By Luke Singer
Key Points:
The California Department of Insurance must balance keeping property insurance rates affordable for consumers while allowing private insurers to generate healthy profits.
Climate change-induced natural disasters, like the Los Angeles wildfires, have caused private insurers to reduce coverage, putting more pressure on public insurers of last resort.
California taxpayers, small businesses, and lower-income individuals will be most severely affected by increased climate risk, resulting in higher insurance costs.
Solutions should hold entities emitting considerable amounts of greenhouse gases accountable instead of expending more taxpayer dollars.
The cataclysmic wildfires in Los Angeles and surrounding areas caused an estimated $75 billion in insured damages, burdening residents, insurers, and the state government. [1] California has seen over 35,000 homes burn down in the last decade, far more than any decade before it. [2] State Farm, Allstate, and other major insurers have recently pulled back from renewing property insurance policies in the California market, and the ongoing fires are likely to accelerate this trend. [3] Many of these consumers purchased properties when there was substantially less risk, as the effects of climate change weren’t as pronounced. This issue has been building up over the past two decades but has become wildly inflated lately, worsening the state’s housing crisis. In 2023, the nationwide weighted average home insurance price jumped 11.3% [4], more than triple the inflation of other consumer goods. [5] With wildfires and other natural disasters becoming more frequent and severe nationwide due to climate change [6], all stakeholders are looking for economically sustainable solutions.
Why was California experiencing an insurance crisis before the Los Angeles fires?
For context, voters passed Proposition 103 in 1988, which required insurers to seek approval from the state’s Insurance Commissioner, Ricardo Lara, to raise their premiums. [7] Some were concerned this broke the price-risk feedback loop as insurance rates are supposed to reflect risks involved with property. As rising temperatures, droughts, and windy conditions worsened fire risk across the state, the suppression of premiums allowed residents to save billions of dollars on their insurance policies. [7] However, it had the unintended consequence of making California increasingly unattractive for insurance corporations to operate. The higher number of fires in 2018 marked a tipping point for insurers, as the Camp Fire alone caused an estimated $12 billion in insured damages. [8] Private insurers said they lost decades of profit and began to question whether the California market was worthwhile. [3]
What is the FAIR Plan, and why has it expanded drastically in the last few years?
Policies in areas affected by natural disasters have dropped in the thousands, leaving homeowners two options: get coverage from the state-sponsored FAIR Plan or not get coverage at all. Created initially to help families who became uninsurable after the 1965 Watts Riots, the FAIR Plan was meant to be a niche insurer. [3] However, by September 2024, it had expanded in size by a factor of five since 2018 and had $458 billion in exposure. [9] The FAIR Plan is not fit to insure all residents as it caps coverage at $3 million per residential property (far less than the average value of properties burned down in the LA Fires) and often charges more than private counterparts. [10] Policyholders also report that the process of receiving payments from the FAIR Plan is long and complicated. [11] Sometimes, it can take over a year of waiting and involve legal disputes to receive compensation. [11]
How are public and private insurers responding to the LA Fires?
On February 11th, the FAIR Plan was granted an assessment raising $1 billion to pay out claims from the LA Fires. [12] This is the program's first request for extra funds since 1994. [12] Approved by the Insurance Commissioner, this assessment is similar to a tax split between private insurers (relative to their share in the market) and insured homeowners across the state [9] in the form of higher charges on their policies. [12]
Due to the increased cost, State Farm filed for emergency rate hikes of 22% for homeowners and 38% for renters, which Commissioner Lara rejected on Valentine’s Day, claiming the company hadn’t proved it was warranted. [13] The emergency rate hike would bypass Prop 103’s stipulation that any rate hike over 7% warrants a public hearing. [7] For this insurance rate hike to be more seriously considered, State Farm needs to provide more substantial evidence of why such a significant percentage increase is merited and show how it will preserve its financial health, besides asking for insurance rate hikes, among other conditions. [13] The Commissioner called for a meeting on February 26th with representatives from State Farm and the independent Consumer Watchdog that urged the Commissioner not to approve the hike. [13] This meeting was inconclusive, and Commissioner Lara is expected to make a final decision imminently. Meanwhile, State Farm is becoming more transparent with its financial data and continues to threaten further limits on the number of insurance policies it offers to Californian residents. [14]
Lara claims he is committed to the sustainability of California’s insurance sector, as he proposed 10 bills to safeguard consumers on February 15th. [15] These bills are breaking new ground by requiring insurance companies to pay policyholders affected by wildfires and other natural disasters 100% of their contents coverage without an itemized list. Another bill establishes the nation’s first public catastrophic model for wildfires, which will be used in firms’ insurance rate-making decisions. [15]
Who Will Pay For The Increasing Risks Posed By Climate Change?
Despite State Farm's refusal to renew 72,000 claims in California last March [16], the state is too attractive a market for insurers to withdraw completely. However, without more systemic changes, the increased climate-change-related catastrophes will shift more of the financial burden onto the state, especially as the number of private insurance firms in California continues to decrease. This means taxpayers will ultimately pay for the effects of climate change instead of the parties responsible for emitting large quantities of greenhouse gases. California is already looking at a sizeable deficit of $56 billion in the next two fiscal years. [17]
Organizations have advocated for more light to be shed on this issue for over a decade. In 2013, the National Resources Defense Council advocated for the federal government to be more transparent in reporting climate disruption costs, including costs in response to floods, droughts, and fires. [17] They found that these costs eat up more funds than any other non-defense discretionary spending (more than transportation or education), and private insurance firms are paying a third of what the government is spending in insured losses for climate-related disasters. [17]
Aside from the federal and state governments, low-income individuals living in areas at high risk of wildfires are the most vulnerable, as they lack affordable housing options in safer areas. They are also less likely to have the financial resources to rebuild after their homes are destroyed. Small businesses in high-risk areas may be forced to close permanently if they cannot secure business interruption insurance or if the fires destroy their buildings. Investors who have heavily concentrated portfolios in fire-prone areas will experience significant losses. These could include real estate investment trusts (REITs) and institutional investors owning large residential or commercial properties in regions predisposed to wildfires.
Holding Responsible Parties Accountable for Climate Change
There is growing momentum for holding corporations contributing to environmental degradation—mainly through greenhouse gas (GHG) emissions—more accountable for the damages caused. The state of California is already suing fossil fuel companies like Shell and Chevron for misinforming consumers when they knew their products could lead to more climate disasters. [19] The suit would force these corporations to stop lying about the impact of fossil fuels and pay for climate change-related damages to put less pressure on insurers. [19] California residents are joining the legal battle with big oil and gas companies as the state is considering allowing people affected by climate-related disasters to take these companies to court. [20] California and its residents are not alone; several other states and municipalities have also filed similar lawsuits, as shown on the map below:
Center for Climate Integrity (2025) [21]
What Does This Mean For The Future Of Insurance In California And The U.S.?
Insurers will not abandon California altogether because of its massive size, population, and influence. The long-term solution is investment from the public and private sectors into infrastructure to make individual buildings and whole communities less flammable. That means retrofitting roofs and siding, adding sprinkler systems, clearing vegetation, and undertaking many other measures that cost money and require constant vigilance. [10] The same can be said for the rest of the nation in areas with high natural disaster risks.
A former board member of a large reinsurance company emphasizes the importance of accurately determining the costs and benefits of climate resilience. It’s common knowledge that prevention measures cost a fraction of the funds needed to restore destroyed properties, but no commercial insurance products exist to help finance prevention measures. Furthermore, offloading a risk piece into capital markets could prove worthwhile, an idea supported by Californian Insurance Commissioner Ricardo Lara, who proposed that the FAIR Plan be able to access catastrophic bonds through the California Infrastructure and Economic Development Bank. [15] This would allow FAIR to raise funds without putting pressure on private insurers if it ran out of money to pay future claims. Other innovations in the insurance world that may help mitigate further economic losses include community-based insurance programs where every community member in a high-risk area shares the cost. Community-based insurance is currently only a concept and needs further development before being offered to the public.
Ultimately, those responsible for significant pollution and greenhouse gas emissions, including oil and gas companies, should be held financially accountable through climate-related taxes or penalties. These funds could be diverted toward disaster relief and rebuilding affected areas. State and federal governments should continue implementing policies supporting those who have lost their homes. Additionally, all relevant stakeholders should prioritize affordable, climate-resilient housing options in rebuilding efforts. California has shown adaptability in funding drought-resistant infrastructure [22] and can overcome future challenges. The state is also a bastion of U.S. agricultural production. Implementing climate resilience measures across all sectors, especially insurance, is vital to keeping food on the table for all Americans.
Sources:
Li, A., & Yu, W. (2025, February 12). Economic impact of the Los Angeles wildfires. University of California, Los Angeles. Prevention Web. https://www.preventionweb.net/news/economic-impact-los-angeles-wildfires#:~:text=Total%20property%20and%20capital%20losses,employees%20in%20the%20affected%20areas
California Department of Forestry & Fire Protection. Statistics | CAL FIRE. California Department of Forestry & Fire Protection. Retrieved March 1, 2025, from https://www.fire.ca.gov/our-impact/statistics
Kaufman, L. (2025, January 15). How wildfires upended California’s insurance market. BNN Bloomberg. https://www.bnnbloomberg.ca/business/international/2025/01/15/how-la-wildfires-torched-californias-insurance-market/
Woleben, J. (2025, January 25). US homeowners insurance rates jump by double digits in 2023. S&P Global. https://www.spglobal.com/market-intelligence/en/news-insights/articles/2024/1/us-homeowners-insurance-rates-jump-by-double-digits-in-2023-80057804
Consumer Price Index: 2023 in review. (2024, January 19). U.S. Bureau of Labor Statistics. https://www.bls.gov/opub/ted/2024/consumer-price-index-2023-in-review.htm
Seneviratne, S., & Zhang, X. (2021). Chapter 11: Weather and Climate Extreme Events in a Changing Climate. International Panel on Climate Change (IPCC). https://www.ipcc.ch/report/ar6/wg1/chapter/chapter-11/
Prop 103 Consumer Intervenor Process. California Department of Insurance. Retrieved March 1, 2025, from https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/
Gutierrez, H. (2025, January 15). Paradise stands with Los Angeles County amid wildfires, reflects on 2018 Camp Fire. KRCR. https://krcrtv.com/news/local/paradise-stands-with-los-angeles-county-amid-wildfires-reflects-on-2018-camp-fire
Howard, L. (2025, January 16). Will California’s FAIR Plan Have Enough Cash for Its Wildfire Claims? Insurance Journal. https://www.insurancejournal.com/news/west/2025/01/16/808564.htm
De Pellis, L. (2025, January 15). Economic Toll of Los Angeles Fires Goes Far Beyond Destroyed Homes. New York Times. https://www.nytimes.com/2025/01/15/business/economy/los-angeles-fires-economy.html
Fan Munce, M., & Neilson, S. (2025, January 25). ‘What are we paying for?’ California FAIR Plan complaints from people whose homes have burned. San Francisco Chronicle. https://www.sfchronicle.com/california-wildfires/article/insurance-fair-plan-20036794.php
Flavelle, C. (2025, February 11). California’s High-Risk Insurer Gets $1 Billion Bailout After L.A. Fires. New York Times. https://www.nytimes.com/2025/02/11/climate/california-fairplan-insurance-bailout.html
Lara, R. (2025, February 14). Letter from Ricardo Lara, California Insurance Commissioner, to Dan Krause, Mark Schwamberger, and Keesha-Lu Mitra of State Farm Insurance Companies regarding State Farm General Insurance Company Request for Emergency Interim Rate Approval. California Department of Insurance. https://www.insurance.ca.gov/0400-news/0100-press-releases/2025/upload/nr018CommissionerLetterEmergencyInterimRateApproval.pdf
Recamara, J. (2025, March 3). State Farm reveals financials amid California controversy. Insurance Business. https://www.insurancebusinessmag.com/us/news/breaking-news/state-farm-reveals-financials-amid-california-controversy-526884.aspx
California Department of Insurance. (2025, February 14). Commissioner Lara and legislative leaders join forces to safeguard consumers by introducing proposals for wildfire mitigation and recovery. https://www.insurance.ca.gov/0400-news/0100-press-releases/2025/release017-2025.cfm
Vives, R. (2024, March 23). State Farm won’t renew 72,000 insurance policies in California. Los Angeles Times. https://www.latimes.com/california/story/2024-03-23/state-farm-wont-renew-72-000-insurance-policies-in-california-worsening-the-states-insurance-crisis
Koseff, A. (2024, May 10). Big cuts, no new taxes: Gov. Newsom’s plan to fix California’s budget deficit. CalMatters. https://calmatters.org/politics/2024/05/california-budget-deficit-newsom-may-proposal/
Lashof, D., & Stevenson, A. (2013). Who pays for climate change? National Resource Defence Council. https://www.nrdc.org/sites/default/files/taxpayer-climate-costs-IP.pdf
Center for Climate Integrity. (2025, January 10). Deadly Wildfires Show Why California Is Suing Big Oil. Center for Climate Integrity. https://climateintegrity.org/news/view/deadly-wildfires-show-why-california-is-suing-big-oil
Nguyễn, T. (2025, January 27). California considers letting victims of natural disasters sue oil companies for damages | AP News. AP News. https://apnews.com/article/california-wildfires-big-oil-climate-lawsuit-3f1141c4fa128ba8e2fe8fb2b3c980f3
Center for Climate Integrity. (2025). Archive of Climate Accountability Lawsuits Against Big Oil. Center for Climate Integrity. https://climateintegrity.org/lawsuits
Governor of California. (2021). Newsom’s $5.1 Billion Plan For Water Infrastructure, Drought Response, an Improved Climate Resilience. State of California. https://www.gov.ca.gov/wp-content/uploads/2021/05/Drought-Response-and-Water-Resilience-Factsheet.pdf
* Photo by Apu Gomes/Getty Images. The image above depicts a firefighter watching the flames from the Palisades Fire burning homes on the Pacific Coast Highway amid a mighty windstorm on January 8, 2025, in Los Angeles, California.
The views and opinions expressed are those of the author and do not necessarily reflect those of Etho Capital, LLC.