It’s too soon to know the financial cost of the wildfires burning around Los Angeles. But the toll on California’s troubled insurance market could be enormous.
The fires struck just as California officials have been working to stop insurance companies from fleeing their state. That exodus, driven by rising losses from wildfires that have grown larger and more frequent, could accelerate because of this week’s fires, experts said.
“The California insurance market has been balanced on a knife edge,” said Nancy Watkins, an insurance expert and principle actuary at Milliman, a consulting firm. As homeowners begin filing claims, insurers that cover large numbers of dwellings in Southern California could see a drain on their financial reserves, forcing them to drop customers, be punished by investors or exit the state.
If insurers keep leaving California, it would drive up insurance rates that are already elevated and make coverage harder to find, said Sridhar Manyem, senior director for industry research and analytics at AM Best, a company that rates the financial strength of insurers.
The Los Angeles fires pose another threat to California’s insurance industry, beyond the money those companies will have to pay directly to their customers.
In the areas hit by this week’s fires, many homes are insured through a state-backed system called the California FAIR Plan, designed to be a last resort for homeowners who cannot find insurance coverage on the private market. The plans are more expensive and provide less coverage than commercial versions.
The number of homes in the ZIP code affected by the Palisades fire that are enrolled in the FAIR Plan almost doubled between 2023 and 2024, said Tim Zawacki, an insurance sector strategist at S&P Global Market Intelligence.
If the FAIR Plan doesn’t have enough money to pay all the claims it faces, it collects funds from insurance companies operating in California. That would further strain the financial health of those insurers, adding to the pressure to pull back from the market.
The potential consequences are huge. Without insurance, banks won’t issue a mortgage; without a mortgage, most people can’t buy a home. Fewer buyers mean falling home prices, threatening the tax base of fire-prone communities. It’s a scenario that could come to define California, as rising temperatures and drier conditions caused by climate change intensify the risk of wildfires.
California’s insurance crisis has been building over the last several years as insurers have struggled to increase premiums fast enough to pay for growing claims from homeowners. Fires in 2017 and 2018 wiped out a full quarter-century of profits for insurers, leading many carriers to reduce the number of homeowners they covered. In response, California officials temporarily blocked insurers from dropping homeowners in areas hit by wildfires.
The change does not appear to have worked. Since 2020, the share of home insurance contracts getting dropped in California has grown every year, according to data issued last month by congressional investigators. Many California counties now have among the highest rates of so-called nonrenewals in the country.
On Dec. 30, Ricardo Lara, California’s insurance commissioner, tried a new approach, agreeing to let insurers set premiums that reflect how much money they expect to lose from wildfires, based on projections derived from computer models. In exchange, insurers are supposed to cover more homes in high-risk areas.
In an interview, Mr. Lara said he wanted to explore further changes that would make insurers want to do business in California, including potentially paying homeowners to reduce their fire risk through steps like replacing their roofs.
“I’m always worried about how the markets are going to react to these massive fires and massive losses,” Mr. Lara said. Still, he said, “we are still the largest market in the country, and fourth globally. And our sheer market size, irrespective of these devastating fires, still makes it an attractive place to do business.”
It’s not yet clear whether those changes will stem the exit of insurers from California, especially in light of the current fires, according to the American Property Casualty Insurance Association, which represents insurance companies.
“We need to see how the reforms are actually implemented,” said Denneile Ritter, a vice president with the association. “We’re optimistic, but it’s too early to tell.” She said the current focus of insurers was “helping people who are suffering the worst possible losses right now.”
The insurers that cover the most homes in California are State Farm and Farmers, according to data from AM Best.
Asked how the fires would affect the company’s business in California, a State Farm spokesman, Steve Baldwin, said by email, “Our number one priority right now is the safety of our customers, agents and employees impacted by the fires and assisting our customers in the midst of this tragedy.”
Luis Sahagun, a spokesman for Farmers, said the company was “currently focused on assisting customers who are impacted by the devastating fires.”