The state-created Fair Access to Insurance Requirements (FAIR) plan serves as insurance of last resort for some homeowners, but wildfires, floods, and severe storms are taking their toll not just on communities across the United States, but on FAIR as well. That’s according to Insurance for a FAIR Future: Leveraging Insurance for Climate Adaptation, a new report that shows how this accelerating cycle of climate-driven disasters that could jeopardize the financial stability of these state insurance programs.
“Climate change is creating an insurability crisis, and states need to act now before that crisis overwhelms their financial stability,” said Alfonso Pating, a global financial regulation specialist at the Natural Resources Defense Council (NRDC) and author of the report. “As climate-influenced disasters grow in intensity and unpredictability, property insurance will continue to get more expensive and less available. Building resilience and reducing risks are paramount in providing a stable insurance market.”
The report lays out a number of specific actions states should take now to ensure their balance sheets aren’t wiped out by disasters, such as providing incentives so homeowners will upgrade their dwellings, thereby reducing the risks of wildfires, hailstorms, or high winds to their property.
Originally designed for homeowners unable to secure coverage in the private market, FAIR plans are now experiencing mounting financial pressures as disasters grow in frequency and severity. With increasing premiums from the private insurers who have not yet withdrawn from high-risk markets, more homeowners are forced into FAIR plans. In order to pay damage claims from a growing number of policy holders impacted by climate-influenced disasters, some states’ FAIR plans are imposing additional assessments or surcharges on private insurers and policyholders, effectively socializing losses while privatizing profits.
How to Strengthen FAIR Plans
The report identifies specific measures that regulators and policymakers should adopt to strengthen FAIR plans and better manage climate risk, including:
- Barring insurance regulators from the recoupment of assessment costs from policyholders
- Incentivizing risk reduction via hazard mitigation and climate adaptation measures
- Addressing inequitable access to insurance
- Improving FAIR plan balance sheets
- Authorizing FAIR plans to sell catastrophe bonds as a form of reinsurance
- Providing potential additional product offerings
The report also details the importance of promoting climate mitigation, particularly in high-risk communities, as a critical strategy to reduce financial pressures on FAIR plans and ensure insurance remains accessible for those who need it most.
Click here for more detailed findings and to download the full report.
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