The wildfires scorching Southern California are turning entire neighborhoods into ash, decimating expensive properties and exacerbating an insurance crisis that predates the infernal blazes.
Costs are quickly mounting as the Los Angeles area’s disaster continues to unfold, with AccuWeather’s Global Weather Center now estimating total economic damages of between $250 billion and $275 billion. The insurance sector alone is expected to incur about $30 billion in damages, according to new data released by Wells Fargo Securities — costs that could in turn prompt further price hikes for California homeowners.
“I think it’s safe to say, based on history, that when insurers get hit with the kind of claims that they are going to be processing here and paying on here, they will definitely seek to influence statewide rate increases,” Amy Bach, executive director of the consumer advocacy group United Policyholders, told The Hill.
“There will be some impact on everybody,” Bach continued. “The worst of it will be in the areas that already have wildfire risk.”
The Wells Fargo analysts described the $30 billion estimate as a “base case” scenario, noting that the damages could range between $20 billion and $40 billion. the analysts said that about 85 percent of that money would come from homeowner policies, while 13.5 percent would be linked to commercial properties and 1.5 percent to vehicles.
“There’s never been losses as large as these losses in terms of the number of structures,” Bruce Babcock, a professor of public policy at the University of California, Riverside, told The Hill.
Noting that damages from previous fires “pale in comparison to the losses,” he said that the current situation “can’t do anything but make the problem worse for California.”
The Golden State has been plagued by the withdrawal of a number of insurers and climbing rates in recent years as the threat of wildfires — and the costly damages they can incur for underwriters — has mounted.
California officials are attempting to mitigate the crisis with new requirements that insurers cover areas with high fire risk — and those caught in this month’s devastating blazes.
A few days after the fires began, California Insurance Commissioner Ricardo Lara ordered a one-year moratorium on policy cancellations and nonrenewals in the impacted areas. The mandate prohibited companies from eliminating or refusing to renew policies for properties situated within or adjacent to the fire perimeters.
Lara also on Monday issued an emergency declaration for Los Angeles and Ventura counties — requiring strict supervision of out-of-state adjusters that were helping cope with the large volume of insurance claims. All nonlicensed adjusters must be overseen by a California-qualified and trained adjuster, insurer or manager, per the declaration.
“I am doing everything in my power to streamline the recovery process during this unprecedented time, so that residents can begin putting their lives back together in the wake of these devastating wildfires,” Lara said in a statement.
Coincidentally, the blazes began about a week after the onset of new wildfire-related insurance regulations championed by Lara, who has sought to reverse the exodus of underwriters from the state.
The regulations now require companies to insure properties in vulnerable areas at a rate equivalent to 85 percent of their California market share — increasing such coverage by 5 percent increments every two years, until they meet that threshold. In turn, the rules also allow firms to account for the costs of reinsurance — insurance for insurers — in their rate determinations.
The commissioner’s office touted the regulations as both safeguarding consumer interests and building a more resilient market, noting that reinsurance has become an “imperative component of insurance companies operating in high-risk and distressed areas.”
The rules serve as an update to Proposition 103, a 1988 ballot measure created “to protect consumers from arbitrary insurance rates and practices” and to encourage a competitive and fair marketplace. In issuing the new rule, Lara closed a loophole in the measure: the ability of insurers to request rate hikes without needing to cover all Californians.
Also included in the new regulations is California’s first use of “catastrophe modeling,” localized risk simulations based on historical analyses and probabilistic calculations of future such events. Whether relying upon such models — which have long been used by other states — will end up lowering or raising consumer rates remains a point of contention among stakeholders.
Overall, Bach said she sees the regulations as a reason why “insurers are not piling on and saying, ‘See, this is why we can’t do business here. We’re out.’” The changes, she added, may not “bode well for consumers in terms of affordability,” but they do “in terms of us continuing to have a market.”
She and other experts have expressed unease over a possible increase in reliance upon California’s FAIR Plan: a basic-but-expensive “quasi-private insurer of last resort” available to residents when traditional coverage is not.
Some concern centers on the potential for escalating claims to overwhelm the FAIR Plan, which comprises all licensed California property insurers and is funded by policies sold to customers. Following the 2017 and 2018 wildfire seasons, for example, usage of the plan surged amid rampant policy cancellations and rising insurance premiums, as a June 2024 report found.
Bach described the FAIR Plan as only as strong as its member insurers, who do face additional exposure risk by participating. But she stressed that no major insurers have left California, and that the plan has affirmed the solvency of both its finances and reinsurance.
“What’s still up in the air is, are they going to have to levy an assessment on their member companies once they blow through their own reserves, plus their reinsurance?” Bach questioned, noting that this has never happened before.
“If that happens, I’m sure insurers will not be happy about that — having to kick in money toward the FAIR plan’s liabilities in addition to the claims that they got on their own books,” Bach added.
One place where Bach said Washington could ideally play a bigger role is in reinsurance, since it is “such a big factor” in the rates that insurers charge customers. As such, having “a public reinsurance alternative for the state-run insurers of last resort” could be pivotal, she explained.
But she acknowledged that “the kind of federal solutions that we are starting to talk about and look for may not be viable with the incoming administration and Congress.”
Philip Mulder, an assistant professor at the University of Wisconsin’s School of Business, voiced concern that the ongoing fires could make the adjustment period to Lara’s new regulations more challenging.
Recognizing the rising reliance on FAIR, Mulder described the plan as a “complicating factor” in a state that otherwise embraces consumer-friendly regulation. California leadership, he added, had warned that the plan was “not adequately capitalized to deal with the major loss events.”
Late last week, lawmakers introduced legislation that would seek to reduce some of FAIR’s unknowns by issuing catastrophe bonds to help finance the cost of insurance claims. The bill would “alleviate some of the uncertainty that FAIR Plan policy holders may encounter as a result of this tragedy,” California State Assembly member Lisa Calderon (D) said in a statement at the time.
While many questions remain, Mulder said he saw Lara’s new rules as an overall improvement, particularly “given the increasing nature of the wildfire risk and the demonstrated reluctance we’ve seen by the insurers to do business in a lot of these parts of California.”
Yet Babcock, from the University of California, Riverside, expressed doubt that insurers would want to write policies in higher-risk neighborhoods — and that the sole way they will agree to do so is by charging “people in low-risk neighborhoods enough to compensate for their future losses.”
“The only way we’re going to keep the insurance industry willing to write in high-risk areas is for the rest of the policyholders to pony up even more money,” he said.
Regarding the new regulations, Babcock questioned whether insurers are truly going to be able to rate specific neighborhoods for risk and then charge those areas higher premiums accordingly.
“I’m an economist, and I like people to pay for their own risk,” he said. “I don’t really think it behooves us to socialize risk, because all you’re doing is encouraging people to take on extra risk.”
Turning to his personal situation, Babcock noted that even though he lives in a low-risk area, his insurance premium has risen more than 50 percent in two years.
“Insurance is expensive, and it’s the first harbinger of the financial consequences of climate change,” Babcock said.
