The devastating fires in the Los Angeles area could be the costliest in California’s history, further destabilizing the state’s already fragile insurance market. The blazes, which have resulted in at least five deaths and the destruction of over 2,000 structures, are placing immense pressure on the California FAIR Plan, the state’s insurer of last resort.
The fires come at a critical juncture, just as a plan aimed at stabilizing the insurance market was implemented. The strategy, championed by Insurance Commissioner Ricardo Lara, is designed to encourage insurance companies to resume writing policies in the state. However, the scale of the losses from the Los Angeles fires is raising serious questions about the plan’s viability and the overall future of insurance coverage in California.
The situation is particularly acute in areas like Pacific Palisades, an upscale Los Angeles neighborhood. Data indicates that approximately one in five homes in the area were insured by the FAIR Plan, highlighting the growing reliance on this insurer. Faced with rising wildfire risks, many insurance companies have been restricting coverage or canceling policies, leading property owners to seek coverage through the FAIR Plan, by state law.
As a consequence, the number of homeowner policies held by the FAIR Plan has skyrocketed, reaching over 451,000 by September 2024, a staggering 123% increase over the previous three years. Data from the 90272 ZIP code in Pacific Palisades shows an 85% increase in FAIR Plan policies compared to the prior year, with 1,430 residential policies. Other Los Angeles neighborhoods, including some that have been evacuated or are near active fires, have also seen a surge in FAIR Plan usage.
“There’s no doubt that this massively complicates things,” said Stephen Collier, professor of city and regional planning at UC Berkeley, whose research focuses on insurance, climate change and urban planning. “It couldn’t be at a worse possible time.”
The state’s recent insurance strategy, aimed at addressing market instability, includes provisions such as streamlining the review of rate hike requests from insurance companies and allowing insurers to utilize catastrophe models when setting premiums. Insurers can also adjust premiums to cover the cost of reinsurance, the financial mechanism that insurers use to protect themselves, from future losses. In exchange for these concessions, insurers are expected to write or maintain a specified number of policies in high-risk areas.
Commissioner Lara told CalMatters that the fires “are going to complicate an already complicated market.” He also stated that, based on recent conversations with insurance companies, their commitments to the new reforms remain in place. This is a welcome sign, providing a path towards insurance stability despite this recent disaster.
The FAIR Plan is expected to face a massive financial burden as it processes claims for the recent fires. Stephen Collier, professor of city and regional planning at UC Berkeley stated that the potential liabilities could prompt insurers to reconsider their presence in the California market. “Having all this risk transferred to the FAIR Plan doesn’t get insurers off the hook if they’re still writing in the California market,” he said.
Pacific Palisades, for example, is identified as one of the top five areas in Southern California with the highest wildfire exposure. Other areas with significant exposure include Lake Arrowhead, Crestline, Big Bear City, and Big Bear Lake, all located in San Bernardino County.
Victoria Roach, president of the FAIR Plan, has expressed concerns about the plan’s financial stability as its policy numbers have grown. According to Hilary McLean, a spokesperson for the FAIR Plan, while it is too early to provide loss estimates she assured that the plan has “payment mechanisms in place, including reinsurance, to ensure all covered claims are paid.”
Denni Ritter, vice president at American Property Casualty Insurance Association, noted that the fires “underscore the importance of this work” that looks to reform California insurance rules. She said that the organization is “committed to working with California’s leaders to restore the health of our insurance market so that Californians can access the coverage they need.”
Dan DePodwin, senior director of forecasting operations at AccuWeather, stated that preliminary economic estimates for the fires ranged from $52 billion to $57 billion, but that this number would be raised to $135 billion to $150 billion. “It could be the costliest set of fires in modern California, if not U.S., history,”
Former state insurance commissioner Dave Jones predicted that the new fires will likely lead to higher rate increases as insurers assess the cost. David Russell, a professor of insurance at Cal State University Northridge, added that the fires are “validating the rate increases and (insurance) industry pressure over the last 18 to 24 months.”
The key message from Commissioner Lara and other experts is that consumers should anticipate potentially significant premium increases in the short term. The long-term goal is to achieve a market stabilization.
