Conversation with Caldwell Insurance: Increase in California Fair Plan Usage and Cost (Sonora, CA)

Destructive events are high-risk. We’re probably right in 70% to 80% of our policies today with a California Fair Plan, where five years ago it was less than 2% .. less than 1%?

That’s amazing. Can you explain why it is it so much more expensive? Because like you said, there’s this perception that it’s a state-run insurance plan, but obviously, it’s not. It’s run by an assemblage of private insurers. But generally, there’s this perception that if the state has its stamp on it, that it would be subsidized, it should be cheaper, but it’s absolutely not cheaper.

What is driving that? Is it just the fact that, well, you have to be on the Fair Plan? So obviously, you’re high-risk, so we’re going to have your rates higher. How does that work?

Great questions in any insurance company, whether it’s health insurance, life insurance, we’re specifically today talking about property insurance, right? The best portfolio would be to spread your risk equally among maybe some difficult risks, some high exposed risks, but also some great ones. Well, when you look at how the California Far Plan is being utilized, well, now what’s happened is we’ve taken all these high-risk homes in these high-brush areas and put them into one pool.

So, in the event of a catastrophic loss where hundreds or thousands of homes are being lost, they need to make sure that they have the reserves in that California Fair plan to pay out those policyholders. And the interesting thing is with a standard insurance company, a lot of times they’re mutual companies, or they’re operated by stockholders. So profits are getting distributed, right. To stockholders. Well, in the California Fair Plan, there are no stockholders. It’s not a mutual company. It’s a true risk pool. So, any of the losses or gains in that stay in that California Fair Plan.

Okay, so it has to be completely self-sustained and pay for itself. Correct.

And that’s what’s know, we’re seeing. These rates are constantly going up, and they’re one of the most expensive plans out there, of yeah. Because they need to make sure that in their reserves, should a catastrophic fire occur, they can pay those out. And it doesn’t help when you’re only taking on high risk. Right.

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