California fires stress already pressured insurance industry

• Some market experts warn the state may need to consider becoming a primary insurer for fire risk — much as it already did with earthquakes and Florida did with hurricanes.

The big picture: Climate change has made California vastly more susceptible to wildfires — previously in summer, now no matter the season.

• That growing risk has made insurers wary of covering the state, and led many to pull out of the market altogether.
• California FAIR Plan, the state's insurer of last resort for fire risk, is soaking up that demand — protecting homeowners, but squeezing other insurers and weakening its own financial condition.
• "When the FAIR Plan takes on more customers, it causes traditional insurance companies to withdraw from certain areas, further increasing dependence on the FAIR Plan. This cycle can ultimately weaken the FAIR Plan's financial stability and limit consumer choice," state insurance commissioner Ricardo Lara wrote in a Sept. 2024 bulletin.

By the numbers: As of Sept. 2024, FAIR Plan's exposure to residential fire risk was $431.45 billion, up almost 60% from the year before.

• The number of policies in force rose 123% in four years, the agency says.
• One of the biggest risk areas in the state is the currently burning Pacific Palisades, with $5.89 billion in exposure due in large part to high property values.
• FAIR Plan does have a mechanism to share its burden with insurers in the state if its solvency is at risk, but insurers now have the ability to pass those assessment costs onto their customers.

Between the lines: The California Department of Insurance (CDI) moved in recent years to implement a "Sustainable Insurance Strategy," changes that traded more flexibility for insurers for more coverage of at-risk areas.

• Lara issued new regulations letting insurers pass along some of their reinsurance costs to their customers, and letting them use "catastrophe modeling" to project possible future losses instead of simply relying on historical data.
• Those changes were controversial, as opponents said they would cause rates to rise faster than coverage would expand.
• The Insurance Information Institute, a clearinghouse for the industry, says the regulations are having a positive effect, prompting more insurers to write more coverage.
• This week's fires may have complicated matters, though.

What they're saying: "I think that California is being progressive in a lot of ways in the insurance market," says Jeremy Porter, head of climate implications research at risk modeling firm First Street.

• "The downside of that is, there's a correction that has to be made. There's what I call a climate debt," Porter says. "All of those fees, all of those insurance premiums, they're all going to adjust upward as we talk about risk."
• In other words, Californians have to accept they're going to pay more if the risk of fires is modeled properly and insured in a sound manner.

What's next: It's far too soon to say what kind of losses this week's fires will generate, for FAIR Plan or the industry. But the evident damage is enough to get people thinking about outcomes.

• "Things could still break for the positive, but it is seeming more likely that the losses from tonight's fires could push insurance markets over the brink in California — despite all the good work CDI and stakeholders have done over the past few years to stabilize the situation," Michael Wara, a senior research scholar at the Stanford Woods Institute for the Environment, posted on X.
• "I am beginning to think that we need to be having a much bigger conversation about the structure and assumptions that underlie this rate regulated industry. The current model may just not be sustainable," Wara wrote, pointing to the difficulties in Florida, which has a strained state-run insurer for hurricanes.