Wildfires rage as insurers weigh risk; Liberty Mutual to reduce coverage

The biggest wildfires ever to hit the Los Angeles area continue to rage into another day, forcing more than 100,000 people to evacuate and racking up billions of dollars in damages.

These latest California fires hit at a time when property insurers have been canceling coverage in the Golden State, leaving thousands of property owners at risk.

“We would expect insured losses to run in the billions of dollars given the high value of homes and businesses in the impacted areas,” said Jasper Cooper, vice president-senior credit officer, Moody’s Ratings, in a statement.

“Losses will be shared among standard homeowners insurers, insurers specializing in high-value excess and surplus lines homeowners policies, and the California FAIR plan. In addition, commercial property losses could be significant.”

UCLA climate scientist Daniel Swain told AM Best that the Palisades fire, one of four wildfires blazing in the Los Angeles area, will likely become California’s costliest wildfire ever.

AccuWeather estimates $52 billion to $57 billion in preliminary damage and economic loss has occurred from the Los Angeles wildfires.

Sridhar Manyem, senior director, industry research and analytics, AM Best, said the fires will lead insurers to re-examine their appetite for wildfire risk “as it becomes highly unpredictable with respect to location, intensity and seasonality. There may be challenges with respect to affordability and affordability depending on the magnitude of the loss.”

The fires continue to destroy property and threaten lives as Liberty Mutual announced it would stop offering condominium and rental insurance in California in 2025 and would begin dropping coverage for its existing clients in 2026.

"During this time of increasing risk and volatility, we are building a sustainable business path forward in California by simplifying our product offerings and investing in the areas where we can win in the long term," the company said in a statement.

The change will affect approximately 67,500 condos and 102,200 rental properties, according to the San Francisco Chronicle.

Insurers pull back from California

Heavy losses from previous wildfires led several major insurers to pull back from the California marketplace recently.

State Farm canceled hundreds of homeowners policies in the fire-ravaged Pacific Palisades area last summer, and announced it would not renew more than 70,000 residential, commercial and rental policies across California. Since May 2023, State Farm has not been writing any new homeowners policies in the state, as wildfire risk and increasing construction costs have led the company’s liabilities to balloon.

At the time of the cancellation, State Farm explained "This decision was not made lightly and only after careful analysis of State Farm General's financial health, which continues to be impacted by inflation, catastrophe exposure, reinsurance costs, and the limitations of working within decades-old insurance regulations … It is necessary to take these actions now."

Allstate cited wildfire risk, the cost of rebuilding homes and the rising price of reinsurance as reasons for halting new policies in California 2022. The company continued to renew existing policies.

In January 2024, The Hartford said it would stop selling new home, property, condo and dwelling fire insurance in California, citing the state’s “unique challenges,” which include the high risks of elevated wildfires and California’s regulations that restrict how companies can price their policies.

In a statement, The Hartford said, "California is and continues to be an important market to The Hartford. We stopped offering new homeowners’, renters’ and condo policies on Feb. 1, 2024, in consideration, and after analysis, of the unique challenges and dynamics at play in the state. We need to be able to price our homeowners’, renters and condo insurance appropriately for the risks we are protecting against. Lastly, we continue to write all our other existing products in California, such as business insurance and personal auto, and will continue to renew existing homeowners', renters’ and condo policies consistent with our underwriting guidelines."

However, California’s second-largest insurance provider, Farmers Insurance, says it is going to add more policies for property owners. This came about a year after Farmers had announced it would not write any new condo or rental coverage in California.

Farmers announced in December that it would increase the number of new home insurance policies it accepts each month in California from 7,000 to 9,500 and that it would reopen for new condo and rental customers as well.

New regulation could help with coverage

This latest series of wildfires comes on the heels of the California Department of Insurance’s new regulation set to take effect later this month, which requires insurers to expand coverage in high-risk wildfire zones by 5% every two years until they reach 85% coverage.

The regulation would allow insurers to pass on the cost of reinsurance to consumers.

“Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change,” California Insurance Commissioner Ricardo Lara said in a statement.

Fewer insurance options have led more homeowners to the California FAIR Plan, which is designed to be a stopgap measure rather than a permanent solution. The number of policies under the FAIR Plan more than doubled from 2020 to 2024, according to the Associated Press.

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Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].