{ “title”: “Los Angeles Wildfires Expected to Drive Up California Property Insurance Costs, Moody’s Says”, “description”: “Moody’s Ratings predicts that the recent wildfires in Los Angeles will worsen existing challenges in California’s property insurance market, potentially increasing costs and straining the FAIR Plan.”, “tags”: “Catastrophe, Natural Disasters, Trends, Wildfire, California, Property Insurance, Losses, Moody’s Ratings”, “rewritten_content”: “## Wildfires to Worsen California’s Property Insurance Woes
Following the recent wildfires in the Los Angeles area, Moody’s Ratings has released a report projecting increased property insurance costs across California. The report suggests that the state’s already struggling insurance market will likely face further challenges, with potentially negative implications for property values, consumer spending, and the credit quality of public sector entities.
Preliminary estimates from Moody’s RMS indicate that insured property losses from the fires could reach as high as $30 billion. Catastrophe modeler KCC estimates the insured loss from privately insured policies and the California FAIR Plan for residential, commercial, industrial properties, and autos from the Palisades and Eaton Fires to be close to $28 billion. Verisk’s earlier estimates placed insured losses between $28 billion and $35 billion, including losses to the California FAIR Plan.
Strain on the FAIR Plan
The California FAIR Plan, designed as a last resort for homeowners unable to get insurance, is also expected to face significant strain. Gerald Glombicki, a senior director at Fitch Ratings, noted in an interview, the FAIR Plan may not have sufficient surplus to cover losses of this magnitude. The FAIR Plan’s reinsurance coverage is triggered after claims reach $900 million; the plan has an exposure of $4.8 billion to structures in the Pacific Palisades and Eaton fire zones, according to Moody’s. The highest figures for insured losses so far include an estimate of $40 billion from Keefe Bruyette & Woods analysts.
CoreLogic has projected a range of $35 to $45 billion in insured losses from the two major Los Angeles fires.
Further complicating the situation, there were five significant wildfires burning in the L.A. area at one point. Overall, the total economic impact of the fires is expected to be substantial. AccuWeather revised its preliminary estimate of total damage and economic loss from the fires to between $250 billion and $275 billion. These figures do not account for potential losses from two new wildfires that have since started in Southern California, which are rapidly spreading and prompting evacuations.
The Hughes Fire, which began Wednesday and rapidly expanded to over 10,000 acres, is burning north of Los Angeles. The Sepulveda Fire began Thursday and has consumed 40 acres near the Getty Center art museum.
Impact on Insurance Regulations and Premiums
The wildfires have spurred discussion regarding a revamp of Proposition 103, California’s landmark insurance law. The law previously restricted the use of reinsurance rates in setting homeowners insurance rates and the implementation of catastrophe models for rate setting. Both of these aspects are now changing.
California Insurance Commissioner Ricardo Lara recently announced the final step in efforts to aid the state’s strained homeowners insurance market with the Net Cost of Reinsurance in Ratemaking Regulation. This regulation permits the use of reinsurance as a ratemaking factor and mandates insurers to increase coverage in high-risk areas. The California Department of Insurance believes this step will generate more insurance coverage options while limiting costs for consumers.
These shifting regulations come as several insurance carriers are scaling back operations in the wildfire-prone state, and are simultaneously requesting substantial rate increases. State Farm, which sought rate approvals of 7% and 20% in the prior year, has applied for significant rate increases in California. As the largest insurer in California, State Farm insures close to one in five homes in the state and has requested a 30% rate increase for its homeowners coverage, a 52% increase for renters, and a 36% increase for condo coverage.
Allstate, which stopped issuing new California homeowners insurance policies in 2022, is seeking an average 34% increase in its California homeowners insurance premiums. If approved, this would represent the largest rate increase for the year and would affect over 350,000 policyholders.
Moody’s forecasts that the L.A. wildfires “are certain to be the costliest wildfire disaster in California’s history.” If insured property losses hit Moody’s $30 billion estimate, it would be more than double the losses of the 2018 Camp Fire. “The LA wildfires underscore the high level of physical climate risk in California, which is seriously challenging its property insurance market and causing more frequent economic interruptions across the state,” the Moody’s report states.
Palisades Fire in Los Angeles, California. January 2024.” }
