Southern California’s wildfires are a high-stakes early test for new regulations designed to shore up the state’s spiraling home insurance market.
Rules aimed at luring insurers back to the wildfire-prone state were finalized by the state’s insurance commissioner in December and take effect this month. The regulations allow companies to take climate change risks into account when setting rates. Over time, insurers will also need to increase their coverage offerings for high-risk areas.
The changes are an effort to bring California’s insurance rules closer to those of other states and stem a statewide crisis that has deepened as climate change increases the frequency and intensity of wildfires and other natural disasters.
That’s now grimly evident as five wildfires have burned 29,000 acres across Los Angeles and surrounding areas hit by months of drought. Evacuations are still ordered for almost 180,000 people, and the fires are already considered the most destructive in the city’s history.
“It’s unprecedented and it’s amazing how many fires we actually have,” Karl Susman, president of Susman Insurance Services, told Yahoo Finance on Wednesday. “Fires are literally in almost every corner of Southern California.”
The fires in Southern California illustrate why insurers have been fleeing in recent years.
January is not a typical wildfire season in the state, but the drier climate has spread the risks into the colder months. The fires have ripped through affluent Los Angeles neighborhoods, including Pacific Palisades where the average home price is $3.5 million.
Insurers are likely to be on the hook for a large percentage of what is lost.
The Eaton Fire engulfs a structure on Jan. 8 in Altadena, Calif. (AP Photo/Ethan Swope) ·ASSOCIATED PRESS
Faced with mounting claims-paying losses in California, insurance giants including Allstate, State Farm and Farmers have either pulled out of the state entirely in recent years or limited the new policies they will write. The exodus has forced millions of residents to seek alternative coverage in a shrinking market.
It also prompted new rules coming into effect this month that, in addition to allowing insurers to factor in climate change risks, also allow insurers to pass the cost of reinsurance on to consumers. It is insurance that insurers buy to spread their own risk. All other states already allow reinsurance costs to be reflected in consumer premiums.
Because the new regulations mean many Californians will have higher premiums, they have drawn the ire of some consumer groups. But experts say such increases are needed as the planet warms and natural disasters increase.
Many insurers still believe it’s possible to do business in the state, at the right price, said David Russell, a professor of insurance and finance at California State University, Northridge. The latest fires could increase premiums, he added.
“They believe wildfires are insured,” Russell said. “Before, they couldn’t charge as much as they should have.”
Insurers overwhelmingly supported the changes, which Insurance Commissioner Ricardo Lara heralded as a “historic moment for California” in a statement last month. Farmers has said it will continue to offer certain types of coverage in the state, and Allstate has also suggested it will return.
California Insurance Commissioner Ricardo Lara, right, speaks with homeowner Bruce Breslau after a legislative oversight hearing held by the state insurance commissioner at LA City Hall in September. (Getty Images) ·Robert Gauthier via Getty Images
Currently, California homeowners in high-risk areas have few insurance options. Many have turned to California’s FAIR Plan, a private program established by the state designed as a last resort for fire insurance.
Coverage tends to be more expensive and less comprehensive than private alternative insurance, but Californians are turning to the program in droves: some 452,000 housing policies they were in effect from September 2024, more than double the September 2020 level.
Insurance is a capital-intensive business with low profit margins, and many insurers have been spending money in California in recent years as wildfires have intensified. The 2018 Camp Fire in Northern California was the deadliest and most destructive wildfire in the state’s history, destroying the city of Paradise and causing about $10 billion in insured losses.
Its destruction surpassed records set just a year earlier by the 2017 Tubbs Fire that ravaged parts of Napa and Sonoma counties. From 2012 to 2021 California home insurers lost money on underwriting and insurance transactions, while average profit margins across the country on these deals were 3.6% to 4.2%, respectively.
“While I was commissioner, we began to see more extreme and frequent weather-related events fueled by climate change that began to kill more people, injure more people, damage more homes and businesses, and in some cases, entire communities, and cause more insurance losses,” said Dave Jones, who served as California’s insurance commissioner from 2011 to 2018. “It’s gotten a lot worse since I left office.”
As of Thursday, with the fires still raging in Los Angeles, JPMorgan estimated that insured losses could top $20 billion, with most of the pain coming in homeowners insurance versus reinsurance, commercial insurance and auto lines.
Jones, who is now director of the Climate Risk Initiative at UC Berkeley’s Center for Law, Energy and the Environment, said the latest changes are a step in the right direction for the state’s insurance market, but they likely won’t be enough as climate change intensifies.
“In the long term, regulatory changes give insurers [faster rate increases] and reduce the cost burdens on them will be overwhelmed and overwhelmed by the growing risk,” he said.
Claire Boston is a senior reporter for Yahoo Finance covering housing, mortgages and home insurance.
