California lawmaker offers municipal bond solution to insurance crisis

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

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

House Bill 2996, authored by Assemblyman David Alvarez, D-San Diego, would help stabilize the insurance market by strengthening of the state — the provider of last resort for homeowners insurance for those who can’t get coverage on the marketplace, according to the bill’s language.

Office of Assemblyman David Alvarez

The FAIR Plan is a syndicated fire insurance group made up of all insurers licensed to do property and casualty business in California. Established in 1968, more people have fallen into it as insurers scale back or withdraw business in California after a their risk exposure exploded.

“As the state moves to expand the FAIR Plan to cover a very large portion of the housing stock, we need to make sure the association has financial tools available to make sure it doesn’t collapse,” Alvarez said in a statement in April, when he introduced the bill, which passed third reading in the Senate after unanimous approval by the Assembly in May.

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

The California Department of Insurance announced last year that it would expand the FAIR plan commercial insurance coverage from $20 million per location to $20 million per structure to ensure condominium complexes can access insurance. While this is a much-needed step, it also put an already overexposed FAIR plan at greater risk, according to Alvarez’s press 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 insurance market as a whole,” Alvarez said.

The California FAIR Plan Association reports that as of June, it has more than 408,000 home policies in force, up 27 percent in just nine months. This number has doubled since September 2020.

In June, the FAIR Plan’s total exposure is $393 billion, reflecting a 38.3% increase from September. It had just $113 million in exposure five years ago.

Because of that exposure, according to Alvarez, a major disaster could result in an insolvent FAIR plan — an event that would trigger a review of all member insurers.

That, in turn, the bill’s supporters say, could hasten the fatal loop that drives more homeowners into the FAIR plan.

“According to proponents, without this bill, there is no mechanism for insurers to immediately address FAIR Plan assessments after a disaster, and their only option to reduce exposure is to not renew existing policies,” the Senate staff analysis of the bill says.

This bill “is the biggest thing going on right now because it could lead to billions of debt being issued in bonds,” said Justin Cooper, co-head of public finance law firm Orrick.

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

The issue of insurance availability – Cooper blames an increase in wildfires and storm surges, combined with inadequate forest management and possibly regulatory failures on the part of insurance commissioners – “presents a large systemic risk because of the link with the mortgage market and the construction market – their members are they stopped they build condos because home buyers can’t get insurance on their condos and they don’t build any condos.”

He compared Alvarez’s bill to what the Federal Reserve has done with the Municipal Liquidity Facilitywhich guaranteed liquidity for municipal issuers during the outbreak of the COVID-19 pandemic. Only $1.5 billion of the $500 billion available through the MLF had been used, he said, but the fact that it was there gave everyone time to calm the markets.

“The idea is that the FAIR plan would get a big infusion of capital from the bond markets and then it could start to fix the underlying problems,” he said.

“The bond market solution is not a solution, but it buys time to solve problems in the insurance market, like air quality management, forest management and all the things that would go into that,” he said.

It also wouldn’t hurt the state’s bottom line because any money lent through IBank would have to be repaid by insurers and could then be passed on to individual owners, which could raise rates.

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

Insurance Commissioner Ricardo Lara has spent the past year trying to implement speeding up the ability of insurance companies to raise rates so they can continue to provide coverage while making sure they don’t rise so high that homeowners of properties in the state can not afford your insurance.

Governor Gavin Newsom announced as part of his budget revisions in May, a bill to speed up the work Lara is doing.

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

“We need to have a functioning insurance market where all 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 get them to participate in the marketplace,” Cooper said. “But insurers want faster and higher rate increases to cover costs. The insurance commissioner has to balance homeowners screaming about rate hikes with insurers saying if they don’t get rate hikes, it doesn’t make sense to do business in the state.”

The insurance crisis is as much an obstacle to California media solving the twin crises of affordable housing and homelessness as 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 of natural disasters and other threats,” said Dan Dunmoyer, president and CEO of the California Construction Industry Association, in a statement .

“Passage of this bill will help protect 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 is also putting pressure on affordable homeowners in the multifamily rental market, Cooper said. The concept behind low-income apartments is that rents are kept below market, but if insurance costs double or triple, operating the apartments becomes a non-starter, he said.

Caitlin Devitt contributed to this story.