The wildfires ravaging Los Angeles have pushed California’s already fragile home-insurance market deeper into crisis, with analysts at JP Morgan projecting insured losses exceeding $20 billion.
This estimate, which has doubled in just days, places the event among the costliest in US history.
A state in turmoil
California has been a focal point for wildfire devastation, accounting for eight of the 10 most expensive fires the country has ever experienced.
The current infernos, which have destroyed more than 2,000 structures, are concentrated in high-value areas such as Pacific Palisades, where the median home price exceeds $3 million.
Analysts warn that these fires may surpass the 2018 Camp Fire’s $10 billion in insured losses, which until now held the record for the most damaging wildfire in state history.
Pacific Palisades alone has seen over 300 structures destroyed, with another 13,000 under threat.
These areas’ densely packed, high-value homes compound potential losses and there are fears that rebuilding costs could escalate beyond current projections.
Fires in neighbouring areas, including the Hurst Fire near Burbank and the Eaton (NYSE:ETN) Fire near Pasadena, have endangered an additional 68,000 structures.
Last straw for insurers?
Three major insurers – State Farm, Allstate Corporation (NYSE:ALL) and Chubb (NYSE:CB) Limited – are expected to bear the brunt of the fallout.
Chubb in particular faces heightened risk due to its focus on high-net-worth policies in affluent areas.
The losses will primarily stem from homeowners’ insurance, with significant secondary claims in commercial and auto policies as the fires spread to non-residential areas.
California’s insurance market has been under immense pressure for years and this escalating crisis might be the last straw.
State Farm, the largest home insurer in California, ceased issuing new policies statewide and has actively non-renewed existing ones in high-risk zones, including 69% of policies in Pacific Palisades’ 90272 ZIP code.
Disaster affecting the national economy
The total economic damage is expected to exceed $50 billion, further straining an industry and a broader California economy already reeling from years of climate-driven disasters.
And the disaster will no doubt have flow-on effects for the national economy, just as the new president – who has already directed his trademark antagonism and blame towards California governor Gavin Newsom – assumes office.
Consumer protections
In fact, Newsom can be thanked for the recently introduced ‘Net Cost of Reinsurance in Ratemaking Regulation’, which requires insurers to provide coverage to high-risk areas, part of an attempt to create resilience among the state’s insurers as climate change turns up the heat.
The regulation allows insurers to expand coverage and updates reinsurance practices to ensure insurers expand coverage and issue more policies in communities most at risk.
The industry is compelled under the regulation to underwrite policies for at least 85% of the statewide market share, increasing by annual increments until they meet the target.
The regulation puts a cap on the costs that industry can pass on to consumers in these areas, preventing them from charging more than the standard.
Insurers under unprecedented strain
Of course, this somewhat transfers the risk to the companies themselves.
Indeed, some analysts point to these consumer-friendly laws as a contributing factor in the crisis, saying that while they protect homeowners from steep premium increases, they also deter insurers from taking on additional risk in fire-prone areas.
Critics of the scheme say that, over time, it will lead to a sharp reduction in available policies, leaving millions of homeowners facing non-renewals, steeper costs or reliance on the limited California FAIR Plan, the state-sponsored insurer of last resort.
FAIR Plan stretched
The California FAIR Plan has seen its exposure balloon.
In Pacific Palisades, its policies surged by 85% in the last year, bringing its statewide exposure to $458 billion – a 61% increase over the previous year.
FAIR offers limited coverage, primarily for fire and smoke damage, leaving homeowners to supplement with costly additional private policies.
FAIR’s financial stability is a growing concern. With just $2.5 billion in reinsurance and $200 million in surplus cash, the plan may struggle to meet claims if the fires continue to expand.
Some industry experts warn that the increasing reliance on the FAIR Plan is unsustainable, particularly as climate change intensifies the frequency and severity of wildfires.
A market at breaking point
The wildfires have further destabilised a market already in crisis.
The regulatory concessions, including approval for premium increases exceeding historical caps, had offered a glimmer of hope for stabilisation.
But JP Morgan analysts note that recent rate hikes, such as Allstate’s 34% increase, reflect an industry-wide shift to account for future wildfire risks.
If they hadn’t already, the latest Los Angeles infernos may prompt insurers to reassess their appetite for California’s wildfire-prone regions.