The ongoing wildfires in Los Angeles may drive significant changes in California's insurance industry, including potential insolvencies and state withdrawals, according to Daniel Aldrich, co-director of Northeastern University’s Global Resilience Institute.
Drawing parallels to Hurricane Katrina nearly two decades ago, Aldrich suggested potential insolvencies and additional withdrawals from the state’s property insurance market, according to a recent article from BestWire.
The California FAIR Plan has a significant presence in areas affected by wildfires. Pacific Palisades, one of the regions impacted by recent fires, accounted for $5.89 billion of the plan’s exposure. Statewide, the FAIR Plan reported a 61.3% increase in exposure for the year ending September 2024, reaching $458 billion. During the same period, the number of dwelling policies rose 123% by 248,902.
Victoria Roach, president of the California FAIR Plan, stated in January 2024 that the plan carried $336 billion in property exposure. It was supported by $200 million in capital and $700 million in cash reserves.
So far, J.P. Morgan has estimated that insured losses from the fires could exceed $20 billion, although fresher figures from Keefe Bruyette & Woods have placed the figure around $40 billion.
Aldrich noted that despite the FAIR Plan’s $2.5 billion in reinsurance coverage, private insurers may face assessments, potentially leading to increased premiums for policyholders. These assessments would add to existing and anticipated rate hikes driven by wildfire risks and broader economic factors.
“What’s unusual in Los Angeles is we started seeing in March 2024 the pullout of private market insurance carriers, in a way we had not seen so much in the past,” Aldrich explained. He also noted that the FAIR Plan stepped in to fill the gap, but losses exceeding its capital and reinsurance resources could ultimately affect insureds across California and potentially nationwide.
The wildfires may also influence insurance penetration rates. Property owners not required to carry coverage due to lack of mortgage obligations could opt out of insurance entirely, leaving them financially vulnerable.
Investigations into the cause of the fires are ongoing. A report by BMO Capital Markets highlighted the possibility of electrical equipment involvement. Under California’s legal framework of inverse condemnation, utilities could be held liable for damages regardless of fault, enabling insurers to pursue subrogation claims as they did with PG&E following the 2017-2018 wildfires.
Aldrich suggested that insurers would examine these events in the context of broader climate-driven catastrophic risks, potentially influencing their underwriting and pricing strategies nationwide.
Since January, the wildfires have destroyed more than 12,300 structures, according to the California Department of Fire and Forestry. Damage assessments continue for the most destructive fires, including those in Palisades and Eaton.