By Andy Sullivan
The fire-ravaged Pacific Palisades area of Los Angeles is one of the most expensive neighborhoods in the US, home to Hollywood A-Listers and multi-million dollar mansions. And before this week’s disaster, its insurance costs were among the most affordable in the country, according to a Reuters analysis of insurance and real estate industry data.
That could change. The scale of expected losses in the wildfires now ravaging Los Angeles, as well as regulatory changes enacted late last year, could spell the end of relatively cheap homeowners insurance in areas like the Palisades that are at increased risk of wildfires, four analysts told the Reuters.
“We’re seeing relatively low premiums in high-risk markets in California, but that may be starting to change,” said Philip Mulder, a University of Wisconsin professor who studies the industry.
Measured by home values, insurance costs are cheaper in the Palisades than in 97% of U.S. zip codes, according to a Reuters analysis of a national price database compiled by Mulder and University of Pennsylvania Wharton School professor Benjamin Keys, as well as home- data about values calculated by Zillow (NASDAQ: ), a real estate company.
The wildfires raging around Los Angeles could be the most damaging in the state’s history, officials say. The blaze has engulfed thousands of homes and businesses from the beaches of the Pacific Ocean to the hills north of Los Angeles, and was 0% contained by Thursday morning. At least five people have died, and initial damage estimates range from $10 billion to more than $50 billion.
Pacific Palisades’ relatively low insurance rates reflect the vagaries of the homeowner’s insurance market in the United States where rates can vary widely due to different regulatory policies from state to state. California’s consumer-friendly regulations have kept coverage affordable, even in high-risk areas, but prompted many insurers to cut coverage.
Sangmin Oh, a finance professor at Columbia Business School, and other researchers have found that homeowners in more loosely regulated states effectively subsidize homeowners in states like California, where the industry is more heavily regulated — despite higher levels of risk.
Compared to home values, the state’s average premium in 2023 was the lowest among all 50 states, according to a Reuters analysis. California’s high property values may make insurance seem relatively cheap, but even on an absolute dollar basis, the average annual premium of $2,200 was less than residents paid in 30 other US states.
At least six fires have burned near Pacific Palisades since 1980, including a 2018 fire that was the third costliest in California history. First Street, a climate risk research firm, found that 95% of homes in Pacific Palisades are at “high” risk of burning to the ground.
According to data compiled by Mulder and Keys, Pacific Palisades homeowners paid an average insurance premium of $5,450 in 2023. That’s less than residents of Glencoe, Illinois, an upscale suburb of Chicago where homes are two-thirds cheaper and the fire risk is minimal.
It’s also less than what residents of New Orleans’ Lower Ninth Ward, a poor and historically black neighborhood inundated by Hurricane Katrina in 2005, are paying — even though a typical home in the Ninth Ward is worth less than 1/20th of a typical home in Pacific Palisade, according to Zillow.
KEEPING UP WITH EXTREME WEATHER
The U.S. insurance industry has struggled to keep up with extreme weather in recent years, with more than twenty billion dollars worth of climate-related fires, floods and other disasters in 2023 alone.
In the hurricane-prone areas of Louisiana and Florida, insurance prices more than doubled after hurricanes in 2020, 2021 and 2022 sent the state markets into turmoil, Keys and Mulder found.
In California, until recently, regulators mandated price controls for home insurance, which limited annual increases. However, insurers fled the state as they struggled to turn a profit. According to state regulators, 7 of the 12 largest insurers have paused or limited new business from 2022.
Insurance companies cut 1.72% of California homeowners’ policies in 2023, according to a December report by the U.S. Senate Budget Committee. Only three other states – Florida, Louisiana and North Carolina – had a higher non-renewal rate.
Shunned by their insurance companies, California homeowners have increasingly turned to the state pool, which provides basic policies for those who can’t find coverage elsewhere. About 450,000 homes – about 3% of the state’s population – were covered by California’s Fair Access to Insurance Requirements plan in September, a 40% increase from a year earlier. The fund is managed by the state but financed by insurance providers.
In Pacific Palisades, 1,430 homes were in the state plan, up 85% from a year earlier. The state fund now covers $5.9 billion worth of assets in the area.
The increasingly difficult nature of finding insurance coverage has prompted state regulators to rethink their approach.
The state’s insurance commissioner, Ricardo Lara, announced an overhaul in December that will make it easier for insurers to raise rates and factor climate risks and reinsurance costs into pricing, but will also require them to offer coverage in high-risk areas. The new rules take effect this month.
Patrick Douville, vice president of insurance at Morningstar, said insurers will try to continue offering coverage in California, which is one of the most lucrative markets in the country. But they will struggle to provide affordable coverage in areas like the Pacific Palisades that will remain at risk even after this fire is out.
“Insurers need randomness,” he said in an interview. “If the same people are always being targeted, you have to charge them an astronomical premium.”
