Will L.A. Wildfires Escalate California’s Property Insurance Crisis?
Will L.A. Wildfires Escalate California’s Property Insurance Crisis?
Key Insights
The wildfires that have ravaged neighborhoods in Los Angeles this week occurred just months after California's largest property insurer began allowing numerous policies to expire.
Insurers, citing heightened exposure to disasters and the challenges of increasing premiums in California, have reduced their presence in the state in recent years, compelling more property owners to depend on the state's insurer of last resort.
A spokesperson from the Insurance Information Institute, a trade organization, has stated that insurers are "prepared to support customers and settle claims."
Recently, regulators have implemented a series of reforms aimed at curbing the departure of insurers from California and enhancing the availability of coverage in high-risk regions.
Current Situation
Wildfires continued to devastate Los Angeles late Thursday, obliterating neighborhoods and prompting concerns regarding the future of California's already struggling property insurance market.
In recent years, insurers have increasingly withdrawn from the California market due to the rising frequency and severity of wildfires both within the state and nationwide.
Last March, State Farm, California's largest property insurer, announced it would not renew 2% of its existing policies in the state, attributing this decision to factors such as “inflation, catastrophe exposure, reinsurance costs, and the constraints of operating under outdated insurance regulations.”
This announcement followed less than a year after the insurer declared it would cease accepting new applications in California. In Pacific Palisades, the location of the most destructive fire in the city’s history, the company terminated approximately 1,600 policies last year, as reported by the state insurance department to CBS News.
State Farm is not the only company reducing its operations in California. Numerous other prominent insurers, such as Allstate, Travelers, and Chubb, have adjusted their product offerings in the state to mitigate their risk related to natural disasters.
These insurers have indicated that the challenges associated with increasing premiums due to California's regulatory environment, along with the inability to factor reinsurance costs into rate increases, have contributed to their decision to scale back.
Projected Damage and Economic Loss Exceeding $50 Billion
The overall financial impact of the fires occurring this week remains uncertain. A preliminary assessment by AccuWeather estimates the total economic losses to be between $52 billion and $57 billion.
CoreLogic has identified nearly 200,000 residences in Los Angeles County that are at high or very high risk of suffering wildfire damage, with the total reconstruction value of these properties exceeding $145 billion.
As reported by the Los Angeles Times, by late Thursday, the Palisades and Eaton fires, the two most significant incidents, had caused damage to or destruction of over 9,000 structures.
Mark Friedlander, Director of Corporate Communications at the Insurance Information Institute, indicated that insurers are unlikely to provide cost estimates until at least next week. However, he expressed optimism regarding the insurers' ability to handle the damage, stating, “Property insurers have managed their books of business responsibly” and are “ready to assist customers and pay claims.”
Jasper Cooper, a senior credit officer at Moody's Ratings, informed S&P Global that he anticipated insured losses would amount to billions of dollars.
State Insurance Reforms Improve Stability
Friedlander indicated that a series of recent reforms at the state’s insurance department, enacted by state insurance commissioner Ricardo Lara, are expected to enhance market stability. The Sustainable Insurance Strategy aims to mitigate the departure of insurers from California by relaxing certain restrictions on rate increases in return for improved coverage in high-risk regions.
These reforms also seek to decrease the number of homeowners dependent on the FAIR plan, which serves as the state’s insurer of last resort. Over the past four years, the number of policies under the FAIR plan has more than doubled, coinciding with the withdrawal of private insurers from the state. During the same timeframe, the plan’s exposure has nearly tripled, escalating from $153 billion in 2020 to $458 billion as of September 2024.
The ongoing wildfires in Los Angeles could further exacerbate California’s already fragile property insurance market. With insurers retreating due to escalating risks and regulatory challenges, many homeowners are increasingly reliant on the state's insurer of last resort. As wildfires continue to intensify, the financial strain on both insurers and homeowners will likely worsen.
LATEST: Los Angeles Wildfires: Current Updates and Underlying Causes.
While state reforms aim to stabilize the market, the sheer scale of destruction from these fires threatens to overwhelm the system. The growing economic losses, coupled with rising premiums, suggest that California’s property insurance crisis may only deepen, leaving many vulnerable to future catastrophes.
