No better time for the wind-driven wildfires that are out of control in the Los Angeles area to start than right now, when Californians are already trying to recover from what they call a “insurance crisis.”
“We were all hoping that 2025 would be the year that insurers got interested in the California market again, but this disaster hit us right away, which is very disappointing,” said Amy Bach, executive director of United Policyholders, a nonprofit consumer group in California.
“Up until this latest disaster,” said she, “we thought we might be turning a corner.”
The California Department of Insurance put out a new rule last month that is meant to stop some of the state’s biggest insurance companies from refusing to take on new customers or renewing the policies of people who already have policies with them. The rule lets insurance companies charge customers for reinsurance, but only up to a certain amount that is standard in the business.
Insurance companies buy reinsurance to protect themselves from big claims events.
California was the only state, according to the Insurance Department, that wouldn’t let the cost be passed on.
In exchange, insurance companies that do business in the state must again offer a certain amount of coverage in places that are likely to catch fire. A different rule that was finished last month lets insurance companies use catastrophe modeling to set their rates, but only if they offer more policies in parts of the state that aren’t well covered yet.
In a previous statement, Insurance Commissioner Ricardo Lara said, “Californians deserve a reliable insurance market that doesn’t pull away from communities most vulnerable to wildfires and climate change.” “This is a historic moment for California.”
Consumer groups, on the other hand, are closely watching what is happening because they think it will only cause premiums to go up very quickly.
After the latest wildfires, Lara’s office didn’t answer right away when asked for comment on Wednesday.
As it continues, the Palisades Fire is likely to become one of the most expensive in the state: Wednesday, fire officials said that the fire destroyed more than 11,800 acres and set 1,000 buildings on fire. A study by J.P. Morgan Insurance suggests that the covered losses from that fire alone could reach $10 billion. At least four other large fires have also started.
The analysts at J.P. Morgan say that the Palisades Fire area is “an affluent residential area, with a median home price” of more than $3 million.
Bach said that California homeowners could pay anywhere from $1,000 to more than $40,000 a year to cover their homes.
People who own land in the state are not required by law to have insurance, but people who have mortgages are required to have it. But most home insurance plans don’t cover damage from natural disasters like earthquakes, floods, and landslides. To protect against these kinds of disasters, you need separate insurance plans.
Bach said the worry is not whether insurance companies will pay for the damage, but how much and how long it will take.
“For the people who lose their homes in these wildfires, there will be fights over coverage,” she mentioned.
Only if they have insurance.
Some homes were caught off guard in March when State Farm said it would no longer renew their insurance in the wealthy Pacific Palisades neighborhood that was destroyed by the wildfires.
Officials from State Farm, California’s biggest home insurance company, said that their choice was “not made lightly.” It said it had to protect “its bottom line” because of the costs of inflation, disaster risk, reinsurance, and rules.
Wildfires have caused tens of billions of dollars worth of insurance property damage in California over the past ten years. The damage has only gotten worse as climate change causes temperatures to rise, fire seasons to last longer, and drought conditions to get worse.
State Farm told the state in a letter that it would not be renewing the policies of 30,000 Californians whose homes were in places that “present the most substantial wildfire or fire following earthquake hazards.” When the company made its choice last summer, it hurt the Westside of Los Angeles the most. Over 1,600 policies in Pacific Palisades were not renewed.
In 2023, State Farm already said that it would not offer new customers home insurance in California, in part because of the risk of disasters. Allstate, which is California’s sixth-biggest home insurance company, also said that year that it would no longer be writing new plans in the state.
States Farm said in a statement Wednesday that its “number one priority right now is the safety of our customers, agents, and employees impacted by the fires and helping our customers in the midst of this tragedy.” This was in response to a question about its homeowner coverage in the areas affected by the wildfires.
The Fair Access to Insurance Requirements Plan, which was created in the 1960s, is California’s insurance program. It covers high-risk buildings against fire. The covering is pretty basic, and the insurance companies pay for it.
While it’s supposed to be a last option for homeowners, the number of policies that use it has skyrocketed in the past few years, from nearly 154,500 in September 2019 to more than 408,400 in June. This has created a high risk exposure that state officials say was never meant.
There was a chance, though, that some insurance companies would step in to fill the gaps in the market. Mercury Insurance, a California-based independent home insurer, said on Tuesday that it would start writing new homeowner’s insurance plans in the town of Paradise. This is where the deadly Camp Fire happened in 2018, making it the state’s worst wildfire in recent memory.
According to Janet Ruiz, top spokesperson for the Insurance Information Institute, which speaks for the insurance industry, companies have to figure out how much work they can handle in the face of destructive wildfires and rising costs for rebuilding.
“California is the fourth-largest insurance market in the world,” said Ruiz. “We want to be here, we want to be a part of it, but we do need to make some profit.”
Bach said that consumers might gain if the state is able to get insurance companies to return to the market and become competitive.
But she said she was afraid that the new wildfires might make insurers even less confident.
“Home insurance is an essential good that the private market is increasingly unwilling to provide,” said Bach. “We are at a crossroads.”
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