FAIR Plans: An Imperfect Insurance Safety Net

As private insurers retreat from some property and casualty markets, state-mandated FAIR (Fair Access to Insurance Requirements) plans are a critical safety net. These programs provide insurance when private options are unavailable, but they are far from a perfect solution, a new RMA Journal article explains. For banks, particularly those involved in property lending, understanding the dynamics and limitations of FAIR plans is crucial. 

Rising Dependence: Over the past decade, the amount of exposure underwritten in FAIR plans has almost doubled, from $445 billion to $837 billion. For instance, California reported that 65,500 residents signed up for FAIR plan insurance during the fiscal year ending in September 2022. In the first six months of the current fiscal year, 73,839 residents had already signed up. 

Imperfect Solution: While FAIR plans ensure availability, they can be hard to qualify for and often come with higher premiums than those of private insurers. This alienates low-income residents and adds financial strain on other homeowners. 

Scaling Back: States are actively seeking to reduce reliance on FAIR plans and move homeowners back into the private insurance market. For example, Florida has implemented “depopulation” legislation, which incentivizes private insurers to take on FAIR plan participants through cash payments. 

Federal Focus: At the federal level, the government is paying increased attention to climate-related financial risks. The Federal Insurance Office (FIO) has highlighted the need for improved regulatory frameworks to address these challenges. 

The rising dependence on FAIR plans and the shifting insurance landscape have direct implications for banks. Higher insurance costs and limited coverage can increase credit risk, as borrowers may find it difficult to maintain adequate insurance on their property. 

Read the complete article here.