The state’s efforts to address its insurance crisis have been thrown into fresh turmoil by the recent devastating fires in Los Angeles. With the blazes potentially becoming the costliest in California’s history, the insurance market, and particularly the state’s insurer of last resort, is poised to face even greater strain.
The Impact on Pacific Palisades and the FAIR Plan
Data from Pacific Palisades, an affluent Los Angeles neighborhood, highlights the insurance challenges. Approximately one in five homes in the area was insured through the FAIR Plan, the state’s insurer of last resort. Facing increased wildfire risks, insurance companies have been canceling or declining new policies in California, causing more property owners to rely on the FAIR Plan. As a result, the FAIR Plan’s homeowner policies surged to over 451,000 as of September 2024, a 123% increase over the previous three years. State Farm, for instance, decided not to renew thousands of policies last year, including roughly 1,600 in Pacific Palisades.
In the 90272 ZIP code of Pacific Palisades, the residential FAIR Plan policies increased by 85% year-over-year to 1,430. Other areas of Los Angeles, where the FAIR Plan use is also high due to fire risks, have either been evacuated or are near the fires themselves, including Santa Monica’s 90402 ZIP code, where FAIR Plan policies rose 128% year over year. These rising numbers are raising real concerns.
State’s Insurance Strategy Faces a Test
With at least five fatalities and over 2,000 structures destroyed in the LA area, and as claims begin to flood in, the effectiveness of California’s plan to ensure insurance availability is being tested. The state’s “sustainable insurance strategy,” spearheaded by Insurance Commissioner Ricardo Lara, went into effect at the start of the year. The plan involves quicker reviews of rate hikes, the use of catastrophe models, and allows insurers to account for reinsurance costs. In exchange for these concessions, insurers must write or maintain a certain number of policies in high-risk areas.
“There’s no doubt that this massively complicates things,” said Stephen Collier, a professor at UC Berkeley. Lara acknowledged the complications, but maintained that insurers’ commitments to the reform remain in place. The FAIR Plan, which is likely to face tens of billions of dollars in claims, has a major challenge.
“This massively complicates things.” — Stephen Collier, professor of city and regional planning at UC Berkeley
Collier noted that the potential liability could make insurers hesitant to continue writing policies in California. Insurers are still on the hook regarding the FAIR Plan even when writing in the market – even if they are not directly responsible for claims paid.
Pacific Palisades is among the top five areas in Southern California with the highest wildfire exposure, at almost $6 billion. The FAIR Plan’s total statewide exposure is $458 billion. Victoria Roach, president of the FAIR Plan, has previously expressed concerns about the plan’s long term financial stability as it grows. Roach mentioned that the plan was “one event away from a large assessment.” Hilary McLean, a spokesperson for the FAIR Plan, stated that it is too early to give loss estimates due to the recency of the fires.
Market Reactions and Future Predictions
Denni Ritter, vice president at the American Property Casualty Insurance Association, underscored the importance of the state’s reform efforts, stating the commitment to work with the state. Lara pointed out the agreement with the FAIR Plan providing “data to track any solvency issues” and a mechanism for proactively requesting premium increases for future events, creating “another set of certainty” for insurers.
The overall message from Lara and some other experts is clear: Insurance customers may face substantially higher premiums in the short term to stabilize the market long-term.
AccuWeather’s preliminary estimate of the economic toll from the fires was initially $52 billion to $57 billion, and then rose to $135 billion to $150 billion.
“It could be the costliest set of fires in modern California, if not U.S., history,” said Dan DePodwin, senior director of forecasting operations at AccuWeather.
Dave Jones, Lara’s predecessor, predicts even higher rate hikes due to losses. David Russell, professor of insurance at Cal State University Northridge, confirmed that the fires validate rate increases. He hopes those rate requests will be granted quickly.
