California's Question: Will Insurance Market Survive This?

The devastating Los Angeles wildfires have left many Californians wondering about the future of a home insurance industry that was already in crisis. Most of California's major insurers cut coverage after wildfires in 2017 and 2018, when they paid out around twice as much in claims and expenses as they received in premiums, the New York Times reports. CNN reports that, according to the California Department of Insurance, insurance companies declined to renew 2.8 million homeowner policies between 2020 and 2022, including more than 500,000 in Los Angeles County. Last summer, around 1,600 homeowners in Pacific Palisades lost coverage when State Farm dropped policies in the Santa Monica Mountains due to wildfire risks.

Many of those denied coverage elsewhere have turned to the California FAIR plan, paying higher premiums for what the Wall Street Journal describes as "bare-bones insurance provided by a state-sponsored insurer of last resort." Amid surging demand, the FAIR plan's exposure for dwellings was up 61% year-on-year in September to $458 billion, per CNN. "The FAIR plan, which is primarily a catastrophe insurer, is prepared for this and is actively serving customers who have made claims," the insurance pool said Wednesday. "The FAIR Plan has payment mechanisms in place, including reinsurance, to ensure all covered claims are paid." Its premiums, however, are expected to climb even higher.

With a median home price of more than $3 million in the area, JP Morgan analysts believe the Palisades Fire will cause losses of around $10 billion, USA Today. The fires are expected to set back the state's efforts to persuade insurers to cover more Californians, including permitting premium increases much bigger than the long-standing 7% cap. Allstate recently won approval for an average increase of 34%. Brett Dedeaux, a real-estate developer whose Pacific Palisades home was destroyed, told the Journal he was wondering what would happen to insurance now. "Does it even make sense to own a house here when the insurance is so much?" he wondered. (More California wildfires stories.)