© Cal Fire
Devastating wildfires in Los Angeles have raised concerns about California’s insurance sector, which is already under pressure as some insurers have left the state. And while recent reforms are expected to help increase coverage, it may be a while before the changes take effect.
AccuWeather estimates there could be more than US$250bn in damages and economic losses from the wildfires, which would make it one of the costliest natural disasters in the US.
The disaster highlights the growing need to provide insurance not just in California but across the US and the world as climate change increases the frequency and duration of natural disasters, which could threaten the insurance industry and financial stability.
Climate change has increased risks in the insurance industry, said Jérôme Crugnola-Humbert, a former sustainable finance policy expert at the European Insurance and Occupational Pensions Authority (EIOPA).
“The risk has gone up, the exposure has gone up. So you have some sort of exponential explosion of the costs, which means insurance will become either unaffordable or won’t even be offered anymore,” he said.
Insurance premiums in the US have recently skyrocketed, and some homeowners in areas exposed to climate disasters have forgone insurance altogether, a report from the Department of the Treasury found. Homeowners living in areas with the highest expected annual losses from climate-related events paid up to 82% more for their insurance.
In California, the insurance crisis has been happening for years. The wildfires are just putting further pressure on the issue, said Jordan Haedtler, a climate policy consultant.
“It’s expected to cause further disruptions, not only in California’s insurance market, but potentially throughout the country,” he said.
California’s insurance crisis could get worse
While the rules around insurance pricing have recently changed in California, it is uncertain when those changes will take effect. California’s insurance market is unique in the US in that rate increases of over 7% are subject to a state approval process. The measure, called Prop 103, has undervalued the cost of insurance in one of the wealthiest states in the US.
Insurance rates in California are cheap compared to other climate-risk prone areas like New Orleans and Miami, partly due to hurricane risk in the south, but also because of California’s regulatory market, said Ben Keys, an economist and real estate finance professor at the Wharton School at the University of Pennsylvania.
Annual property insurance coverage costs in California are among the cheapest in the US, falling below $3 per $1,000 of coverage in some areas.
This has put a burden on California’s Fair Access to Insurance Requirements (Fair) plan, the state government’s insurer of last resort, with exposure increasing from US$50bn in 2018 to US$450bn today.
The Fair plan helps residents and businesses who are otherwise unable to get insurance but there are concerns that the LA wildfires could cause the programme to seek a bailout, which would cause a surcharge from other policyholders.
“The commissioner of the program said in testimony this past year that they’re sort of one disaster away [from insolvency]. And these wildfires are that disaster,” said Keys.
Fair plans are meant to be a sticking plaster to help people transition between insurance policies, but they have “expanded well beyond their intended use”.
Insurers could still limit exposure in areas prone to risk
For decades insurers could not model future catastrophic risks like wildfire for pricing purposes. In December, California insurance commissioner Ricardo Lara issued a regulation to expand insurance access, including mandatory increased coverage in high-risk areas and allowing insurers to use wildfire catastrophe modelling if they increase offerings in underserved areas of the state. But those requirements do not extend to underwriting.
Insurance premiums for California homeowners could increase in the next year due to Lara’s changes and the LA fires, said Joel Laucher, a former California Department of Insurance commissioner and consumer advocate at United Policyholders.
The risk changes are “likely to result in pretty significant rate increases given the insurers fervor for using them, we know they wouldn’t want to use them If it was going to result in lower rates,” he said.
But the regulation changes may not increase access, as “insurance companies don’t have to incorporate those wildfire resilient investments into determining whether or not to write policies in the first place in riskier regions,” said Haedtler.
Insurance policies are set annually, which means there’s no guarantee that the new regulations will help long term. State Farm, California’s largest private insurer, has already asked for a 22% emergency rate hike due to the LA fires.
Laucher says it is likely insurers will be careful to not be concentrated in areas too prone to risk.
“That’s kind of an old insurance standard to guard against over risk, meaning writing too many homes or businesses, such that the cumulative values of all that coverage subject to a single catastrophe could do financial damage to the insurer,” Laucher said.
State solutions to reducing climate and insurance risk
Ultimately, Haedtler says states need to take matters into their own hands and address the insurance crisis holistically, as the federal disaster relief system is unlikely to be reformed anytime soon under US president Donald Trump.
“The trend of states making decisions about how to fund climate resilience and then incorporating those climate-resilient land planning and investment decisions into their insurance regulations rules is going to be a pattern going forward.”
Shrinking the insurance protection gap in California and other states goes beyond just raising rates and regulation. It also “encompasses not just insurance regulation, but land use, building codes, affordable housing” said Haedtler.
State legislatures in Colorado, a state which also faces increasing wildfire risk, have introduced several bills to help fix the insurance market. One bill would require insurance companies to integrate wildfire-resilient investments made by state and local governments into insurance pricing and underwriting. This would not only make fire prevention and floodplain management measures safer for communities, but hopefully lower the cost of premiums as well. A similar bill was introduced in California last year but failed to gain traction.
“Colorado appears to be not only making those sorts of climate-resilient investments, but harmonising those investments with their insurance regulation regime, which is exactly what states should be doing,” said Haedtler.
Crugnola-Humbert said that while an obvious solution is for banks and insurance companies to stop financing and insuring fossil fuel companies, it is not politically realistic at the moment and “it would not solve anything for many years anyway because of the long physical inertia of greenhouse gases”.
In a Council on Economic Policies report which he authored, Crugnola-Humbert highlighted his recommendations for policymakers to address the insurance climate gap.
One solution that he thinks would be feasible is implementing more public support for the failing insurance markets. In the case of California, rather than keeping prices artificially low, the state can allow insurers to set prices but will subsidise premiums if certain measures like clearing out debris or using better building materials are used.
“So subsidies are not in the form of control prices, but rather in the form of, let’s say, rewarding good risk management and prevention,” he said.
States and policymakers can also help people build back better by setting building and zoning standards that are more resilient to climate change. While it might be expensive upfront, it will be cheaper in the long term.
Insurance is largely regulated on a one-year basis because of the pricing cycle but it should be more long term, said Crugnola-Humbert.
Homeowners and regulators across the US should think about the longer-term effects of resilience measures instead of just building as quickly and cheaply as possible because those structures might become damaged again.
“Invest more at the start for more resilient building materials or other prevention measures, knowing that it’s an investment, but it will be recouped not in one year, but over five or 10 years,” he said.
In the end he worries that insurance is becoming more individualised and more like self-insurance, where money is kept aside or put in a safe, as insurers increase their risk selection and become over-reliant on precise risk diagnostics. This trend could ultimately make insurance only available to those who are not so much at risk and can recover from disasters more easily.
This page was last updated February 10, 2025
Written by
Moriah Costa is the Editor-in-Chief of Green Central Banking and has over a decade of experience writing about banking and finance. She is an award-winning American journalist based in Paris and has written for major international publications, including Reuters, The Guardian, and S&P Global. Having grown up in water-stressed Arizona, she has always had a strong interest in bringing awareness to climate and environmental issues.
