California’s Home Insurance Crisis
Devastating wildfires are escalating home insurance costs in California, which holds the title of the largest insurance market in the United States. As climate-related disasters increase across the country, other states are starting to feel the heat, too.
As flames rage across hillsides in Los Angeles, destroying neighborhoods and displacing residents, the full extent of the damage is yet to be determined. Early projections indicate substantial costs. Daniel Swain, a climate scientist at the University of California, Los Angeles, told KQED that these fires could become some of the most expensive in U.S. history. AccuWeather experts estimate that total losses could reach $250 billion to $275 billion.
These unknown costs coincide with a critical moment in California’s home insurance market. While home insurance rates are climbing nationwide, California has been hit particularly hard because of increasingly destructive wildfire seasons, influenced by hotter temperatures and drought-stricken vegetation.
Experts and policymakers agree: climate change is fundamentally altering how homes are insured in the United States. The “once-in-a-generation” weather events are now happening with greater frequency. As insurance companies grapple with the cumulative impact of these disasters, the elevated costs are carried over to policyholders.
While the situation in California is unique, this is a problem that’s playing out across the country. The effects of climate change are significantly impacting home insurance bills.
Insurance premiums have been slowly increasing in California for years. Meredith Fowlie, a professor at the University of California, Berkeley, explains that while climate change is a major factor, it’s not the only one. The costs of materials and skilled labor required to repair and rebuild homes are increasing.
According to a study co-authored by Fowlie, the devastating 2017 and 2018 wildfire seasons significantly destabilized California’s insurance market. The extensive losses from these fires “wiped out more than a quarter century of cumulative profits for the industry twice over,” noted Carolyn Kousky of the Environmental Defense Fund.
This financial strain led the industry to invest more in sophisticated risk modeling and analytics. Fowlie says that these tools are helping insurers to better understand and price wildfire risk, so they can ensure they are ready to pay when claims are filed. This has significant implications for consumers.
The National Bureau of Economic Research (NBER) study found that premiums increased, especially in areas prone to wildfires or those deemed high-risk by insurers. Insurers paused the writing of new policies or chose not to renew existing ones, prompting more people to turn to California’s FAIR Plan, a semiprivate insurance program. This plan has higher premiums and less coverage than standard plans.
California is facing an unprecedented insurance crisis. Problems in California – high premiums, fewer insurers, and a rising number of people relying on insurance plans of last resort – are mirrored across the country.
Florida and Louisiana are experiencing similar market instability, linked to intensified hurricane seasons due to rising temperatures and sea levels. In Florida, 16 insurance carriers have become insolvent since 2017, and others have stopped writing policies. The state-backed insurer of last resort has been absorbing more policyholders.
While hurricanes and wildfires have created extreme conditions in Florida, Louisiana, and California, the trend exists across the nation. Colorado created its first state-backed insurance program because of wildfire-related insurance issues. Coastal New Jersey is dealing with rising sea levels causing increased flooding.
Adjusted for inflation, average home insurance premiums have increased 13% since 2020. This situation is being closely monitored by state insurance commissioners nationwide, with California’s market serving as a potential warning for other states.
To address the crisis, the California Department of Insurance passed new regulations in late 2024 to increase insurance access. These allow insurers to base rates on forward-looking climate risk models rather than solely historical data. In exchange, companies committed to writing more policies in high-risk areas and consider fire-mitigation efforts when determining rates.
These reforms could serve as a model for other states dealing with the effects of climate change on homeownership. As the Environmental Defense Fund’s Kousky notes, traditional insurance models have struggled with the “known unknown” risks of climate change, making it difficult to provide affordable coverage.
The increasing costs associated with home insurance are becoming a significant concern for many Americans, highlighting the economic impacts of a changing climate. These changes are critical to adapt to, and the insurance industry is one of the first places where a lot of people are grappling with that reality.
