California Fires Cause Human Misery But Exact Economic Toll on Residents and the Insurance Industry as Well
The human suffering is a disaster. But the economic cost to residents and the insurance industry will add to the woes facing Southern California.
The series of fires raging across neighborhoods in and around Los Angeles is a humanitarian nightmare with a death toll in the double digits and thousands of homes destroyed.
But it is also likely to be an economic disaster with both the cost of rebuilding homes and lives and the impact on an insurance industry that is already reeling from the effects of Hurricanes Helene and Milton.
Various estimates for the Los Angeles fires have come out ranging from $10 to $20 billion and even higher. The two hurricanes that struck Florida, Georgia and the Carolinas in the fall have already caused more than an estimated $100 billion in damage – around $60 billion for Helene and $50 billion for Milton.
Damage estimates from natural disasters tend to vary quite a bit, depending on whether they include only direct costs insurers face or additional costs such as long-term health problems and mitigation efforts to prevent future harm.
Whatever the number ends up being, it will add to an increasing problem for insurers and residents as the number and severity of climate-related incidents increases. While the exact cause of the fire is unknown, some have said that changes in weather patterns – the emergence of a La Nina replacing the prior El Nino – provided a lot of the fuel.
First was the extremely dry ground in Southern California, with negligible rain having fallen in the latter part of 2024 compared to normal. A strong high-pressure system centered over Idaho brought winds from the east toward Southern California in a reversal of usual trends while a low-pressure system moved up from the eastern Pacific well south of Los Angeles. Both helped drive hurricane level winds into the neighborhoods between the mountains and the Pacific Ocean.
Changing and extreme weather patterns are becoming more common across America, raising wind and rainfall levels as well as fueling faster and stronger fires.
These unusual weather scenarios have led many insurers to curtail their underwriting of home insurance across the country from California to Florida. Where companies continue to write coverage, premiums have been going up dramatically.
That has been the case in California with major national insurers State Farm, Allstate, Farmers and others. But raising rates in high-risk areas and withdrawing from some markets only goes so far. Insurers rely on a system of reinsurance whereby the primary company “lays off” a portion of its risk to another firm. This, in turn, gets spread around the industry. Ultimately, costs go up for most homeowners even if they live thousands of miles away.
States often have their own systems of insurance, where people can get policies if a company moves out or otherwise their options are few. In California, the state’s FAIR plan has seen its own share of business increase to around 3% of the market. As of September, the plan had $458 billion in insurance exposure, up 61% from a year earlier.
In the Pacific Palisades neighborhood of Los Angeles, where home prices average around $3 million, FAIR insured around 1,400 homes in that ZIP code as of September. That follows a move by State Farm to not renew thousands of policies in the state due to fire risk, with 1,600 homes affected in Pacific Palisades alone.
Insurance companies help support FAIR with assessments and, as claims mount for the state plan, it is likely the industry will have to pay more to help out.
The state and the insurance industry have been working to address some of the issues. One is to speed up approval of rate increases, while another is to allow insurers to model the risks of catastrophes into their rates. But these changes only took effect this year. Despite reports that FAIR could be endangered financially, a spokesperson told the nonpartisan, nonprofit media outlet CalMatters that it has “payment mechanisms in place, including reinsurance, to ensure all covered claims are paid.”
Aon, a major player in the reinsurance market, said that economic losses from natural disasters in 2023 were $114 billion, a number that was considerably above the median since 2000 of $84 billion.
“Public and private insurers covered approximately $80 billion, which was more than 40 percent above the average and 95 percent above the median,” the firm said.
Many of those claims came from a series of convective storms that struck the U.S. throughout the year, although the deadly fire on the Hawaii island of Maui was responsible for $3.5 billion of the total.
Firefighters in California are hoping for a predicted shift in the winds over the next few days to give them some respite. While that will be welcome news to residents affected by the disaster, it is not likely to change the dynamics facing the region and the insurance industry as Mother Nature continues to serve up extreme weather.
