California Home Insurance Under Siege from Climate Change
California, the largest home insurance market in the U.S., is grappling with significantly increased home insurance rates because of the growing threat of wildfires, which are exacerbated by climate change. As climate disasters increase across the country, the pressure is being felt in other states as well.
The remains of a burned home in the Pacific Palisades neighborhood of Los Angeles after being destroyed by the wildfire.
The recent wildfires in Los Angeles have caused widespread destruction, and though the full extent of the damage is still unknown, initial estimates point to massive costs. Daniel Swain, a leading 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 have projected total losses between $250 billion and $275 billion.
These massive costs coincide with a critical juncture in California’s home insurance market, as climate change disrupts traditional models. While home insurance rates are increasing across the country, California has been particularly hard hit because wildfire seasons have become more devastating due to hotter temperatures and drought-dried vegetation. Experts and policymakers agree: Climate change is fundamentally changing how homes are insured in the United States.
California’s Unique Insurance Crisis
California faces what some are calling “an insurance crisis like we’ve never seen.” While rising insurance rates aren’t solely attributable to climate change, the impact of worsening wildfires on insurance costs is undeniable, according to Meredith Fowlie, a professor of agricultural and resource economics at the University of California, Berkeley.
The rising costs of construction materials and skilled labor, coupled with higher interest rates, have also contributed to rising costs. However, Fowlie’s research clearly points to the growing severity of wildfire seasons as a major driver of instability in California’s insurance market.
The 2017 and 2018 wildfire seasons caused “particularly devastating” losses, raising concerns about the insurability of catastrophic wildfire risk. Carolyn Kousky of the Environmental Defense Fund explained that the massive losses from these fires “wiped out more than a quarter century of cumulative profits for the industry twice over.”
A person walks down a burned-out street in the aftermath of the Palisades Fire in Los Angeles.
The insurance industry has responded with increased investment in risk modeling and analytics, but these efforts have, in turn, affected consumers. Premiums have increased, especially in high-risk areas. Furthermore, some insurers have paused writing new policies, and an increasing number of homeowners are forced to turn to California’s FAIR Plan, a last-resort insurance option, which has higher premiums and less coverage. Because home insurance is typically a requirement for securing and maintaining a mortgage, this situation is particularly challenging for those living in high-risk areas.
National Trends in Home Insurance
The challenges in California – high premiums, limited insurer availability, and an increase in reliance on last-resort plans – are echoed across the country. States like Florida and Louisiana are experiencing similar market instability, due to worsening hurricane seasons connected to rising temperatures and sea levels.
Firefighters survey damage at a home leveled by the Palisades Fire in the Pacific Palisades community.
Florida, for instance, has seen 16 insurance carriers become insolvent since 2017, with 16 others halting policy writing. This has caused Floridians to pay the highest premiums in the U.S. In 2022, as Hurricane Ian devastated the state, the fear was that the ensuing payouts would be the final blow for many insurers. The storm proved to be the most costly in Florida’s history, leading over 30 insurance carriers to exit the market.
Similar trends are observed in other states. Kousky notes that Colorado had to create a state-backed insurance program because of escalating wildfire concerns. Coastal New Jersey has dealt with rising sea levels and increased flooding risk. “We’ve seen challenges with pricing and managing this growing risk,” Kousky said.
Potential Solutions and Future Outlook
California Insurance Commissioner Ricardo Lara emphasized that the state’s challenges could be a warning sign. The state is implementing new regulations to increase access to insurance, allowing companies to use forward-looking climate risk models instead of solely relying on historical data. In exchange, insurance companies are committing to writing more policies in high-risk areas and factoring in fire-mitigation efforts into lower rates.
These changes are intended to make the market more stable, but many experts believe they will temporarily increase rates as insurers adjust their pricing models. Lara is hopeful that the changes will improve the market within a year but acknowledges the complexities of the situation. The long-term success of these potential solutions is yet to be determined.
Despite the complexities, one thing is clear: the impacts of climate change on home insurance are becoming a central concern for homeowners. According to Kousky this is “the one place where I feel lots of Americans are seeing the costs of climate hit their pocketbooks.”
