California lawmaker offers municipal bond solution to insurance crisis

A proposal to help solve California’s property insurance crisis would tap the bond markets and could involve billions of dollars in debt issuance.

The debt would be issued through the California Infrastructure and Economic Development Bank.

Assembly Bill 2996 authored by Assemblymember David Alvarez, D-San Diego, would help stabilize the insurance marketplace by bolstering the state’s FAIR Plan — the last-resort provider of homeowners insurance for those who can’t get coverage in the marketplace, according to the bill’s language.

The FAIR plan is a syndicated fire insurance pool made up of all insurers licensed to conduct property and casualty business in California. Established in 1968, more individuals have fallen into it as insurers reduce or withdraw business in California after a run of record-breaking wildfires has exploded their risk exposure.

“As the state takes steps to expand the FAIR Plan to cover a very important part of the housing stock, we must ensure that the association has financial tools available to ensure it doesn’t collapse,” Alvarez said in an April statement when he introduced the bill, which has moved to its third Senate reading after unanimous Assembly approval in May.

The Legislature must adjourn Friday, so the bill must pass by then.

The California Department of Insurance announced last year that it would expand the FAIR Plan’s commercial insurance coverage from $20 million per location to $20 million per structure to ensure that condominium complexes can access insurance. Although this is a much-needed step, it also put an already overexposed FAIR Plan at more risk, according to Alvarez’s news release.

“AB 2996 ensures that if a significant disaster occurs that bankrupts the FAIR Plan, it has financial tools available to mitigate the impact on the overall insurance market,” Alvarez said.

The California FAIR Plan Association reports that as of June, it has more than 408,000 dwelling policies in force, up 27% in only nine months. That number has doubled since September 2020.

As of June, the FAIR Plan’s total exposure is $393 billion, reflecting a 38.3% increase since September. It had only $113 million of exposure five years ago.

Due to this exposure, according to Alvarez, one major disaster could result in an insolvent FAIR plan — an event that would trigger an assessment on all of its member insurers.

That in turn, the bill’s backers say, could speed up the doom loop that is driving more property owners onto the FAIR plan.

“According to supporters, without this bill, there is no mechanism for insurers to immediately address post-disaster FAIR Plan assessments and their only option to reduce exposure is to non-renew existing policies,” the Senate staff analysis of the bill says.

This bill “is the biggest thing happening right now, because it could result in the issuance of billions in bond debt,” said Justin Cooper, co-head of law firm Orrick’s public finance practice.

“All signs point to the need for a capital markets solution,” Cooper said.

The insurance availability issue — Cooper blames increased wildfire and storm activity combined with inadequate forestry management and possibly regulatory failures from insurance commissioners — “poses a big systemic risk because of the tie-in to the mortgage market and the building market — their members have stopped building condos because the homebuyers can’t get insurance on their condos and they’re not building any condos.”

He compared Alvarez’s bill to what the Federal Reserve did with the Municipal Liquidity Facility, which guaranteed liquidity for municipal issuers during the onset of the COVID-19 pandemic. Only $1.5 billion of the $500 billion available through the MLF was used, he said, but the fact it was there bought everyone time to calm the markets.

“The idea is the FAIR plan would get a large capital infusion from the bond markets and then it could start fixing the underlying problems,” he said.

“The bond market solution is not a solution-solution, but it buys time to fix the problems in the insurance market, such as air quality management, forestry management and all the things that would go into this,” he said.

It also would not affect the state’s bottom line, because any money borrowed through IBank would have to be repaid by the insurers and then could be passed on to individual property owners, which could increase rates.

It wouldn’t be the first time the municipal bonds have been used to support property insurance market; in Florida, the Citizens Property Insurance Corporation, that state’s last-resort insurer, supported its goals with the help of the municipal bond market. In the Golden State, the same can be said for the California Earthquake Authority.

Insurance Commissioner Ricardo Lara has spent the past year trying to thread the needle on expediting the ability of insurance companies to raise rates so that they will continue to offer coverage, while making sure they don’t soar so high that property owners in the state can’t afford insurance.

Gov. Gavin Newsom announced as part of his May budget revisions a trailer bill to speed up the work Lara has been doing.

“We need to stabilize this market,” Newsom said at the time. “We need to send the right signals, and we need to move.”

“We need to have a functioning insurance market where all of the insurers are actively participating,” Cooper said.

“I don’t envy the insurance commissioner,” Cooper said.

“The insurance commissioner needs to bring insurers into the state and have them participate in the market,” Cooper said. “But insurers want faster and greater rate increases to cover costs. The insurance commissioner has to balance the homeowners screaming about rate increases against the insurers who are saying if they don’t get rate increases, it doesn’t make sense to do business in the state.”

The insurance crisis is also an obstacle to California’s full-court press to solve the twin affordable housing and homelessness crises, because it is an obstacle to construction.

“This legislation is a key component of the state’s efforts to promote housing affordability and resilience in the face of increasing risks from natural disasters and other threats,” Dan Dunmoyer, president and CEO of the California Building Industry Association, said in a release.

“The passage of this bill will help to safeguard homeowners and support the construction of new housing units, contributing to the overall growth and resilience of California’s housing market,” Dunmoyer said.

The insurance crisis also pressures owners of affordable housing in the multifamily rental market, Cooper said. The concept behind low-income apartments is that rents are held below market, but if insurance costs are doubling or tripling, operating the apartments becomes a non-starter, he said.

Caitlin Devitt contributed to this story.