The devastating wildfires in Southern California, now in their seventh day, are poised to worsen the ongoing property insurance crisis in the state. Experts predict these fires will result in higher premiums, reduced coverage, and further strain on insurers already grappling with the complexities of operating in a high-risk market.
“The fires will push the crisis to a new level, with likely FAIR Plan assessments on both insurers and their policyholders,” said Dr. David T. Russell, Professor of Insurance and Finance at California State University. “Combined with the Commissioner’s moratorium on non-renewals in wildfire areas, it is easy to see why insurers view the California market as unattractive, despite its large size.”
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Why It Matters
California has long been vulnerable to catastrophic wildfires. However, the effects of climate change—including higher temperatures, prolonged droughts, and stronger winds—are making these events more unpredictable, frequent, and severe. Several studies have linked these environmental changes to the growing number of devastating wildfires.
For insurance companies, the increasing risk has become a financial nightmare. Major insurers have begun pulling coverage from at-risk areas due to restrictions on raising premiums beyond what state regulators consider reasonable. This has left countless homeowners scrambling for affordable insurance options, often forcing them to rely on the state’s FAIR Plan, which provides basic fire coverage at a higher cost.
Wildfires’ Immediate Impact
The two largest fires in Los Angeles County, the Palisades and Eaton fires, have been burning since January 7. Together, they have consumed over 37,000 acres of land, destroyed thousands of structures, and claimed at least 24 lives. Despite significant efforts by firefighters, containment remains partial, meaning the scope of the destruction is likely to grow.
According to private forecaster AccuWeather, damages and economic losses from these wildfires could range between $250 billion and $275 billion, potentially making them the most expensive wildfires in U.S. history. Insured losses alone could exceed $100 billion, according to Trevor Saliba, COO of Swiss-based investment holding company NFG SA. “This major financial hit to insurers could have lasting effects on the availability and cost of property insurance throughout California,” Saliba noted.
Growing Reinsurance Costs
As insurers face mounting losses, the cost of reinsurance—insurance for insurance companies—is expected to rise sharply. Dr. Russell explained, “The Southern California fires show that climate change combined with infrastructure challenges and population density can generate loss severities above previous expectations. Reinsurance premiums reflect a forward-looking view of what can happen, and these fires have reset the market’s expectation for the severity of future losses.”
Recent regulatory changes now allow insurers to factor reinsurance costs into their rate settings, but this may not be enough to stabilize the market. Saliba pointed out, “As insurance premiums rise, some insurers may still choose to withdraw from high-risk areas. This could lead more people to depend on the California FAIR Plan, which typically costs more and offers less coverage compared to private insurance.”
Reduced Coverage for At-Risk Areas
The availability of property insurance in wildfire-prone areas has been steadily declining over the past few years. According to the California Department of Insurance, seven of the state’s 12 largest insurers reduced coverage in California between 2020 and 2024. This has left many homeowners with no option but to rely on the FAIR Plan, which functions as an insurer of last resort.
While the FAIR Plan offers essential fire coverage, it is far from an ideal solution. Policies are often more expensive and provide less comprehensive coverage than those from private insurers. This has created significant financial burdens for homeowners trying to protect their properties in high-risk zones.
Regulators in California are attempting to address this issue. In December 2024, a new regulation was passed requiring insurance companies to maintain coverage in areas equivalent to no less than 85 percent of their statewide market share. However, this threshold will be phased in gradually, with insurers required to meet only a 5 percent increase every two years.
Regulatory and Market Responses
Experts warn that the recent wildfires could delay or undermine these regulatory efforts. “Unless the Commissioner approves large rate increase requests quickly, more insurers may decide that long-promised insurance market reforms are not worth the wait,” Dr. Russell cautioned. “Additional insurer exits—and/or underwriting restrictions—would create additional availability challenges, especially for those in higher-risk areas.”
In the short term, insurers are likely to tighten their underwriting criteria. Stephen Poux, EVP of Risk Management at Liberty Company Insurance Brokers, explained that underwriters will likely implement stricter guidelines and demand comprehensive wildfire mitigation measures from homeowners. “Immediate effects of recent regulatory changes will take time to materialize,” he said.
Future Outlook
The road ahead for California’s insurance market appears fraught with challenges. Experts agree that long-term solutions will require a combination of strategies, including risk pooling, improved wildfire prevention measures, and adjustments to reinsurance models.
“To ensure these areas have coverage when insurers want to back out, California and other jurisdictions will need to implement several strategies, which include risk pooling and reinsurance strategies,” Saliba noted. Additionally, more investment in infrastructure and wildfire prevention could help mitigate future risks and provide some relief to insurers and homeowners alike.
Meanwhile, homeowners are left grappling with rising premiums and shrinking coverage options. Without swift and effective regulatory action, the insurance crisis could deepen, leaving more Californians vulnerable to financial ruin in the wake of natural disasters.
Final Thoughts
The Southern California wildfires underscore the urgent need for a comprehensive overhaul of the state’s property insurance market. As the climate crisis accelerates, the insurance industry faces mounting pressure to adapt to new realities. For now, homeowners, insurers, and regulators must navigate a precarious landscape where every decision carries significant consequences for the state’s economic and environmental future.
Disclaimer: We are not insurance experts. The information provided is for general informational purposes only and should not be considered professional advice. For specific insurance questions or concerns, please consult a licensed insurance professional.