California LA Wildfires: Impact on Insurance Industry and Rising Premiums

The Los Angeles wildfires are expected to be a major catastrophic event for the insurance industry. However, analysts indicate that the insurance and reinsurance sector remains well-capitalized to manage losses, though some insurers may face greater challenges than others.

The longer-term impact on California’s insurance market from the Los Angeles County wildfires may be substantial, as insurers will further re-examine their appetites for wildfire risk as it has become highly unpredictable concerning location, intensity and seasonality.

The wildfires in the Los Angeles area have caused unprecedented property damage, with insured losses potentially surpassing $40 bn, leading to a negative but manageable impact on insurers’ credit profiles. As for the total loss economic loss estimated to between $135 bn and $150 bn.

As of January 23, 30 deaths were attributed to the wildfires. Of those, 20 were attributed to the Eaton Fire and 10 to the Palisades Fire. These figures represent the 5th and 14th deadliest fires in the history of California, respectively.

Insurance Loss Estimates for Los Angeles Wildfires

• CoreLogic. Insured losses from the Palisades and Eaton fires are estimated to range between $35 bn and $45 bn.
• KBW. Updated insured loss scenario estimate to a maximum of $40 bn.
• BMS Group. Insured losses are likely to exceed $25 bn, though specific estimates remain preliminary.
• Morningstar DBRS. Analysts expect losses to range from $20 bn to over $40 bn, depending on the final damage assessment.
• J.P. Morgan. Insured losses could surpass $20 bn as of early 2025.
• KBRA. Industry losses from the wildfires are estimated at $20 bn to $25 bn, with total economic losses reaching up to $150 bn.
• Moody’s. Projects insured losses to reach billions of dollars due to high property values in impacted areas.
• Berenberg. Anticipates insurance industry losses of more than $20 bn, with potential estimates exceeding $40 bn.
• AM Best. Insurance industry loss estimates range from $10 bn to $20 bn and could increase if the fires continue to spread.
• Fitch Ratings. Insured losses are estimated between $10 bn and $30 bn, with economic losses projected at $150 bn to $275 bn

Wildfire losses in California have historically been viewed as secondary risks compared to hurricanes and earthquakes. The 2017 Tubbs Fire and 2018 Camp Fire resulted in insured losses of $11.1 bn and $12.5 bn, respectively, according to Aon (see Global Natural Catastrophe Overview).

While these losses may not affect capital levels, they are expected to reduce near-term earnings, particularly for companies with significant exposure to claims from homeowners, auto, commercial property, and business interruption lines.

Meanwhile, the impact of the wildfire losses will reportedly be felt less by national carriers because of their considerable risk-adjusted capital positions.

At the end of 2024, the California Department of Insurance introduced regulatory changes to make the property insurance market more attractive to private insurers.

These changes included allowing rate filings to factor in reinsurance costs and permitting the use of predictive models, previously disallowed.

Dwelling fire policies have become increasingly common as insurance premiums in wildfire-prone areas skyrocket. These policies provide only minimal coverage, focusing solely on the structure of the home while excluding essential protections such as personal property, liability, and additional living expenses.

For families displaced by the fires, the absence of ALE coverage means they must bear the full cost of temporary housing and other relocation expenses.

In contrast, standard homeowners policies offer more comprehensive coverage. They not only protect the structure but also cover personal belongings and provide compensation for displacement costs. However, these policies come with significantly higher premiums — a major barrier for many homeowners, especially as insurers continue to limit or withdraw coverage in high-risk areas.

Insurance Losses from LA Wildfires

Analysts at Morningstar DBRS noted in a recent commentary that, with more than 12,600 structures destroyed, the LA area wildfires are expected to be the costliest in U.S. history, given the high property values in the affected neighbourhoods. The Eaton Fire is estimated to have damaged or destroyed over 7,000 structures, and the Palisades Fire around 5,000 structures.

Damage assessments are ongoing. It has been reported that the estimated average residential replacement values in the Eaton area are about $1 mn and exceed $2 mn in both the Malibu and Pacific Palisades areas.

Morningstar DBRS observed that the wildfires will worsen the ongoing crisis in the California property insurance market, which has already caused major insurers to stop issuing new policies while regulators attempt to address affordability and insurability issues.

Berenberg expected to drive insurance industry losses of more than $20 bn, with some estimates even hitting or exceeding the $40 bn mark. In a recent note, analysts focus on re/insurers Zurich, SCOR, and Conduit Re, three stocks the investment bank feels have been oversold since the outbreak of the Los Angeles wildfires, and that potentially stand to benefit from firming prices.

Insurance is a business where pricing is often adjusted after the event, as the loss cost is not known until after the coverage period ends. This means that, after a severe event – like the California wildfires – insurance rates would be expected to rise to help cover for the unexpected rise in claims

Currently, insurance industry loss estimates for the fires are wide, from as low as $15 bn to more than $40 bn, and the unexpected severity of the event could cause insurers and reinsurers to push for payback and look to increase prices to offset these first quarter losses.

The California Fair Plan seems to be capped at $20 mn per location with new reforms offering a high-value commercial coverage option at $20 mn per building with $100 mn cap by per location.

I am using my oversight to make sure all Californians have options for coverage that meet their needs. While the FAIR Plan has a long history of protecting consumers it must continue to respond to climate change and future threats

Ricardo Lara is California’s 8th Insurance Commissioner

While created by the Governor and Legislature, the FAIR Plan is a private association whose day-to-day operations are controlled by insurance companies, not taxpayers.

The FAIR Plan is available to California residents and businesses in urban and rural areas who cannot obtain insurance through a regular insurance company. As of 2020, the FAIR Plan covers less than 3% of residents, meaning more than 97% of Californians have a competitive option for insurance. 

Specialist insurance and reinsurance broker BMS Group has noted that, while it is too early to provide a credible insured loss estimate for the Los Angeles wildfires, the total is likely to exceed $25 bn.

We know disasters like these will take years, if not decades, to recover, and there are questions about how quickly this will occur with permitting

Adjusters will be reportedly in high demand, raising concerns about potential litigation from claims disputes, which could drive up loss-adjustment expenses. Meanwhile, estimating commercial losses is often more complex, and the resulting business interruptions are expected to further increase overall losses.

Berenberg explains: “Our main assumption is that each of these three stocks has the solvency to renew coverage at the higher prices that are likely to be achieved following this event. We believe that the three insurers will likely achieve full recovery of the loss, whereas implicit in the current share prices is the assumption by the market that they will not, and that the wildfires will not repeat the historical loss recovery pattern.”

According to CoreLogic’s catastrophe modeling estimates, insured losses from the Palisades and Eaton fires in the Los Angeles area will range from $35 bn to $45 bn.

KBRA (Kroll Bond Rating Agency) analysts highlighted California’s property insurance market’s significant protection gap, worsened by inconsistent fire coverage and difficult market conditions. “Industry losses from the wildfires are estimated at $20 bn to $25 bn, while total economic losses could reach $150 bn”.

The report drew parallels to Hurricane Helene, where many policyholder losses were flood-related and not covered under standard homeowner policies. Similarly, many affected property owners in Los Angeles may not be compensated unless they had sufficient fire coverage.

KBRA noted the role of the California FAIR Plan Association, established to provide insurance for homeowners unable to find coverage in the private market. However, the association’s exposure has surged in recent years. If its capital resources fall short, it may require additional funding to pay claims.

Specialist insurance and reinsurance broker BMS Group recently noted that while it is too early to provide a credible insured loss estimate for the LA wildfires, the total is likely to exceed $25 bn, while KBW (Keefe, Bruyette & Woods) has raised its insured loss scenario estimate range to a maximum of $40 bn.

Reinsurance Costs are Reportedly to be Negatively Affected

Reinsurance costs are reportedly likely to be negatively affected, further challenging the ability of primary insurers to provide coverage.

Overall, the resulting economic damage could rank these fires among the most damaging natural disasters in U.S. history, including major hurricanes.

KBRA also observed that January 1 property reinsurance renewals saw rates largely flat to slightly down, with more significant decreases for loss-free exposures. However, following the LA wildfires, KBRA anticipates the midyear renewals will see a material shift. Reinsurers are likely to adjust their risk appetite for catastrophe-prone properties due to the large payouts required for these events.

Reinsurers and insurers with losses exceeding earnings and reinsurance limits may face negative rating actions if their capital positions weaken.

The fires could also push reinsurance costs higher and add further pressure to a market already experiencing an insurer retreat due to wildfire risks and pricing concerns.

New Reinsurance Rules Aim to Boost Home Insurance in California

A new regulation has been introduced to expand insurance access for Californians facing rising climate risks. This includes increased coverage for wildfire-prone regions by incorporating reinsurance costs into insurance pricing.

Under the Net Cost of Reinsurance in Ratemaking Regulation, all homeowners insurance companies must increase coverage in wildfire-prone areas. This requires factoring reinsurance costs into the calculation.

The California Department of Insurance (CDI) mandates that insurers provide policies covering at least 85% of their statewide market share. This threshold will increase by 5% every two years until it is fully met.

Currently, insurers are not legally required to offer coverage in high-risk areas, according to the CDI. The new regulation seeks to protect consumers from excessive costs by regulating reinsurance expenses, treating them similarly to other insurance costs.

The regulation sets an industry-wide standard for reinsurance costs. Any expenses exceeding this standard cannot be passed on to policyholders.

This mirrors existing practices under Proposition 103, which regulates claims handling and agent commission expenses to prevent unfair costs for consumers.

Unlike California, other states allow reinsurance costs to be fully incorporated into insurance rates. A 2023 study by Ceres and the CDI found that reinsurance remains the primary tool for insurers to maintain and expand coverage in high-risk regions, both within California and across the country.

As climate risks escalate across the nation, reinsurance has become an even more imperative component of insurance companies operating in high-risk and distressed areas, including California.

Modernizing regulations around reinsurance will enable insurance companies to expand coverage and write more policies in communities across the state facing greater risk, ensuring stability and resilience in our insurance market.

By limiting costs to California-specific events, the regulation prevents consumers from being charged for the impact of hurricanes in the Gulf Coast or Midwest windstorms, the CDI noted.

Insurers need to work with their customers

Insurers need to work with their customers to protect properties from fire damage, and homebuyers need to be aware of the high insurance costs when purchasing high-risk properties.

With climate change having the potential to increase the frequency of catastrophic wildfires, a large effort will be required to adapt to evolving risk exposures and maintain a functioning insurance market.

Insurance regulators must allow for risk-based pricing, as the departure of insurers from the market would be counterproductive.

Meanwhile, the rapid growth of coverage provided by the FAIR Plan is reportedly unsustainable, as the plan depends on a healthy state-wide property insurance market to operate, meaning premiums are likely to rise and affordability issues will persist, potentially affecting property values and leaving some homeowners without insurance.

Moody’s projects insured losses to run into the billions of dollars due to the high property values in the impacted areas. While the full extent of the damages may take weeks or months to quantify, these wildfires are anticipated to be among the most costly in California’s history.

Although the exact causes of the fires are yet to be determined, an unusually dry winter in Southern California has increased the risk of wildfire activity. Typically a rainy season, the current dry conditions have facilitated the fires’ spread. Firefighting efforts have faced additional challenges due to limited water availability and low hydrant pressure in some areas.

The financial impact of the fires will be distributed across multiple sectors of the insurance market, including standard homeowners insurers, high-value excess and surplus lines (E&S) insurers, the California FAIR Plan, and commercial property insurers. Reinsurers will also be exposed through quota share agreements, per-risk policies, and excess of loss contracts.

The wildfires reflect ongoing challenges in the California homeowners insurance market. In response to increasing wildfire risks, insurers have adjusted underwriting practices, conducted inspections, and implemented rate increases.

Some major carriers, including State Farm, Allstate, and Farmers, have scaled back their operations in the state or limited new business, raising concerns about insurance availability in high-risk areas.

High-net-worth insurers, such as Chubb and AIG, have moved portions of their homeowners insurance business into the E&S market. This shift allows for greater flexibility in setting rates and policy terms, enabling insurers to better align premiums with risk.

According to Moody’s, the extent of losses for individual insurers will depend on their market share within the affected regions, which may differ from their statewide market share. Leading homeowners and commercial property insurers are likely to be significantly impacted.

Insurers have implemented measures to mitigate wildfire risks, such as geographic diversification, comprehensive reinsurance programmes, and maintaining strong capital reserves.

LA Wildfires Leads to Changes in California’s Insurance Industry

Wildfires raging through Los Angeles may lead to significant changes in California’s insurance industry, said Daniel Aldrich, co-director of Northeastern University’s Global Resilience Institute. He compared the situation to Hurricane Katrina nearly 20 years ago, predicting insolvencies and further exits from the property insurance market.

California FAIR Plan, the state’s insurer of last resort, faces increased pressure due to concentrated exposures in fire-hit neighborhoods.

For instance, the FAIR Plan had $5.89 bn in exposure in Pacific Palisades, one of the hardest-hit areas. Statewide exposure surged 61.3% year-over-year to $458 bn as of September 2024.

Dwelling policies rose 123% over the past four years, reaching 248,902, according to FAIR’s report. Last year, FAIR Plan President Victoria Roach stated that the plan’s $336 bn in property exposure was backed by just $200 mn in capital and $700 mn in cash.

J.P. Morgan estimated insured losses from the fires could surpass $20 bn as of early 2025. Aldrich warned that even with $2.5 bn in reinsurance, private insurers could face assessments that drive up property insurance premiums by hundreds of dollars. These increases would compound recent and pending rate hikes driven by wildfire risks and inflation.

Private insurers began withdrawing from Los Angeles in March 2024, Aldrich noted, a trend not previously observed at such a scale. The FAIR Plan absorbed much of the market gap, but losses exceeding capital and reinsurance could still impact policyholders statewide and ripple across the U.S. This situation might also reduce insurance penetration as some property owners, particularly those without mortgage requirements, opt out of coverage.

Investigations into the fires’ causes are ongoing. A BMO Capital Markets report suggested that if electrical equipment is implicated, inverse condemnation laws could apply.

Under these laws, utilities would be liable for damages regardless of fault, allowing insurers to pursue subrogation claims similar to those made against PG&E in 2017 and 2018.

The California FAIR Plan, a state-mandated insurance pool for high-risk properties, has expanded in recent years as more homeowners face difficulties obtaining private market coverage. Moody’s notes that the Pacific Palisades area is among the FAIR Plan’s largest wildfire exposures, with approximately $5.9 bn in insured assets.

List of Largest California Wildfires

Starting in 2001, the National Interagency Fire Center began keeping more accurate records on the total fire acreage burned in each state.

TOP 20 largest wildfires in 2024 in California

FAQs: Los Angeles Wildfires and Insurance Impacts