*

California asks for $1 billion to support FAIR plan

*

Highlights challenges of state's insurance market

*

Industry braces for $35 billion loss

By Niket Nishant and Manya Saini

Feb 12 (Reuters) - California's levy of $1 billion on

private insurers to help pay out wildfire claims in its

state-run program has renewed focus on the challenges the

industry faces in a market already losing appeal rapidly,

analysts said.

Stringent regulations and recurring wildfires have driven

some insurers away from the state in recent years, as companies

scale back from risky geographies where frequent natural

disasters are leading to billions in losses.

"The insurance regulatory environment in California is not

very friendly to the industry and major changes will be needed

if the state wants the private market to resume writing new

business," analysts at Roth MKM said.

The devastating blaze that scorched entire neighborhoods in

Los Angeles in January is expected to be the costliest wildfire

in U.S. history for the insurance industry, with some expecting

losses as high as $35 billion.

In addition, companies will now be required to contribute $1

billion to California's Fair Access to Insurance Requirements

(FAIR) plan - also called the "insurer of last resort" - which

offers coverage to those who cannot secure private insurance.

The industry has been battered by escalating losses in

recent years due to severe weather events. Limited flexibility

to adjust premiums also makes California a less attractive

market for insurers.

As of September 2024, there were 451,799 FAIR Plan policies

in force, up 41% from 2023.

California's insurance commission did not immediately

respond to a Reuters request for comment.

RISING COSTS, SHRINKING COVERAGE

An insurer exodus could limit options for the 39 million

residents in the state and put a further strain on their

finances.

"Tales of California residents finding it ever more

expensive to get insurance are legion, assuming they can get it

at all," Russ Mould, investment director at AJ Bell, told

Reuters.

Insurers will be permitted to charge a temporary fee to

customers to pass on half the costs related to their FAIR bill.

"California property owners will ultimately be billed

through their insurers to fund the FAIR Plan's assessment," said

Michael Ashley Schulman, partner and CIO at Running Point

Capital Advisors.

"This is a significant event for California insurers but

also a bit of a relief because it seems to put a cap on what the

state will ask from insurance companies, and they can now adjust

their premium charges to account for this extra expense."

Industry bellwether Travelers and Zurich-based Chubb

have estimated losses of roughly $1.7 billion and $1.5

billion, respectively, from the wildfires.

"It is going to be a big event for the industry," Travelers

CEO Alan Schnitzer said in an earnings call last month,

referring to the impact the wildfires will have on company

balance sheets.

LA-based Mercury General ( MCY ) currently expects

catastrophe losses in the range of $1.6 billion to $2 billion

while Allstate ( ALL ) has forecast about $1.1 billion of

losses, pre-tax, net of reinsurance.

Meanwhile, AIG - one of the world's largest

commercial insurers - said it expects net losses to be roughly

$500 million, before reinstatement premiums.

AIG CEO Peter Zaffino in a post-earnings call said the

company had reduced its overall California exposure beginning in

2022. The retreat coupled with reinsurance has kept losses tied

to the wildfires under check.

"I think that in California we just saw that, the modeling

is flawed... some of these states set up vehicles that become a

market of last resort, which sometimes become the market of only

resort and then they end up taking on a lot of aggregate,"

Zaffino added.

Concerns over rising catastrophe losses have also weighed on

investors, with the S&P 500 property and insurance index edging

up just 0.2% this year, lagging the broader financial industry's

6.2% gain.