Following State Farm’s lead, insurers expected to seek rate hikes due to LA fires

Following a provisional approval of a 22% emergency rate hike for State Farm Insurance in the wake of the Los Angeles wildfires, other insurers are expected to apply for increased rates as they try to close their risk-to-pricing gaps.

A new report from Morningstar DBRS, finds that heavily affected insurers have disclosed their preliminary losses, including reinsurance recoveries and FAIR Plan assessment losses with roughly $12 billion on 38,000 claims already paid out as of March 5, 2025.

"The large wildfire losses are manageable for most national players but will add to the concerns on their capital allocation and profitability in the California insurance market, which has been particularly challenging for insurers in recent years," said Steve Liu, Assistant Vice President Global Insurance and Pension Ratings. "While the state has taken steps to improve the insurance market conditions, the burdens of strict regulatory environment and high insurance risk remain heavy and may require more dramatic changes to make the insurance market sustainable."

The report, titled "Aftermath of Los Angeles Wildfires: A Wake-Up Call for Property & Casualty Insurers and Regulators," said California's FAIR Plan has been growing in recent years, leaving the industry more vulnerable to assessment risks, especially with the thin surplus balance following the 2025 wildfires.

Costliest wildfire event in US history

The fires destroyed more than 16,000 structures in affluent Los Angeles communities, becoming the costliest wildfire event in U.S. history. According to the California Department of Forestry and Fire Protection, insured losses are projected to exceed $30 billion. The disaster has intensified scrutiny of California’s fragile property insurance market, exposing systemic vulnerabilities and prompting urgent calls for regulatory and structural reforms.

The Morningstar report found that wildfires disproportionately affected insurers with concentrated exposure in California. Mercury General Corporation, a regional player, faced severe losses, while diversified national insurers absorbed the blow more effectively.

The state’s insurer of last resort, the FAIR Plan, suffered staggering losses of $4 billion due to its overexposure to high-risk properties. Rapid growth in FAIR Plan coverage—up over 300% since 2021—has left it reliant on a $1 billion assessment from private insurers, reducing its surplus to a precarious $305 million by mid-2025. This thin buffer raises alarms as wildfire season persists, threatening further instability.

Calif. regulations hinder insurers

California’s restrictive regulatory environment has long hindered insurers’ ability to align premiums with risk. State Farm’s emergency underscored the tension between sustainability and affordability, Morningstar said. However, California’s 1988 Insurance Rate Reduction and Reform Act mandates lengthy public hearings for increases above 7%, delaying critical pricing adjustments. Despite having some of the nation’s highest weather-related losses, the state’s average homeowners’ premiums remain below the national average, creating a “risk-to-pricing gap” that jeopardizes market viability. Morningstar DBRS warns that prolonged regulatory delays could exacerbate capital flight from the sector.

Reinsurance mitigated losses for many insurers but at a steep cost. State Farm’s net loss was limited to $612 million thanks to support from its parent company, but others relied on costly external reinsurance. Global reinsurers, including European giants like Munich Re, absorbed roughly $5 billion in losses. Rising reinsurance costs since 2023 have forced insurers to retain more risk or pass expenses to policyholders—a newly permitted but contentious strategy under December 2024 reforms. While this policy aims to revive market participation, affordability concerns loom, risking pushback from consumer advocates.

The wildfires underscore systemic risks in California’s insurance ecosystem. The FAIR Plan’s expanding role mirrors Florida’s troubled Citizens Property Insurance, where public plans crowd out private insurers, creating a cycle of dependency. Without reforms to curb high-risk exposure and stabilize pricing, California risks a market collapse. While recent regulatory changes, such as allowing reinsurance cost pass-throughs, are steps forward, Morningstar DBRS emphasizes that bolder measures—like incentivizing risk mitigation and overhauling assessment frameworks—are essential for long-term sustainability.

The 2025 wildfires serve as a wake-up call: California’s insurance market remains trapped between escalating climate risks, regulatory inertia, and financial precariousness, the Morningstar report said. Insurers, regulators, and policymakers must collaborate to balance affordability with realistic risk pricing, reduce over-reliance on the FAIR Plan, and attract private capital. Without transformative action, the state’s insurance landscape may face irreversible fragmentation, leaving homeowners and insurers alike in peril.

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].