The day that Hurricane Andrew touched down in Florida in 1992, J.W. Greenberg—executive vice president of the finance and insurance giant American International Group, or AIG—sent a memo around to company staff. “This is an opportunity,” he wrote, “to get price increases now. We must be the first, and it begins by establishing the psychology with our own people. Please get it moving today.”
To date, no such memos have surfaced about the fires now engulfing Los Angeles County, where at least five people have died and tens of thousands remain under evacuation orders from Santa Clarita to Santa Monica. Preliminary estimates from JPMorgan predict that damages could soar to $50 billion. Thanks to recent regulatory changes in California’s insurance market, though—including some pushed through as recently as late December—insurers there could find it easier to extract the kinds of price increases Greenberg was talking about.
Standard mainstream media accounts of California’s insurance market warn of a virtually existential “crisis” facing insurers that operate in the state, who are grappling with “profound financial strain” amid mounting losses from climate-fueled wildfires. Citing these pressures, AllState and State Farm both announced in 2023 that they would stop issuing new homeowners insurance policies, and move to shed existing policies. State Farm announced last March that it would not renew 72,000 existing California property insurance policies, including in some of the places worst hit by the fires still blazing in L.A. An investigation by the San Francisco Chronicle found that the company planned to scrap more than 69 percent of its policies in the well-heeled Pacific Palisades neighborhood, much of which now stands in ruins. Overall, California last year had the fourth-highest rate of nonrenewal in the country after Florida, Louisiana and North Carolina.
Insurers in California did indeed face considerable losses due to wildfires in 2017 and 2018, when damages from the Camp, Tubbs, and Woolsey fires totaled $23 billion. California, however, has in recent years been among the country’s most lucrative states for companies that sell homeowners multi-peril insurance, a product that covers wildfire damages. Data collected by S&P Global Intelligence on statewide loss ratios—essentially, the percentage of premium income that insurers pay out to cover insured losses—shows that insurers offering homeowners multi-peril insurance in California had a loss ratio of 53.7 percent in 2022 and 61.3 percent in 2023. That’s compared to nationwide loss ratios of around 70 percent in each year. In other words, home insurers in California had a significantly larger share of their income from premiums left over after paying out policyholders. State Farm actually outperformed statewide average loss ratios in both years.
At the time that State Farm announced it was pulling out of California “to improve the company’s financial strength” in 2023, California was one of five states—including Texas and Florida—that buoyed the company’s performance nationally. A September 2024 article in the trade journal Property Insurance Reports notes that, in those markets, State Farm “posted a lower loss ratio than the industry in both 2022 and 2023. That advantage has been more than offset by trouble in other states, but it provides a solid foundation.”
Douglas Heller, director of insurance at the Consumer Federation of America, worries that insurance companies will treat this week’s fires as yet another opportunity to raise rates. “Yes, this is going to be a devastating set of claims,” he told me over the phone on Wednesday, looking out from the other side of the mountain at smoke billowing up from the Palisades fire. “But it’s one that they’ve overprepared for in their rates and underwriting decisions.”
Major insurers’ decision to scale back coverage has put more pressure on California’s state-backed insurer of last resort, known as the FAIR Plan. FAIR Plan policies in the Pacific Palisades, for instance—funded by participating insurance companies—increased 85 percent in the 12 months leading up to last September; FAIR Plan policies swelled by 40 percent statewide over the same period. As of September, FAIR Plan exposure to residential fire risk was nearly 60 greater than it had been from the year before. Property insurance has also gotten a lot more expensive overall. Last year, for instance, California’s Department of Insurance—the state body that regulates the insurance industry—approved AllState’s request to raise premiums by an average of 34.1 percent.
California’s insurance situation mirrors the much more dire one in Florida, where homeowners can expect to pay $10,966 per year for standard coverage—more than four times the national average. After Hurricane Andrew, major insurers fled the state en masse; still more left following a series of devastating storms between 2017 and 2022. Lawmakers there have erected a series of taxpayer-funded backstops in response. Florida now has a state-backed insurer, reinsurer and catastrophe fund. Under Ron DeSantis—who’s received generous campaign contributions from the insurance industry—the state government has showered insurers with generous incentives, including a $1 billion subsidy incentivizing them to purchase reinsurance.
More dubious insurers have also proliferated, many of which are less diversified than bigger players and rely inordinately on reinsurance to hedge risk. In both California and Florida, insurers—including subsidiaries of major insurers—have also been expanding non-traditional, less tightly regulated offerings such as “non-admitted” policies. These have historically been boutique products used to protect against specialized types of risk such as fireworks or nuclear waste, and which aren’t subject to statewide regulators that monitor for quality, contracts and price hikes. Where home insurance premiums in the traditional “admitted” market rose by 13.8 percent between 2022 and 2023, S&P Global Market Intelligence finds that the same policies in the non-admitted market grew by 27.5 percent.
Eager to entice insurers back to the Golden State, meanwhile, Democratic California policymakers have followed a similar playbook to Florida Republicans. Recent reforms from the Department of Insurance do, importantly, include vital protections for consumers that are lacking in Florida, like requiring insurers to expand and maintain coverage in riskier parts of the state. As a result of these changes, at least 85 percent of an insurers’ market share must be in “distressed areas” like those devastated by this week’s blazes. Insurers also need to offer discounts to customers who invest in risk-reduction practices such as clearing brush. Elsewhere, the state has invested $2 billion in wildfire prevention efforts, and made efforts to expand affordable housing in ways that can keep more lower and middle-income households from being pushed out into the more fire-prone areas known as the wildland-urban interface.
Recent insurance market reforms, however, also allow insurers to pass on the cost of reinsurance—i.e., the insurance policies that insurance companies take out for themselves—onto consumers. Insurance companies will further be able to use forward-looking, typically proprietary data—accounting for the prospective costs of climate-fueled disasters, among other risks—to justify rate increases to state regulators. Consumer advocates estimate that these changes could result in a 30 percent rise in home insurance premiums.
“Despite publicly posturing as sworn enemies, the ways that DeSantis and [California Governor Gavin] Newsom are intervening in their insurance market meltdowns are not all that different,” says Jordan Haedtler, a consultant to the Sunrise Project and Climate Cabinet.
At first glance these changes seem to make intuitive sense. Every other state in the country allows insurers to pass on the ever-escalating costs of reinsurance. It stands to reason, as well, that insurance companies should be allowed to raise rates based on climate risk: if properties are riskier, it should cost more to insure them.
The devil is in the details, though. The risk modeling that insurance companies use is largely proprietary and sold through a small set of and thinly regulated firms whose data is protected by trade secrets and whose predictions can vary widely. Companies aren’t required to share details of the models they use to justify higher rates with regulators. And while the Department of Insurance and Cal Poly Humboldt announced in September that they’d form a “strategy group” to create a public wildfire catastrophe model—the country’s first—there is currently no established baseline against which private models can be judged.
“If for some reason the private insurance companies’ model had a result that’s a standard deviation away from what the public model said, regulators should be able to investigate that,” Heller says. “Who knows what levers they get to pull to get whatever rate they want.”
The broader problem facing California, Florida, and just about everywhere else is just how much of the country’s capacity to plan for and respond to disasters has been outsourced to the insurance industry. Although states regulate the sector and treat it as an increasingly essential service—homeowners are required to buy insurance in order to get federally-backed mortgages—insurers aren’t treated in the same way as other companies that provide societal necessities like electricity and telecommunications infrastructure.
“When we’re talking about home insurance and the crisis in those markets, there’s been a tendency to blame it on the people who decide to live on the coast or in the wildland-urban interface,” says Moira Birss, a fellow with the Climate and Community Institute and co-author of a recent report on the home insurance crisis. “Obviously there are differing levels of risk in different geographies, but we can’t just think about it as something that’s on the edges of where people live.” Home insurance premiums, she adds, leave it up to individual homeowners and businesses to assess whether a place is too risky to live. Many don’t have the means to relocate, though, and even people who live far from harm’s way pay the price when premiums go up statewide. The kinds of resilience investments and planning decisions that could enable neighborhoods, towns and states to adequately adapt to a changing climate need to happen at a much larger scale. “At this point,” Birss says, “it’s pretty delusional to argue that individual premium price signaling is going to sufficiently address this crisis.”
