California Wildfires May Exacerbate State’s Insurance Crisis

January 10, 2025 TruthUSA

Recent fires have ravaged thousands of luxury homes, with projected losses potentially exceeding $150 billion, intensifying the strain on California’s insurance industry.

As Californians grapple with significant difficulties securing home insurance, the ongoing fires in Los Angeles County could exacerbate the situation, making it even more arduous and expensive to insure properties in the future.

Beginning on January 7, deadly fires have resulted in at least 11 fatalities and prompted the evacuation of over 180,000 residents at one point, with another 200,000 individuals under evacuation warnings.

According to the latest estimates, damage or destruction has affected more than 10,000 structures countywide, with expectations that this figure will increase as fires remain minimally contained, making it one of the most expensive natural disasters in U.S. history. Economic losses from the fires are estimated by AccuWeather to potentially reach $150 billion.

As of the latest count on January 9, the Pacific Palisades fire has destroyed nearly 6,000 structures, including luxurious oceanfront mansions in neighborhoods north of Santa Monica, where home prices range from $7 million to $20 million, with an average exceeding $3 million citywide.

This affluent region is predominantly inhabited by white-collar workers, according to demographics from Cal Fire, indicating that slightly fewer than half of the buildings impacted by the Palisades Fire were erected after 1970, while about 12,000 are older.

Footage showcasing the aftermath reveals businesses and homes obliterated by flames, with entire blocks of certain neighborhoods turned to rubble.

In 2024, State Farm non-renewed around 1,600 policies in the area, part of the approximately 30,000 homeowners and 42,000 apartment policies the company dropped statewide, citing increasing costs and heightened risks.

“This decision was not taken lightly and followed meticulous analysis of State Farm General’s financial health, which remains impacted by inflation, exposure to catastrophes, reinsurance costs, and the constraints of adhering to decades-old insurance regulations,” the company stated in a statement.

“State Farm General is dedicated to maintaining sufficient claims-paying capacity for our clients while complying with relevant financial solvency laws. These measures are necessary at this time.”

Approximately 6,000 structures were reported lost in the Eaton Fire as of the latest updates on January 10, with the East Altadena and Hasting Heights neighborhoods suffering considerable damage.

The average home value in this area stands at about $1.4 million, based on figures from the online real estate listing platform Zillow.

On January 10, Ricardo Lara, commissioner of the state’s Department of Insurance, issued a one-year moratorium halting non-renewals and cancellations for households situated in and around the fire sites.

“I am invoking my moratorium powers to ensure that families are not burdened with the additional stress of searching for new insurance during this devastating time,” he stated. “I am committed to making sure wildfire victims receive their entitled benefits as quickly as possible.”

Insurance Market Stability Under Threat

As losses accumulate, California’s already precarious insurance landscape may face increased challenges if insurers become more reluctant to issue policies.

The state is currently experiencing what legislators and other officials have labeled a “real crisis” impacting millions of residents.

A building destroyed by the Palisades Fire near Los Angeles, Calif., on Jan. 8, 2025. (John Fredricks/The Epoch Times) — A building demolished by the Palisades Fire near Los Angeles, Calif., on Jan. 8, 2025. John Fredricks/The Epoch Times

Supervisors from various counties across the state passed resolutions last year declaring a state of emergency due to the lack of affordable insurance options.

“It is not an exaggeration at this point to assert that the state is confronting an insurance crisis regarding both affordability and availability,” remarked Ray Mueller, San Mateo County supervisor, during a board meeting on October 8.

Seven out of the 12 largest insurers, including State Farm—responsible for about 10 percent of the market share, according to Department of Insurance data—paused the issuance of new policies starting in 2023.

The lack of availability has left many Californians with a single option: the FAIR plan—an insurer of last resort supported financially by insurance firms.

If this plan enters insolvency, insurers must cover the losses, with each company contributing based on their market share—thus incentivizing them to limit their liability by reducing exposure, analysts have indicated.

The charred remains of a tree stump during the Palisades Fire near Los Angeles, Calif., on Jan. 8, 2025. (John Fredricks/The Epoch Times) — The smoldering remains of a tree stump during the Palisades Fire near Los Angeles, Calif., on Jan. 8, 2025. John Fredricks/The Epoch Times

In recent years, the number of homes insured through the FAIR plan surged, now exceeding 450,000 policies, overwhelming the staff managing inquiries, representatives from the state’s Department of Insurance testified to the Senate Insurance Committee last year.

Many individuals trapped within these plans argue that they are anything but fair, with some households facing premium costs up to 500 percent higher for reduced coverage.

Coverage is capped at $3 million per structure for residential homes, which could be problematic for homeowners in coastal regions affected by fires where property values exceed this limit.

It remains unclear how many properties impacted by the recent wildfires were insured under the FAIR plan.

Regulatory Barriers

Insurance firms have become increasingly hesitant to operate in California due to stringent regulations that restrict rate increases and prolong application processes, as noted by Rex Frazier, president of the Personal Insurance Federation of California.

He advocated for a faster approval process, highlighting that rising construction, labor, and reinsurance costs necessitate higher premiums.

Some of the largest insurance providers have recently sought premium increases of 30 percent or more, and the insurance department is currently processing these requests.

“The issue lies in the fact that the remedy involves higher premiums, which will not be well received by the public,” stated state Senator Roger Niello, vice chair of the Senate’s Insurance Committee.

The industry cites a challenging regulatory atmosphere, compounded by fire risks and inflation, as key factors driving companies to reduce coverage in California.

Destruction caused by the Palisades Fire impacting neighborhoods near Los Angeles on Jan. 9, 2025. (John Fredricks/The Epoch Times) — Destruction from the Palisades Fire affecting neighborhoods near Los Angeles on Jan. 9, 2025. John Fredricks/The Epoch Times

Additional points of contention for insurers include the stringent rules instituted by Proposition 103—also known as the Insurance Rate Reduction and Reform Act—narrowly approved by voters in 1988 to regulate the industry following skyrocketing auto insurance prices.

“This is a significant issue,” Niello remarked. “It poses a problem stemming from the passage of an initiative 30 years ago with a notably slender margin of victory… in a market and under circumstances that were entirely different from what exists today.”

Seeking Solutions

Officials in the insurance department have acknowledged that some existing regulations hinder progress.

“Californians throughout the state are frustrated with outdated regulations and are clamoring for change,” Commissioner Lara remarked in a June 2024 press release. “We are facing this insurance availability crisis head-on. For those Californians residing in wildfire-prone areas, my strategy aims to expand their options while mandating that insurance companies seriously consider their wildfire safety measures,”

Last year, he unveiled new guidelines that permit insurers to employ models allowing for increased pricing, and the coverage cap on the FAIR plan has been raised to $20 million per structure.

To decrease reliance on the FAIR plan, the new regulations require insurers to boost the number of policies issued in high-risk areas by at least 5 percent.

One policy analyst suggested that lifting government regulation and permitting a free market to determine pricing could produce a more effective solution.

“Deregulation presents a simpler solution. Hundreds of insurers could then freely compete for California residents’ business, with third parties providing information on each company’s financial condition and claims-handling practices,” wrote Marc Joffe in a December analysis for the Cato Institute.

“An additional benefit would be the potential elimination of the state’s 3 percent tax on insurance premiums, part of which funds the Department of Insurance, creating immediate savings for consumers.”

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