they can't absorb. Before I close, I did want to get to, I know Assemblymember Patterson and I think several of you are sort of trying to get at this question of what happens to the private market and policyholders if there's a substantial assessment.

And I thought maybe an illustrative example, just to think about that. So imagine there's a wildfire event that results in a $4 billion loss for the fair plan. If the fair plan could cover half of that, which would be about $2 billion. That leaves a $2 billion assessment for the regular insurers to absorb.

So if an insurer has 20% of the market share, that would be 400 $1.0 million financial hit, which would reduce the insurer's required reserves and force that carrier to non renew tens of thousands of policies. And that was, again, I think, Mr. Alvarez, you were sort of getting at how much Reserve does the fair plan have to have to cover this amount of exposure? And while they don't have that requirement, the admitted market does.

There is a whole regulation and a formula that's more complicated than I can explain to you, but it says you have to have x amount of dollars to write X amount of policies. And in State Farm's case, that's what you saw when they had to pull back from the market. Their claims paying Reserve was low enough that they're like, we can't go write other policies. It doesn't matter if you're in a high fireplace or even in an urban spot at that point.

So the irony of that, of course, is that as these carriers are then forced to non renew people because they got hit with an assessment, reduces their claims paying ability, those people then go to the Fair Plan and you can see the cycle here. They go to the fair plan, the exposure grows again, and then we get into this vicious cycle. And so you can see how this spirals into full blown crisis.

So it's important these fair plan liabilities be capped at a manageable level and we work collaboratively to quickly implement the Commissioner's sustainable insurance strategy. And that's what's going to get out of Assemblymember Ortega point about where insurers can then make those commitments to depopulate the Fair Plan and return to the admitted market. So thank you.

Good afternoon, Madam Chair Members. I want to thank you for holding this informational hearing. It's important we appreciate your commitment to the solvency of the fair plan and your efforts to improve the market. We support the goals of the Commissioner's sustainable insurance strategy, but we urge the department to take immediate action to implement strong, financially viable reforms to restore the solvency of the fair plan and eliminate the obstacles that led to this crisis in the first place.

These include ensuring rate adequacy to cover the cost of consumer claims in the event of a catastrophic wildfire, accounting for the cost of reinsurance and fair plan rate making, streamlining the rate making process and minimizing, not expanding potential liability for insurers and fair plan policies that they've not collected premiums for. Ensuring the fair plan is adequately resourced to cover consumer claims will reduce a significant liability.

That is a major drive behind insurers being forced to restrict policies or exit California entirely. We remain committed to working with Commissioner Lara, the Governor, and legislative leaders to promote comprehensive return reforms to ensure all Californians have access to the insurance they need. Thank you.

Madam Chair Members John Norwood, on behalf of the Independent Insurance Agents and Brokers of California, appreciate the opportunity to be here today. First of all, we just want to commend the Fair Plan for everything they're doing to be the relief valve in this marketplace. Our members don't have markets.

I think the canary in the mine for us was one of our biggest members who maybe never placed a policy with a fair plan, is now placing 300 policies a month, or at least having 300 applications a month. So we desperately need markets. Everybody else is left. We also support the expansion of their fair plan so that we do have coverage and markets to place insurance. However, this is a double edged sword, as you've all heard. As the fair plan grows, so does a possible assessment.

As indicated in the background materials. There's 118 insurers that write property insurance in this state. There's the big 12. Our members write with some of those companies, but we use a lot of those other 100 and they have small market shares. And when they're facing this type of a possible assessment, that's the reason we're seeing the companies pull out of places that aren't even distressed. So that's the problem we're seeing.

It's not going to get better, it's going to get worse unless we deal with this quickly. The other issue I just want to raise real quickly because it was raised, is fire resiliency. Recall when the state had 100 $1.0 billion surplus, the amount of money that was budgeted for fire resiliency was very close to the amount that was budgeted for cleanup around along our highways. It's not a sexy issue. It's going to take sustained funding.

It's going to be in the hundreds of millions and billions of dollars, and that's going to be a challenge for the state as we go forward. Lastly, on the takeout plan that we have for homeowners and commercial insurance, we don't doubt that right now there are issues because nobody's going to be taking risks out of the Fair Plan. Once we restore the marketplace, once we get the tools in place for companies to get adequate rates, we think the takeout program really won't be needed.

Believe me, there's no agent or broker that wants to put a policy with a Fair Plan or with any market mechanism that is for high-cost plans. So appreciate the opportunity to make those comments and thank you very much.

Madam Chair Members. Dan Dunmoyer with the California Building Industry Association with the association that represents home builders. One thank you very much for holding the screen today and thank you for continuing to bring light to this very important issue. As was noted, we build 85% of the housing units in the state. That includes affordable market rate apartments. And the big issue for us is condominiums. Really wanted to recognize that we are still not building very many condos in the State of California.

Last year, 10,000 sat on hold. So we really appreciate the fact that the fair plan has created 20 million per location. We're starting to use that in our smaller projects and really appreciate the CEO's efforts on 20 million per building, which creates the layer cake that Victoria outlined for us. This is a very important issue to addressing our housing crisis as well as the insurance crisis, and we look forward to partnering with the Committee and coming up with these solutions.

We also want to make it very clear we fully and wholly support the Commissioner's plan to address this issue on a long-term basis. Our only issue is the timing and the sequencing and the Fair Plan having to step in the gap. But if all those issues are implemented, it will create a more stable market and all we would urge is that move as quickly as possible. Madam Chair Members, thank you.

Thank you. Because the Fair Plan is not under the provisions of Prop. 103, this Association is the path of least resistance solutions. Expanding the Fair Plan fill an important need and purpose when the insurance market is in turmoil, but they should be considered temporary. California's insurance market needs to be fixed and the fair plan needs to return to its purpose as California's insurer of last resort. I look forward to continuing to monitor the Fair Plan as well as the progress of the sustainable insurance strategy.

And again, I want to thank you for being here today, and I want to thank the Committee Members for your participation in your good questions. And I'd also like to thank the public for being here. T