The wildfires in Los Angeles have torn through roughly 30,000 acres so far, devastating multiple communities. This inferno is the most destructive natural disaster in LA County’s history. With median home values surpassing $2 million, estimates indicate that insured losses may reach $20 billion.

The widespread destruction is further worsening the state’s existing insurance crisis of homeowners facing unaffordable premiums or no coverage. Three factors have led to this issue:

    1. Premiums were too low. Prior to facing the brunt of wildfires, home insurance rates in California were relatively low. In Pacific Palisades, the area hit hardest by wildfires, premiums have been cheaper than in 97% of zip codes in the US.
    2. The frequency and severity of wildfires have increased. As a result, losses from them have become so costly that insurance companies — a homeowner’s last line of defense when disaster strikes — have canceled policies, raised rates, or exited the state. State Farm, the largest insurer in the state, has dropped 72,000 policies since March of 2024.
    3. California’s regulatory environment was too consumer-friendly. The regulatory environment has kept insurance premiums relatively low, even in high-risk areas. While the insurance regulations protect consumers from sudden rate hikes, this also limits the ability of insurers to respond to increasing risks and costs. Only recently has the state’s insurance regulator permitted double-digit rate increases, but this happened only after years of friction between regulators and the insurance industry.

Lack of adequate insurance resulted in fewer, often cost-prohibitive coverage options. Homeowners have largely replaced their fire coverage with a last-resort state plan. The California FAIR Plan’s potential exposure to losses surged by 61% last year. In Pacific Palisades, the number of residential policies under the FAIR Plan grew by 85% to 1,430 last year. State regulations stipulate that the FAIR Plan can turn to the private insurance companies operating in the state to fill any gap to cover fire claims.

Home insurers in the Golden State will need to adjust their operating models in the following ways:

    1. Understand and appropriately price for the spiraling costs of natural disasters. The impact of intense climate change has left insurers attempting to respond to risks that they do not fully understand. Setting premiums excessively high to create a margin for error has made insurance unaffordable. Insurers must invest in understanding the hazards and vulnerabilities associated with wildfire exposure to increase their underwriting accuracy.
    2. Utilize predictive modeling techniques. This will allow insurers to segment and price risks according to anticipated future damages. In California and in most other states, regulators have recently allowed insurers to set rates based on these models. Rather than only use actuarial models that are based on past loss history, insurers must leverage data science and modern analytical techniques to price risks more accurately.
    3. Hedge risks through reinsurance. Insurance carriers can protect themselves from the higher layers of risk exposure through risk transfer to the reinsurance ecosystem. While reinsurance rates for risks tied to climate change have increased in recent years, the changing regulatory environment allows insurers to transfer some of this over to the reinsurer. Insurers must leverage the reinsurance broker community to help build the appropriate reinsurance structures for disciplined portfolio management.
    4. Strike a balance with regulators. The California Department of Insurance must balance the need to protect consumers from evolving risk at affordable prices while ensuring that insurance companies are attracted to their state and do not become insolvent. The industry and the regulators must work hand in hand to create appropriate solutions at fair prices for consumers and insurers.

The insurance industry exists to provide resiliency to societies, especially during extreme events and natural disasters. Without it, communities will destabilize in the face of increasing natural disasters. A solution for California exists. It will take the cooperation of regulators, insurers, and consumers to develop it.

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