Based on estimates as of Jan 14, the insured losses from the Los Angeles wildfires will be at least $25B on the low end and could already be as high as $40B. With many of the fires still uncontrolled, this could balloon even further as they progress. The day before (Jan 13), the estimate on the high end was only $30B. Just 4 days before that (Jan 9), the estimate was $20B. The day before that (Jan 8), it was $10B.

Even at $10B, it would have been the largest fire event experienced by the insurance industry in California’s history. At $20B, it would be the most expensive wildfire event in terms of insured losses in US history. The actual losses will likely be more than 2x that, and the total in damages and economic losses will be even higher – likely $250B+. It will be a significant blow to California’s economy, representing 6%+ of state GDP.

The insurers with the highest primary losses in aggregate are expected to be Allstate, Travelers Cos and Chubb. High-value insurers Chubb, AIG, and Cincinnati Financial Corp will also bear a disproportionate share of the losses relative to their statewide market share. Mercury is another insurer frequently mentioned as having significant exposure.

California’s insurer of last resort – its Fair Access to Insurance Requirements (FAIR) plan – has $5.9B of exposure in just the Pacific Palisades and could see $8B+ in total insured losses. FAIR’s exposure has grown in recent years as private insurers have pulled back and stopped issuing policies in California, tripling from $153B in Sep 2020 to $458B in Sep 2024. State Farm, for instance, dropped 1,600 policies in the Palisades starting in Jul 2024 – 69% of its policies there. Many of the homeowners shifted to FAIR, which now covers 1,430 of the 9,000 homes in the Palisades. In total, FAIR covers 452K dwellings (3%) of California’s 14.4M housing units.

Homeowners and businesses generally turn to FAIR’s high-risk coverage when they cannot obtain insurance through a private insurer. FAIR is expensive (about 2x the average) and offers only limited coverage – i.e. fire, lightning, smoke, explosions. Notably, FAIR only covers up to $3M per residence and up to $20M per commercial property. For comparison, the average home value in the Palisades is $3.5M, while the median is $4.7M.

As of last Friday, FAIR only had $377M to pay claims. It has long teetered on the brink of insolvency, in large part because the state previously barred FAIR from factoring in the cost of reinsurance, catastrophe modeling, and the cost of capital into premiums. Not being able to include all its expenses meant FAIR was never able to be actuarially sound. FAIR only has $2.6B in reinsurance (of a $5.75B total tower, which includes co-reinsurance). The reinsurance carries a $900M deductible – less than what FAIR has on hand – which means it is virtually guaranteed that FAIR will need to assess private insurers.

As a backstop, the FAIR plan – which was established by statute but operates as a not-for-profit association of licensed California insurers – is allowed to levy an assessment on private insurers to cover its losses. Private insurers are assessed at a rate proportional to their market share in California. If the assessment is less than $1B, private insurers can only pass on 50% to customers. After the first $1B, 100% of the losses can be passed on to customers. Homeowners across California could see a surcharge of thousands of dollars, although any assessment must be approved by the state insurance commissioner.

California also has other avenues to raise funds to cover losses if needed. It could, for instance, issue bonds to raise cash through the California Infrastructure and Economic Development Bank. It could also sue any utilities that might be responsible for sparking one or more of the fires, aiming for a share of California’s $15B utility wildfire insurance fund. However, these costs could end up back in the laps of California residents, who are seeing rising electricity costs as well.

The LA wildfires come at a time when premiums have already been on the rise. In California, home insurance prices rose 43% from 2018-2023, and rate-hike approvals in 2024 ranged from 16-34%. California is also facing a crisis with 7 of the 12 largest private insurers pulling back from the state market, starting in 2022-2023. In Jul 2024, 9 months after halting the issuance of new policies, State Farm – the largest insurer in California – announced it would drop coverage for 72K homes across California. It attributed its pullback to heightened risk of wildfires and other catastrophes, regulations constraining rate increases, rising construction costs, and a tough reinsurance market.

Last year, California sought to address the problems of insurers leaving the state by rolling out new “Sustainable Insurance Strategy” policies. These new policies will allow insurers to use catastrophe modeling and consider climate change (premiums were previously set based on historical losses). Insurers will also be allowed to pass along the costs of reinsurance, which alone could increase premiums by 40-50%. In exchange, insurers will be required to write policies in wildfire-prone areas at a rate of 85% of their California-wide market share. (Insurers must up their rate by 5% every two years until they hit their target.)

Because large insurers operate across multiple US markets, rising costs – even when they are concentrated in certain states – will impact other states. One study found that highly regulated states like California tend to be subsidized by policyholders in more loosely regulated states that have fewer constraints on raising premiums. It found that premiums in more loosely regulated states went up by 3 to 6.5 percentage points more on average than in highly regulated states.

Higher premiums in the future are a given. The question is how will they be passed along. In an environment of relatively frequent high-dollar catastrophes, large surcharges passed along to all California policyholders – who end up subsidizing the costs of rebuilding expensive homes in high-risk areas – will quickly become unpopular. Most stakeholders would prefer that costs be built into premiums rather than assessed in lumps after catastrophes.

One option suggested is that the federal government provide reinsurance as a backstop to the private market. However, it’s not clear whether the incoming Trump administration would support an expansion of the federal government’s role in a market well-populated by private-sector players.

We’ll likely see an end to artificially cheap insurance in high-risk areas. Some believe regulators will steer towards allowing insurers to price with more granularity – by neighborhood or even home by home. If the market trends in this direction, we will see a growing set of players offering drone inspections, geospatial analytics, and other risk-modeling tools to inform property-specific pricing and underwriting decisions. One slice of the market that is seeing growth is the less regulated, more bespoke, and more expensive “excess-and-surplus” (E&S) lines – which can allow homeowners to get more coverage than they might be able to get elsewhere.

In underwriting, the saying goes, “there is no such thing as a bad risk; only a bad price.” Market disjoints occur when prices can’t readily move to reflect changes in the underlying risk. Even when prices can be raised, they may eventually reach a point that’s not economically viable for some customers or insurers. When the risk is probable, sizable and concentrated – e.g. rising natural-disaster events causing insured losses to grow by 5-7% annually – it may turn out there is no risk-pooled solution that works well for everybody. While going without insurance may not be an option for those with mortgages, 13%+ of US homeowners are now going “naked.” It puts credence to the growing belief that we may be “marching toward an uninsurable future.”

Sep 1 2023 (3 Shifts): Rising premiums and market disjoints in homeowners insurance

Aug 19 2022 (3 Shifts): Heatwaves, drought and crop yields