What the Los Angeles fires might mean for the Bay Area home insurance market

The devastating wildfires burning through Los Angeles County this week are stoking concerns that California’s already faltering home insurance market could be thrown into deeper turmoil.

The fires engulfing thousands of homes come on the heels of reforms meant to stop insurers from fleeing the state following almost a decade of increasingly destructive, climate-driven wildfire seasons. But with the changes yet to take full effect, experts say the billions of dollars in expected new insurance claims in Southern California could translate to fewer coverage options and fewer policies written for homeowners in the Bay Area and beyond.

“There are going to be some companies that are severely hit by the LA wildfires,” said Nancy Watkins, an insurance expert and actuary with the consulting firm Milliman. “That could create a situation where, in the short term, they have to get rid of some of their existing policies.”

Consumer advocates, meanwhile, say the deadly fires could mean even higher premiums for policyholders in nearly every corner of the state.

“I’m certain that the insurance companies will demand extraordinarily higher rate increases,” said Harvey Rosenfield, founder of Los Angeles-based Consumer Watchdog, an advocacy group.

In recent years, insurers have already hiked rates and ended hundreds of thousands of policies statewide. An insurance meltdown kicked into overdrive by the latest fires would likely have far-reaching consequences.

Not only would existing homeowners continue to see rate hikes and lose coverage, but families that struggle to find insurance could not take out a mortgage to buy a home. In areas at extreme fire risk, from the Santa Cruz Mountains to rural corners of Northern California, fewer buyers could mean falling home prices, straining local tax bases and stunting efforts to emerge from the state’s lingering post-pandemic economic malaise.

Tim Linerud, whose home on stilts sits tucked into a canyon in Belmont, fears insurers’ response to the destruction wrought by the ongoing blazes. As of Thursday afternoon, the fires had damaged or destroyed more than 5,000 structures, potentially amounting to at least $135 billion in total economic losses, according to the weather forecaster AccuWeather. There were five reported deaths.

“We’ve had issues over the years of insurance companies canceling the policies because of the type of structure and the landscape of our property,” Linerud said. “So any excuse of an insurance company to bail out, they’re going to use, and I’m worried about that.”

California’s largest home insurer, State Farm, which paused writing new policies in California starting in 2023, declined to explain how the fires may impact its business here.

“Our number one priority right now is the safety of our customers, agents and employees impacted by the fires and assisting our customers in the midst of this tragedy,” the company said in a statement.

Allstate, which stopped expanding its California coverage in 2022, offered a similar response.

“We’re supporting customers who have filed claims and have teams ready to move into California once it’s safe to help on site,” the company said.

The California Department of Insurance on Wednesday announced an emergency declaration by Gov. Gavin Newson would protect homeowners in the immediate area of the fires from losing their insurance due to wildfire risk for one year, but did not respond to questions about the fires’ impact on the broader insurance market.

In recent weeks, the agency has also finalized reforms to entice those insurers back to the state, stabilize the broader market and ensure fewer homeowners are dropped from their plans.

Under the new rules, insurers will soon be allowed to raise rates based on the growing threat of climate change, as well as pass along more of their costs incurred during catastrophic disasters to their customers, both long-running industry demands. In exchange, companies are supposed to write more policies in fire-risk areas where many homeowners have lost coverage.

Consumer advocates maintain the deal will do little to benefit struggling homeowners, singling out the rate-setting change that allows companies to use forward-looking “catastrophe modeling” programs to calculate premiums. They claim this will enable insurers to raise rates through an opaque process they liken to a “black box.” While state insurance regulators must still approve rate increases, advocates say companies will be emboldened to hike homeowners’ rates to offset their losses in the LA fires.

However, Watkins, the insurance expert, who consults for the insurance industry, said the reforms should actually prevent rate increases based solely on the recent blazes despite the high losses. That’s because insurers are expected to set new premiums using future projections rather than historical losses.

“I don’t think that any given fire, even one as enormous as the LA fires, is going to directly impact any homeowners’ base rates,” she said.

Another concern is what the fires could mean for the California FAIR Plan, the state’s last-resort insurance plan for those who lose or can’t find traditional coverage.

Over the past half-decade, the number of homeowners on the plan — a state-mandated insurance pool with buy-in from private insurers — has more than doubled to around 350,000. That’s pushed the FAIR Plan toward the brink of insolvency.

Many who lost homes in the LA infernos were likely on the plan. According to a Bay Area News Group analysis of FAIR Plan data, there are more than 26,000 FAIR Plan properties in ZIP codes impacted by the fires across Los Angeles County.

If insurers cannot cover those liabilities, it’s possible they could pass on those costs to all of their home and business customers in the form of higher premiums.

“We are one event away from a large assessment; there’s no other way to say it,” California FAIR Plan President Victoria Roach told lawmakers last year. “We don’t have a lot of money on hand, and we have a lot of exposure out there.”

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