January 9, 2025
4 minimum read
Los Angeles fires could put California’s insurance system in jeopardy
Damage from recent fires in the Los Angeles area could overwhelm California’s already stressed insurance company of last resort.
A cyclist rides along the Pacific Coast Highway past burning homes on Wednesday, January 8, 2025 in Malibu, California. Strong winds caused several fires to spread across Southern California.
David Crane/Media News Group/Los Angeles Daily News via Getty Images
Climate wire | LOS ANGELES — Wednesday’s firestorm in a wealthy area of Los Angeles could be the final blow to collapse California’s insurance market.
The state’s insurance market has been on the verge of bankruptcy for years due to devastating wildfires, with many insurers stopping writing new policies and terminating existing policies. Wind-driven wildfires that ignited Wednesday in parts of Los Angeles packed with multimillion-dollar homes could accelerate the collapse.
Democratic state Rep. Brad Sherman, who represents the area between Malibu and Santa Monica, said the Palisades fire – one of six uncontained fires in the area – had destroyed 1,000 buildings as of Wednesday afternoon. He said more buildings were destroyed. . “We’re already seeing a significant increase. And we’ve seen this increase not only in homes that are close to the bush, but also in areas that are surrounded by other homes.”
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President-elect Donald Trump called out the issue Wednesday, blaming Democrats for deadly wind-driven blazes that forced tens of thousands of people to evacuate their homes. “The Los Angeles fires may be the worst fires in our nation’s history by value,” he wrote on Truth Social. “Many people are even questioning whether insurance companies have enough funds to pay for this catastrophe.”
The state’s last insurance company, known as the FAIR plan, predicted it would be able to pay out. “We are aware that there is misinformation being posted online regarding FAIR Plan’s claims-paying ability,” Hilary McLean, a spokeswoman on behalf of FAIR Plan, said in a statement. “As claims filing and processing have just begun, it is premature to provide an estimate of damages,” MacLean wrote, adding that the plan was prepared for this type of disaster and that the insurance It noted that there are payment mechanisms, including reinsurance, to cover claims.
But California faces a dual threat. Private insurance companies may continue to terminate policies and refuse new policies, a trend that has intensified since the series of severe fires that began with the Tubbs Fire in Northern California in 2017. And the FAIR program, which has been absorbing a shrinking private market, may run out of funds to pay claims.
As MacLean pointed out, that doesn’t mean bankruptcy. Instead, it would have to recover costs from primary insurance companies under state law, raising premiums for all private insurance and causing premiums to skyrocket across the state.
“This is something that everyone has been preparing for,” said Carl Sussman, a West Los Angeles insurance broker who has filed dozens of insurance claims on behalf of his clients. “This is why interest rates are going up. This is why carriers are panicking.”
Last year, State Farm withdrew nearly 70% of its insurance policies in the Pacific Palisades area, more than any other ZIP code in the state, citing the area as unsafe, according to state filings. This is evidence that it was considered. This has led to more people signing up for the FAIR plan. The plan was originally created in the 1960s to insure Los Angeles neighborhoods hit by riots, but has since found more demand in rural and suburban fire-prone areas.
In the Pacific Palisades alone, the FAIR Plan insures nearly $6 billion worth of property, according to September statistics, more than all but four communities in California. Statewide, FAIR insured property totaled $458 billion, triple the total insured in 2020, according to FAIR Plan data.
AccuWeather on Wednesday estimated damages at $52 billion to $57 billion, but thousands more homes could be at risk with hurricane-force winds expected Wednesday into Thursday.
“If more structures are destroyed in the coming days, this could become the deadliest wildfire in California’s modern history,” AccuWeather Chief Meteorologist Jonathan Porter said in a statement.
State officials, who have been trying to stem the flow of insurance companies, said they were prepared to limit the impact, including by passing a one-year moratorium on nonrenewals in recently burned areas.
“Insurance companies have made a commitment to serve California, and we will hold them accountable for fulfilling their commitments,” Insurance Secretary Ricardo Lara said in a statement.
Sussman said the fire was a “testing ground” for rules Lara put together weeks ago to get property and casualty insurers back on the market and force them to increase premiums in fire-prone areas. .
The rule would allow insurers to pass the cost of reinsurance onto customers and increase insurance premiums using forward-looking so-called “catastrophic models” that take into account the likelihood of climate change fires raging in Los Angeles. was allowed to raise. in exchange for achieving certain policy quotas in disaster-prone areas. Insurers such as Allstate have promised to return to the market following the changes.
“If it hadn’t gone into effect in December, you could literally see airlines saying, ‘Okay, we’re leaving.’ It’s over,” Sussman said of the rule. “Now they can underwrite properly, they can offer certain types of discounts, they can have more control over interest rates and underwriting methods, so they can find their way back into the market.”
But that may be an optimistic view. Michael Walla, director of Stanford University’s Climate and Energy Policy Program and a consultant to state public utility commissions on wildfire issues, said the new rules will help insurers stay on track if claims become too expensive. He said there may not be enough to do so.
“We may now be crossing a threshold where much larger measures are needed to essentially create a solvency insurance system,” he said. “And those actions will be politically difficult. They could pose significant risks to California’s balance sheet.”
Reprinted from E&E News Published with permission of POLITICO, LLC. Copyright 2025. E&E News provides news that matters to energy and environment professionals.
