Despite recent reforms, the wildfires' economic toll raises questions about the sustainability of California's insurance strategy.
by Julia Pierrepont III
LOS ANGELES, Jan. 12 (Xinhua) -- The devastating wildfires in Los Angeles have wiped out tens of thousands of homes and businesses, which could inflict a 150 billion U.S. dollars wound as reported by local media Accuweather. The rising risk of wildfires and related costs are adding to a crisis in California's insurance market.
WHY ARE INSURERS LEAVING CALIFORNIA?
Daunted by the many natural hazards California is prone to, major insurers like Heritage have withdrawn from California. This has left many homeowners without insurance or reliant on California's state-mandated FAIR Plan, originally designed as a last resort for fire insurance and reformed and expanded by Governor Gavin Newsom.
"Strengthening the state's FAIR Plan has been a key priority … to get people the reliable and affordable insurance they need … and these upgrades will help stabilize the entire market while providing more stability for those who already depend on it," said Newsom in a previous statement to the press.
But some insurers are running for the hills. "There are so many claims in California from wildfires, earthquakes and mudslides, you name it, that to continue to offer policies in that state would have driven our insurance company bankrupt," a claims adjuster for a large national insurance company told Xinhua off the record.
Over 450,000 Californians now have had to fall back on California's FAIR plan, which has seen its coverage exposure skyrocket to 458 billion dollars, nearly triple the figure from 2020.
For neighborhoods like Pacific Palisades, one of the hardest hit by insurer withdrawals, the situation is dire. This affluent area with thousands of multi-million-dollar homes has experienced many policy non-renewals, and a significant portion of its properties now rely on the FAIR Plan, exposing the state's already strained system to potentially devastating financial risks.
These fires, exacerbated by climate change, highlight how traditional finance tools like home insurance are becoming increasingly ineffective against the mounting risks.
Wildfires are not new to California, but their destructive potential has grown due to warmer temperatures and human development. Climate change leads to heavier rainfall in spring, fostering vegetation that later becomes fuel during dry seasons, upping the odds of an outbreak.
Add the powerful Santa Ana winds to that powder keg, and even a small spark can ignite a massive blaze. These fires spread rapidly, consuming homes built in the wildland-urban interface and areas where development meets natural landscapes, thus exacerbating the destruction.
WHAT REFORMS HAVE BEEN MADE?
In response to the crisis, California Insurance Commissioner Ricardo Lara recently implemented reforms aimed at stabilizing the market. Insurers are allowed to use catastrophe models for rate-setting, incorporate fire-prevention efforts by homeowners, and adjust premiums to cover reinsurance costs.
In exchange, these insurers must maintain coverage in high-risk areas proportional to their statewide market share.
The commissioner has also issued a one-year moratorium preventing insurers from canceling policies in affected areas. This provides temporary relief for homeowners but does not address the systemic issues. Insurers retain the right to decline policy renewals after this period, leaving many residents in precarious positions.
The FAIR Plan, already burdened by increasing demand, will face even greater financial pressure from the current fires. The plan's reserves are insufficient to cover claims for tens of billions of dollars in damages, forcing private insurers to contribute, which could lead them to reconsider their participation in California's market. This precarious situation exposes the fragility of the insurance system in the face of growing climate risks.
Premiums are expected to rise, and many homeowners may still find themselves underinsured due to rising rebuilding costs and widespread disasters.
WILL REFORMS WORK?
Across the United States, hidden losses from underinsured properties could exceed 1 trillion dollars, threatening economic stability. Lightly regulated insurers and state-run programs often step in to fill the gap, but they transfer risks to taxpayers, perpetuating financial vulnerabilities.
Policymakers and homeowners alike are confronting hard questions: Should we rebuild homes in fire-prone areas? Or consider letting high-risk areas revert to their natural conditions and focus on building affordable housing in safer locations?
At the same time, homeowners must reassess their insurance coverage and consider investing in fire-resistant structures, though affordability remains a concern. At what point does insurance fail to provide meaningful protection?
Despite recent reforms, the wildfires' economic toll raises questions about the sustainability of California's insurance strategy.
The reforms are still in their infancy, and it remains uncertain whether they can stabilize the market. Experts predict further rate increases, reinforcing the need for urgent action to address systemic vulnerabilities in the state's insurance framework.■