MASSACHUSETTS MAY BE faring better than other states in riding out turbulence in the home insurance industry, but its insurer of last resort is being forced to confront the affordability of its own coverage amid a reckoning across the state over the high cost of living.

Rising home insurance prices around the country and in New England, driven by increasing climate risk and higher rebuilding costs due to inflation and tariffs, are accelerating the FAIR Plan’s next critical juncture.

Already, the FAIR Plan’s premiums have gone up 11 percent between 2019 and 2023 even without a rate hike, and last year it increased the amount of coverage new policyholders are required to purchase.

Now, after the FAIR Plan saw its largest single-year jump in 2024 in new enrollees in two decades, the plan will need to decide this year whether it wants to raise the rates it charges — something that hasn’t happened in 20 years.

“This is the tension between getting everybody insurance and what that costs,” said Charlie Sidoti, a former insurance executive who now serves as executive director of the Cambridge-based nonprofit InnSure, which works with insurers and communities navigating climate risk. “Either way, people are screwed. If the premiums provide the coverage people need in case disaster strikes, but they can’t afford it, that causes strain. If the coverage is inadequate but affordable, there’s a protection gap that could really hurt people and whole communities during the next catastrophe event.”

Last year, the FAIR Plan, which provides home insurance for those unable to get it in the private market, launched a new requirement to raise the amount of coverage new policyholders must purchase. Those enrollees must now buy insurance that covers at least 90 percent of the reconstruction cost of their home, up from 80 percent.

Frank O’Brien, the FAIR Plan’s general counsel, said in an interview that most other private insurers now also require coverage of at least 90 percent of the reconstruction cost and “we didn’t want to be inconsistent with the marketplace.”

That reflects a growing tension: whether the insurer of last resort should continue to be both widely available and affordable amid rising prices and nonrenewals from private insurers. While being so accessible would help more people get needed coverage, it could also concentrate risk within the FAIR Plan among coastal properties, which are most vulnerable to severe damages from flooding, high winds, and other forms of extreme weather.

Such a scenario would disproportionately saddle the FAIR Plan with massive losses should a major storm hit Cape Cod and Plymouth and Bristol counties. Those areas now account for 55 percent of all FAIR Plan enrollees.

O’Brien said the decision to raise the amount of coverage new enrollees must purchase was essentially made with these tradeoffs in mind.

“We made that change because we were growing,” he said. “And one of the concerns is that when you have a large and growing residual market, which is what the FAIR Plan is, that’s a sign that the market is not as healthy as it should be. Our ability to do things that would slow growth down is pretty limited. One of the things that we looked at, however, was this requirement. It’s not a good thing when somebody’s under-insured — when something bad happens, they get the check and can’t go rebuild their house with it.”

The next decision in the FAIR Plan’s hunt for the affordability sweet spot will be more dramatic and impact far more people.

A two-year ban on the FAIR Plan being able to file for a rate increase will lift in March. Any rate changes would need approval from the state division of insurance, and the FAIR Plan agreed to the two-year prohibition in 2024 as part of a package of reforms it made in coordination with regulators.

O’Brien declined to say whether or not the plan would request a rate hike, saying that “we’re constantly evaluating where we are in the marketplace” and that it “depends on a lot of circumstances” like the plan’s costs and claims.

The last time the FAIR Plan filed for a rate increase, in 2013, the insurance division denied it. A rate increase would likely impact all policyholders within the FAIR Plan and would be a recognition that the base cost of coverage is going up due to a higher potential for climate-driven disasters and increased repair costs.

The churn at the FAIR Plan, accelerated by a spike in enrollment in 2024 and the expiration of the ban on a rate increase, shows how the insurer of last resort is navigating a time of change in the industry.

The Bay State, though, is in a better spot than others. A number of private insurers remain competing for business in Massachusetts, unlike in states like California and Florida, where several companies exited altogether in the wake of catastrophic wildfires and hurricanes that prompted dramatic spikes in enrollees in their insurers of last resort.

And the 11 percent increase in FAIR Plan premiums in Massachusetts between 2019 and 2023 is still far lower than other states’ insurers of last resort, including the 393 percent jump in California, the 116 percent spike in Georgia, the 735 percent increase in Louisiana and the 18 percent hike in Rhode Island.

Insurance in the private market is also likely more expensive since the FAIR Plan last raised rates in 2006, though premiums have gone up in the plan despite rates remaining flat because of increases both in the risk for individual properties and of property values over time.

One tweak that the Massachusetts FAIR Plan made years ago struck right at the heart of the tug-of-war over affordability for homeowners now versus ensuring they can rebuild later in the event of a major loss – and it’s stirring controversy today.

In 2019, the FAIR Plan changed wording in its manual for agents and brokers that required homeowners to purchase insurance based on their home’s reconstruction cost, which is more of a “worse case scenario” of what it would take to rebuild a replica of a home after a loss, including demolition or debris removal and higher labor and material costs.

Buying insurance based on the reconstruction cost can be more expensive than buying it based on the replacement cost, which doesn’t take those factors into account, but could offer a more accurate representation of the price of rebuilding a home after a disaster and thereby grant the homeowner better protection. (The FAIR Plan’s policy terms for home insurance, however, references replacement costs as the level to which a home must be insured.)

Frank Lombard, a Chicopee-based independent insurance adviser, has complained to the FAIR Plan that that switch in wording paved the way for what he views as unnecessarily high insurance costs for policyholders above what the policy terms require, according to emails viewed by CommonWealth Beacon.

For two of Lombard’s clients, according to valuation documents, the difference between the replacement cost and reconstruction cost of the homes was roughly $193,000 and $644,000, respectively. The disparity between purchasing insurance based on the replacement cost and the reconstruction cost, then, would account for the significant increase in premiums those clients shouldered, he argued.

Lombard said he has no doubt private insurers are following the same practice. The difference, he said, is that people enrolled in the FAIR Plan have nowhere else to go for coverage.

“They’re inflating the amount of coverage that’s required,” Lombard said in an interview. “In some cases, these are retired people, or elderly households. It’s not fair.”

O’Brien denied that that change had any impact on the premiums people are paying, arguing that the FAIR Plan treats those terms as interchangeable. He pointed to policy language that states the plan will “repair or replace” the damaged home after a loss, which O’Brien says essentially renders moot any difference between the terms. Premiums, he added, can change for any number of reasons.

There’s some divergence among insurance experts about whether the wording in the agent’s manual would have an impact on the amount of coverage provided and the corresponding premiums that homeowners pay.

Tristan Hormann, executive director of the Washington state FAIR Plan, said replacement and reconstruction costs are, in his experience, used interchangeably, especially when there is the “repair or replace” clause in the policy like there is in Massachusetts.

Chris Stark, executive director of the Massachusetts Insurance Federation, said although the reconstruction cost is generally a more specific value that incorporates more of what it would cost to rebuild a damaged or destroyed home, the disparity in definitions between the terms could look different in practice: In many cases, Stark said, the two values may be similar. But the reconstruction cost of a historic Victorian-style home could be much higher than the replacement cost of that home, for instance, since there could be a large difference in costs between simply building a new home of similar square footage and building that home with today’s prices with identical Victorian style and materials.

Still, even if it costs more to maintain coverage based on the reconstruction value, the homeowner gets more in return, he said.

“This is likely a balance of solvency and ensuring the proper coverage for homeowners by the FAIR Plan, as was the decision to require more coverage for new policyholders, and eventually any decision to raise rates will be one, too,” he said. “We always have to balance solvency with consumer protection. In this instance, you actually are getting more protection for these changes.”

And the FAIR Plan’s choice to use the reconstruction cost value in determining the coverage offered and the corresponding required premium is emblematic of the insurer’s larger tensions, Stark said. The plan is trying to keep insurance affordable in an era of soaring premiums while raising the level of protection for homeowners so they can be made whole should disaster strike and ensuring that the plan has the capital it needs to cover that risk and pay those claims, he added.

“All of this is about addressing the delta that people have between what they are insured for versus what it would cost to get that home back into its pre-loss condition,” Stark said. “It’s a careful balance of having consumer access to affordable and available insurance products while at the same time making sure that they’re not risking their solvency. Collectively, these are all various decisions that help maintain that balance as much as possible with affordability always in mind, especially for the insurer of last resort.”