Even before this week's devastating wildfires left thousands of structures in smoldering ruins across some of the most affluent Los Angeles neighborhoods, the state of California faced an existential insurance crisis. Carriers have been fleeing the state in recent years, driven out by increasingly costly weather events, including previous fires that have wiped out company profits.
It's too soon to know the full cost of repair following this week's disaster, which has already destroyed entire neighborhoods and killed at least five. More homes will likely be destroyed as the fire continues to burn, and many victims who lost homes will find themselves in financial distress. As big insurers try to protect their profits from natural disasters, the Southern California homeowners are left with inadequate or nonexistent coverage, industry experts say.
Just how bad is the problem? Last year, State Farm, the state's largest insurer, announced it would drop coverage for 30,000 home insurance policies. That included about 1,600—just under 70% of total policyholders—in the Pacific Palisades neighborhood, which was hit particularly hard this week. At the time, State Farm defended the decision by saying rate hikes that had been approved by the California Department of Insurance (CDI) were not high enough to keep pace with inflation and other costs.
"Our number one priority right now is the safety of our customers, agents and employees impacted by the fires and assisting our customers in the midst of this tragedy," a State Farm spokesman told Fortune Thursday morning.
The company is far from alone. The CDI reports that seven out of the 12 insurers with the biggest market share have cut coverage in California since 2022.
That's the result of the increasing likelihood of paying billions in damages each year and future risk. Last week, in an effort to stabilize the market, California's Department of Insurance announced insurers will be required to cover more homes in disaster-prone areas if they want to continue to operate in the state. In exchange, the state is allowing carriers to pass the cost of reinsurance onto consumers.
With few, if any, other options, Californians are increasingly turning to the a state-backed California Fair Access to Insurance Requirement (FAIR) Plan as a last resort. This provides more limited coverage for those who can't find affordable, private market policies.
But state officials have been ringing alarm bells for a while that the FAIR Plan is at risk of insolvency. This week's fires are also likely to exacerbate those issues.
And those who haven't been able to replace their fire coverage after being dropped by their previous insurer may have to cover all of the costs of rebuilding on their own—something many residents won't be able to afford.
Pricing the risk
People claiming to be affected by the fires criticized insurance companies for cutting off coverage on social media sites like TikTok and X. But the problems will keep compounding. All of this means that insurance rates will keep spiraling ever upward, leading many homeowners to be underinsured—or not insured at all.
"Premiums are increasing in fire-prone areas because insurance companies are dealing with more claims and bigger payouts," says Nick Ramirez, a California-based Goosehead insurance agent. "It’s that simple. They're pricing the risk."
With insurers leaving the state altogether, even those who can afford to pay more for their policies might not be able to find one. And without insurance options, the entire housing market falls apart, according to a recent investigation conducted by the Senate Budget Committee. Banks won't issue mortgages without insurance, meaning most people won't be able to buy a home. That in turn means falling property values in affected markets, decimating many Americans' largest source of wealth and affecting the larger communities as well.
Climate change a 'looming economic threat'
The fires and possible insurance market collapse are a bellwether of sorts for what other states can expect. This week, it's California. But due to the ever-growing risks of climate change, it's only a matter of time until other states, including Florida, Louisiana, and Texas, face similar events, according to the Congressional report.
All four states are experiencing spiking non-renewal rates among home insurers, the report finds, and "the counties that are most exposed to climate-related risks such as wildfires or hurricanes are the counties seeing the highest non-renewal rates."
Hawaii, Massachusetts, Oklahoma, and North and South Carolina are also experiencing high non-renewal rates and destabilizing markets, as well as higher premiums. In fact, between 2020 and 2023, insurance premiums in the top counties for climate risk increased by 22%, the report finds; from 2017 to 2022, insurance premiums increased 40% faster than inflation.
Calling climate change a "looming economic threat," the report notes that the continued destabilization of the insurance markets could result in "a collapse in property values with the potential to trigger a full-scale financial crisis similar to what occurred in 2008." Except this time around, the report notes, the properties would not regain their lost value.
Are you a California resident whose homeowners insurance has been cut or the premiums increased in recent years? Please email reporter Alicia Adamczyk at alicia.adamczyk@fortune.com to share your story.
