The LA fires are just the beginning of a crisis spreading across the country

The Los Angeles fires are likely to mark a turning point in how homes are built and insured in the United States. The apocalyptic images coming from the Palisades and Eaton neighborhoods are unforgettable, and the destruction is massive: 27 lives lost, 12,000 structures gone and $40 billion in insured damages. The toll will almost certainly rise. Ultimately, these fires could spur changes that touch every American home.

This won't happen right away, but experts tell me that home insurance costs stand to rise nationwide later this year and next as a result of the disaster. Why? Because insurance companies protect themselves against big losses by buying their own insurance, called reinsurance. Reinsurers try to spread the risks around, including to homeowners in other states. This price hike will come on top of the 38 percent jump in home insurance rates that has occurred since 2019.

Though it's easy to point to specific failures in Los Angeles - the California insurance market is a mess, there was insufficient water to fight the fires, and many homes weren't built or retrofitted to withstand the blaze - the reality is that large natural disasters are happening more frequently almost everywhere. Last year, there were 27 severe weather-related events in the United States that caused $1 billion or more in damages. That's up from two in 1984. Most American homes are not built to withstand disasters. And the insurance market isn't prepared, either.

"Our insurance model is increasingly untenable," Daniel Schwarcz, a professor at the University of Minnesota Law School, told me. "Our model needs to change."

Huge, expensive disasters often trigger modifications. After Hurricane Andrew struck Florida in 1992, the state overhauled its building code to require stronger windows and roofs. After the 1994 Northridge earthquake in Los Angeles, insurers mostly pulled back from covering earthquake damage, leading the state to create the California Earthquake Authority. And after Hurricane Betsy decimated Louisiana in 1965, leaving many people homeless with no money to rebuild, the federal government created the National Flood Insurance Program.

The L.A. wildfires should be a similar turning point that forces three changes: 1. Stronger homes - Pretty much everyone I've spoken with about the wildfires made the same argument: Homes need to be built with more fire-resistant materials and have buffers such as concrete fences or "moats" around the outside. In a big demonstration in Anaheim, California, last summer, houses were set on fire to show which ones were strong enough to stay standing. Building such homes usually costs more, however, and it's unclear how many people who lost homes in the L.A. area will be able to afford them.

This isn't only a California problem. Across the country, the risk of damaging hail or wind is rising. In 2023, Florida, Louisiana and North Carolina all had higher "nonrenewal rates," instances in which home insurers refuse to insure anymore, than California had. Smart governors should be looking at ways to incentivize people to fortify their homes. Alabama is among states that provide grants up to $10,000 for homeowners to install roofs that can withstand severe wind and rain - saving lives and lowering insurance costs. 2. Insurance that reflects the real risk - California's insurance problems date at least to 1988, when state voters approved a law limiting insurance price hikes. This sounded good. No one likes a big increase in their annual bill. But over time, the actual cost of insuring California homes became disconnected from the rates that insurers could charge. The business became unsustainable, which is why insurers such as State Farm, Allstate and Farmers pulled back in California. People who lost insurance turned to the state-run FAIR (Fair Access to Insurance Requirements) plan. But it was unprepared for so much use. The FAIR plan has only about $700 million in cash on hand - not enough to cover billions in damages. By law, FAIR can surcharge all other insurers in the state for the shortfall. But guess what? That surcharge will almost certainly be passed along to other California residents who have private insurance policies.

The ugly situation in California is a warning to other states. Limiting insurance rate increases sounds good in the short term, but in the long run, it can drive private insurers away.

3. Government-run disaster insurance - Private insurers in California are still hurting from the 2017-2018 fires that wiped out more than a decade's worth of their profits. Now they face another catastrophic event. It's possible that private home insurers will stop including wildfires in their policies, just as many of them have stopped including earthquakes.

Government-run disaster insurance seems inevitable. Private home coverage would still include losses from such things as theft or burst plumbing, but climate-related risks would be handled by a different policy. Some insurers aren't good at modeling climate risks, but the bigger problem is that the prices they need to charge homeowners are becoming unaffordable. In theory, government-run disaster insurance makes sense, because it would allow risks to be spread widely, and the government doesn't need to make a profit. The problem, of course, is politics. The National Flood Insurance Program has a terrible track record of undercharging. People need to be discouraged from building again and again in high-risk areas.

As the Los Angeles fires are brought under control, the focus will turn to rebuilding. It's easy to say city residents have to use safer materials, but this is expensive. And even if their homes can be rebuilt, can they be insured? It won't be long before this crisis spreads.

Heather Long is a Post Opinions columnist. She was formerly U.S. economics correspondent from 2017 to 2021 and played a large role in identifying and covering the K-shaped recovery from the pandemic. Opinions expressed by columnists do not necessarily reflect the views of Vermont News & Media.