LA Fires, Climate Risks Push California Insurance Market to Limit

If you live in California, you’re always bracing for the Big One. This week it arrived in the form of uncontrollable flames.

Liability experts equipped with climate models had been uneasily eyeing such a scenario, realizing in recent years that wildfire now had similar system-crashing potential as a major earthquake to upend lives and destabilize California’s $10 trillion residential property market. A group convened to examine worst-case scenarios determined that three specific areas in the state were particularly vulnerable and capable of causing far-reaching fallout. One was Pacific Palisades, the Los Angeles neighborhood reduced to ashes this week by one of at least five fires burning across the city.

“Pacific Palisades really jumps out, even in the context of high-risk areas in California,” said Michael Wara, a senior researcher and wildfire expert at Stanford University. He was a member of the expert group five years ago working to envision nightmare liabilities for state utility companies. “It’s like the bullseye in terms of one of the locations where the insurance industry can lose the most money in 24 hours.”

Risk models identified the Palisades — along with Silicon Valley’s Los Altos Hills and the Moraga and Orinda area east of San Francisco — because of problematic commonalities: the highest value homes, difficult topography for fighting blazes, and increased susceptibility to the kind of windy, dry weather conducive to fires.

Read Bloomberg Green’s series Uncovered, an investigation into how climate change is making parts of the planet uninsurable, leaving millions of people without a safety net.

The worst-case scenario is here. As of Friday morning, more than 5,000 buildings had been damaged or destroyed by the Palisades Fire, and another four major fires continue to burn across the city with more than 57,000 structures in severe danger and more than 150,000 people under evacuation. Late Thursday, JPMorgan Chase & Co. estimated the insured damages covered could top $20 billion in what’s almost certain to become the costliest wildfire in US history.

As the fires continue largely unchecked, it’s left many wondering if this event will permanently alter the relationship between climate risk and homes in one of the world’s most valuable property markets. “Could a single event cause insurers to become insolvent? That’s the great fear,” said University of California, Los Angeles climatologist Daniel Swain, an authority on why California seems to be perpetually burning down. “I hope we don’t get there.”

It’s the worst fire that 78-year-old Steve Kalb, a retired entertainment lawyer, has seen in more than four decades spent in Pacific Palisades. On Tuesday, as the first of the fires ignited, he evacuated with his computer, his prescriptions, and two pairs of underwear. A neighbor bicycled by his house the next day and sent a video: everything was gone.

“It was just sort of incomprehensible, total devastation,” Kalb said. “Our house was flat. There was nothing there. We had steel shingles on our roof. It looks like they melted.”

It will take weeks to know the full extent of damages from fires that haven’t yet subsided. But already the Los Angeles wildfires threaten to push the fragile California insurance market closer to the brink. Seven out of the 12 biggest home insurers have limited their coverage in the state over the past two years; increased fire risk driven by climate change is part of the reason.

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California Insurance Commissioner Ricardo Lara is intensely aware of the problem and last month issued back-to-back regulations meant to make it easier for insurers to make money in the state. The first allows insurers to use catastrophe models informed by rising temperatures and worsening droughts when setting rates, instead of relying solely on historical data. The second reform allows reinsurance costs to be passed down to customers in their premiums.

“This sustainable insurance strategy is built for events like this,” said Michael Soller, deputy commissioner of the Department of Insurance. “It is intended to stabilize the insurance market for the long term.”

But only the first policy has been fully implemented. Any impact in steadying the insurers may come too late in the face of huge new liabilities, which could push private companies further towards the exit. For some it has raised the prospect of a housing crash.

“These disasters will make insurers even more cautious about insuring homes and businesses in at-risk communities. That is how the cascading failures begin: uninsurable property is unmortgageable, and unmortgageable property loses much of its value as the pool of available buyers shrinks away,” said US Senator Sheldon Whitehouse, a Democrat from Rhode Island and something of a Congressional Cassandra on climate change and housing. “As we saw with the 2008 financial crisis, a crash in property values quickly becomes an economy-wide meltdown.”

The escalating exodus of private insurers has left the state-backed insurer of last resort, the California FAIR Plan, in a precarious position. In fact, even as State Farm, California’s biggest insurer, cut nearly 70% of its policies in a ZIP code central to Pacific Palisades last year, FAIR grew by 85 % in that same area. Now FAIR could be on the hook for billions. Last September, it estimated its own exposure in the larger Pacific Palisades area at nearly $6 billion. However, according to its most recent public accounting in the spring of last year, it has only $200 million in surplus cash reserves and $2.5 billion in reinsurance (that is insurance that insurers get to cover for worst-case scenarios) to cover that amount.

A spokesman for FAIR declined to confirm numbers but said the plan “has reinsurance and that the amount changes each year based on availability and pricing of reinsurance products.”

“There is no fire season — it’s a fire year,” California Governor Gavin Newsom said at a Tuesday press conference.

Gusts of up to 100 miles (161 kilometers) per hour scoured the landscape in Los Angeles this week, fanning flames and occasionally grounding the planes that drop water on active blazes. For hours on Tuesday and Wednesday, it was difficult to gather aerial images that could shed light on how much land — and how many homes — had burned.

Many residents only had time to grab a few possessions before fleeing. Patrick Netter, 72, left most of his belongings at his house in the Palisades on Tuesday afternoon, saving his two cats, some family photos and a sport coat that had belonged to his father. His neighbor called late Tuesday night to tell him her house had burned down. “It would be miraculous if yours didn’t,” she told him.

On the heels of two extremely wet winters, some parts of Southern California endured their hottest summers on record in 2024 followed by an additional blast of heat in September that broke yet more temperature records. “Exactly the sequence of events you might expect to produce some of the worst fire risk in Southern California,” Swain said. With these conditions intensifying, he worried the current fire “will probably not be the worst event we’ll see.”

Los Angeles is experiencing one of the driest starts to winter ever, stripping moisture from dead and dormant vegetation from the last few years lining mountain canyons and foothills. It was primed to burn. The unrelenting “thirstiness” of the atmosphere, as Swain put it, is a direct consequence of climate change. It’s the flip side of the same coin that’s resulted in extreme rainfall and more intense flooding events around the world and across California.

In the future, Southern California is likely to see more extreme fires erupting during the winter months, leaving millions of residents — and some of the country’s most valuable real estate — in the crosshairs.

“The likelihood of getting these wicked dry conditions and the Santa Ana winds to start the whole thing going is increasing in probability,” said Jennifer Francis, senior scientist at the Woodwell Climate Research Center. “It won’t be in the same place every time, but all of the ingredients that go into fire weather are getting worse.”

In the coming days, Southern California is expected to remain dry and intermittently windy, which could make it even harder for firefighters to put out the existing blazes. Any new fires would spread quickly. Stronger winds are expected to return by Sunday, with another round this coming Tuesday.

Insurance is supposed to communicate that risk through higher prices. But in California that feedback loop has been broken in part by Proposition 103, a law that limits the amount insurers can raise prices without extensive reviews.

The gap between the rising cost of risk and what insurers could charge widened after devastating wildfires in 2017 and 2018, when private insurers lost decades worth of profit and began retreating from the state. With nowhere else to go, homeowners began migrating to the state-run FAIR Plan. Total exposure in that plan — the maximum of how much the last-resort insurer would have to pay out — has tripled since September 2020. In the latest data from September 2024, FAIR reported a 41% increase in policies over a one-year period.

“From the insurance industry’s perspective, it felt a bit like a slow-moving train wreck,” said Denni Ritter, department vice president of state government relations for the American Property Casualty Insurance Association.

Lara, the state’s top insurance official, responded with this year’s reforms. In return, private insurers are supposed to expand their coverage again into high-risk areas.

While many in the insurance industry like the reforms, the latest fires arrived as executives were still waiting to see the full effects on the market. “I don’t want to undercut the fact that they’ve done a ton of work in 2024, and really, regulations take a long time to do,” said Ritter. “I don’t think it’s going to be an overnight fix.”

Lara also took steps to stabilize FAIR. Although FAIR has up to $458 billion in exposure, as of September, it acknowledged previously that it has far less in assets and reinsurance to cover that.

As a Bloomberg Green analysis revealed last March, the FAIR Plan did not enunciate how it would pay claims if they exceeded the reinsurance and cash on hand. Since then, state regulators said that the first $2 billion beyond what FAIR is able to cover will be split evenly between assessments on insurance companies in the state and policyholders. The companies would contribute in line with their percentage of the market over the past two years, meaning an insurer with a 20% market share in California would be responsible for 20% of the costs. The commissioner would have discretion to decide how to levy an assessment on policyholders.

An assessment over $1 billion has never been done. Victoria Roach, president of the California FAIR Plan, warned a state legislative committee last year: “We are one event away from a large assessment.” She added: “We don’t have the money on hand [to pay every claim] and we have a lot of exposure.”

If an assessment is approved, it could send shock waves across California, causing private reinsurers to reconsider the costs of staying in the state and causing upheaval among policyholders who already feel rates are too high.

On Thursday, two Democratic state assembly members from Southern California, Lisa Calderon and David Alvarez, introduced a bill that proposes issuing catastrophe bonds to increase FAIR’s ability to pay claims. California State Senator Ben Allen, who represents Pacific Palisades, said lawmakers are going to have to ask hard questions about FAIR. “It’s too essential a tool to the state insurance system for us to not protect it,” he said. “But obviously we are going to have to figure out how to do that in a way that doesn’t break the bank for the state and that also holds insurers accountable.”

S&P Global Ratings, which evaluates the financial health of insurers, sent out a statement Thursday saying insurance companies will survive just fine: “We believe our rated primary insurers can bear the brunt of the LA wildfire losses, after strong results in the first nine months of 2024 (and likely for the year), combined with a material reduction in policy coverage in wildfire prone areas in California.”

But that optimism isn’t universally held. Pasadena City Councilmember Tyron Hampton is worried about claims being paid. “I’m concerned that if our insurance commissioner, the governor and our federal government don’t step in, they might not get a payout,” he said. “Our insurance companies will try to walk.”

Uncertainty isn’t limited to housing insurance. While no cause of the fires has been determined, Edison International’s Southern California Edison told regulators late Thursday that attorneys representing insurance companies asked it to preserve evidence for the Eaton Fire near Altadena, where it has transmission lines. The utility also said it owns transmission lines near the reported ignition site of the Hurst Fire. The reported origin of the Palisades fire is within the territory of the Los Angeles Department of Water and Power.

If utilities are found liable, they could dip into the state’s utility wildfire insurance fund created after PG&E Corp.’s bankruptcy in 2019 from massive fire liabilities. The wildfire fund’s total assets stood at $14.7 billion to start the year, according to the latest filing from the state.

As the intertwined fate of the ongoing wildfires and the fractured insurance system remain unknown, people who lost homes this week described a grief compounded by concern that help would fail to arrive in their hour of need. In her testimony, Roach confirmed that FAIR has struggled to manage the logistics of its growth, which had led to problems like very long wait times for phone callers and endless feedback loop for some of those on hold.

A spokesman for the FAIR plan said they have fixed the problems and were ready. “The FAIR Plan staff is prepared for and actively serving customers who have made claims. We recently upgraded our software system and are maintaining extended customer service hours, which will help our team process the claims we are receiving.”

Darrin Hurwitz, a 49-year-old lawyer who fled Pacific Palisades with his family to stay with relatives 50 miles outside of Los Angeles, will find out soon enough. He’s a FAIR Plan policyholder, and he fears the program isn’t ready to fulfill its obligations.

“I am very concerned. No one chooses FAIR,” Hurwitz said. And now his family faces the worst kind of test. “Are we going to be made whole here?” he asked. “And ultimately are we going to get the type of coverage that’s going to allow us to move forward?”