Insurance industry shaken by US wildfires

The day before New Year's Eve, California Insurance Commissioner Ricardo Lara announced a landmark rule aimed at improving access to insurance, The New Yorker reported. He said the new rule would address the problems California homeowners face today while also building a sustainable insurance market for the future.

But then the Palisades fire in Los Angeles erupted, followed by the Eaton, Hurst, Lidia and Sunset fires. The damage from those fires is now estimated at $150 billion, leaving the future of California’s insurance market in doubt. “We’re entering a period we’ve never been through,” one Los Angeles insurance agent told the Wall Street Journal.

Crisis due to natural disasters

In fact, California’s insurance crisis has been brewing for years. The devastating Camp Fire near Chico in 2018 caused an estimated $16.5 billion in damage and net losses for the state’s fire insurance companies.

In 2019, the number of California homeowners insurance policies that were not renewed increased by more than 30%. By 2023, two major insurers, State Farm and Allstate, announced they would stop issuing new policies for property insurance in California. State Farm said the decision was due to inflation and rising catastrophe risks. Last summer, the company canceled policies on more than 1,500 homes in Pacific Palisades, the affluent neighborhood where the first Los Angeles fires broke out.

There are several reasons why California’s disaster risk has increased in recent years. One is the trend of more people moving to areas prone to wildfires. Another is that wildfires are becoming more severe, largely due to climate change.

A 2023 study concluded that the area burned in summer wildfires in Central and Northern California has increased by 500% over the past few decades, and that the cause is almost entirely global warming.

Another study by Climate Central published in 2024 found that rising temperatures have increased the number of fire-prone days (strong winds, heat, and dryness) across California. In particular, the desert basin region east of Los Angeles has an average of 61 more fire-prone days per year than it did 50 years ago.

“As our climate warms, the likelihood of intense, fast-moving wildfires like the ones Californians are facing today will continue to increase,” Kaitlyn Trudeau, a senior researcher at Climate Central, said on January 8.

Difficulties due to regulations

The situation is getting worse, at least from the perspective of insurers, as California's insurance regulator makes it difficult for them to offset or even forecast increased costs from weather-related disasters.

Before the agency's rules were revised last year, insurers were not allowed to use catastrophe models to calculate wildfire losses, only to assess previous losses.

Additionally, companies will not be able to pass on reinsurance costs to customers until December 2024. Reinsurance is a form of insurance for insurance companies, and its costs are rising sharply.

As a result of the change, insurers are now required to write more home insurance policies in bushfire-prone areas. Some consumer advocates have criticised the deal as being too favourable to the insurance industry. Others hope it will ultimately improve access to insurance.

“We all thought 2025 would be the year when insurance companies would be interested in returning to the California market,” Amy Bach, executive director of United Policyholders, a California nonprofit, told NBC News. “Unfortunately, this disaster happened right at the beginning of the year.”

Of course, California is not the only state facing a climate-induced insurance crisis. In the wake of devastating storms like Harvey in 2017, Ida in 2021, and Helene and Milton in 2024, property owners in Florida, Louisiana, and Texas are struggling as insurance becomes more expensive or unaffordable. The same is true in Colorado, where, like California, wildfire risk is rising.

“We’re just a few more bad decisions away from being in a situation like California,” said Carole Walker, CEO of the Rocky Mountain Insurance Information Association.

For homeowners who can't find wildfire insurance, California has a last-resort insurance program called the Fair Access to Insurance Requirements Program (FAIR Plan). The FAIR Plan was created by the state, but is run by private companies that share the risk.

Florida, Louisiana and Texas also have similar programs, and Colorado just established one.

As insurers have pulled out of California, the number of policies issued by the FAIR Plan has surged. The number of policies has increased by more than 40% since the end of 2023. Meanwhile, the value of residential properties insured by the FAIR Plan has tripled to more than $450 billion in 2020, raising concerns that, given all the damage from the current fires, the FAIR Plan could go bankrupt.

“I am concerned that we are just one bad wildfire season away from making the FAIR Plan completely insolvent,” then-California legislator Jim Wood said in March 2024.

If FAIR fails to meet its obligations, the state’s insurers will have to make up the shortfall. In turn, they will pass on at least some of those costs to consumers, further pushing up premiums.

All of this raises questions about the role of insurance in a warming world. As climate change hazards increase in California, the FAIR Plan has taken on a greater share of the risk. That’s a boon for homeowners in the most fire-prone areas, but could become a burden for other residents of the state.

“The FAIR Plan is a state decision to do whatever it takes to keep the housing market going, even in high-risk areas,” Susan Crawford, a professor emeritus at Harvard University, wrote in a recent post. “Perhaps now, that decision is being tested. No one knows what will happen next.”