California Insurance Industry at a Crossroads: The Wildfires and Policymakers’ Tightrope

California Insurance Industry at a Crossroads: The Wildfires and Policymakers’ Tightrope

January 27, 2025

By Makenzy Mohrman and Franck Djoumessi, Capstone Financial Services analysts

The Los Angeles wildfires have forced California’s already struggling insurance industry and the state’s policymakers to a critical crossroads.

In recent years, heightened climate-induced wildfire risk has intensified concerns about California’s home insurance market following the exodus of several major insurers. Now, as fires continue to rage in and around LA—running up the bill on what are already the costliest wildfires in US history— the spotlight on property and casualty (P&C) insurers has intensified. Multiple industry reports have pegged the combined losses between $28 billion and $35 billion, with final damage estimates pending until the fires are completely extinguished.

It’s clear that in California, climate change has undermined the insurance system the state relies on, and the path forward is not an easy one. With the escalating intensity and frequency of California fires—and the mounting losses that come with them—insurers have hiked rates statewide and become increasingly reluctant to issue or renew homeowners’ policies in high-risk areas of the state. This trend has forced many policyholders to the California Fair Access to Insurance Requirements (FAIR) Plan, the insurer of last resort in the state. Established in 1968, the FAIR Plan was intended to provide fire coverage for policyholders in high-risk areas who cannot obtain coverage in the admitted market. It operates as a syndicated insurance pool comprising all insurers licensed to conduct P&C business in California. As it is not a state-backed plan, insurers must participate in its profits, losses, and expenses in direct proportion to their respective market share of business in the state. Given the state’s struggling insurance market, there has been significant reliance on the FAIR Plan. As of September 2024, the plan had a financial exposure of $458 billion—a 199% increase since 2019. Exposure totaled $5.8 billion in Pacific Palisades, rendering it the plan’s fifth-largest region in California as of September 2024.

The FAIR Plan’s overexposure in recent years poses a direct threat to its solvency, which is being questioned more frequently now due to the recent fires. And understandably so. According to trade reports, as of January 6, 2025, the FAIR Plan had just $377 million available to pay claims and $5.78 billion in reinsurance available. The FAIR Plan’s outlook amid the fires ravaging Southern California remains questionable, as its reserves could be exhausted.

The looming threat of the FAIR Plan’s insolvency could hasten insurers’ retreat from California, given the inherent risks posed by the increased frequency of wildfires in the state.

The breakdown has become increasingly clear in recent weeks, as the risk of insolvency for the FAIR Plan has heightened, threatening to wipe out reserve funding by wildfire-related claims and potentially triggering an assessment on insurers. Per the California Department of Insurance (CDI)-issued Bulletin 2024-8, if the FAIR Plan can’t meet its financial obligations, it can go back to insurers that have done business in California within the last two years. If an assessment is triggered, insurers would be responsible for 50% of the losses up to $1 billion, after which the entirety of losses could be passed on to policyholders. The looming threat of the FAIR Plan’s insolvency could hasten insurers’ retreat from California, given the inherent risks posed by the increased frequency of wildfires in the state.

The good news: policymakers are taking the threat seriously. Following the recent fires, mitigation efforts from the California legislature have begun, spearheaded by Democratic assembly members introducing the FAIR Plan Stabilization Act (Assembly Bill 226). The bill seeks to issue catastrophe bonds to recapitalize and stabilize the FAIR Plan amid increased financial exposure from the damaging wildfires in recent weeks. The proposal calls for the California Infrastructure and Economic Development Bank to issue bonds financing the costs of claims, and to increase the liquidity and claims-paying capacity of the FAIR Plan. The enactment of such legislation would ensure the solvency of the FAIR Plan, incentivizing insurers to assist in depopulation efforts by taking on riskier policies, given their ability to collect higher premiums.

The recent events in California could also create an opportunity for insurers to use actuarially sound premium rates following the finalization of the Sustainable Insurance Strategy last month. Key reforms allowing insurers to incorporate Catastrophe Modeling and Reinsurance costs into premium pricing could enable them to implement rates that more accurately reflect the risk level in the state. Although the impact of the CDI’s strategy remains in limbo following the wildfires, notable insurance carriers, including Farmers and Allstate, have previously indicated their willingness to re-enter the California market.

Still, the difficulty of threading the needle shouldn’t be underestimated. It remains to be seen whether insurers will look to expand their footprints in California again on the basis of the Sustainable Insurance Strategy reforms, or if the catastrophic fires—and the potential assessments from the FAIR plan—will cause them to retreat. The consequences of inaction by the governor, the CDI, and the state legislature to address the insurance crisis have become increasingly dire. The swelling FAIR plan book of business is evidence that the state is drastically underinsured and requires the re-entry of major insurers able to shift risk and cost away from policyholders. Policymakers must grapple with this while dealing with related housing availability, affordability crises, infrastructure questions, and other emergencies.

California’s home insurance system is at a tipping point. Policymakers will have to walk a tightrope to navigate the multiple crises arising from the wildfires.

California’s home insurance system is at a tipping point. Policymakers will have to walk a tightrope to navigate the multiple crises arising from the wildfires. Capstone believes the coming months will be crucial to the state and the industry’s path. The devil will be in the details, and the stakes of the policy fallout will be high. As the relationship between the insurance industry and the largest state in the US evolves, Capstone will closely follow developments for our investor and corporate clients.


Makenzy Mohrman

Makenzy Mohrman, Financial Services Director

Franck Djoumessi, Financial Services Analyst

Read more from Capstone’s Financial Services Team:
The CFPB Pendulum Swings Back: Regulatory Retreat Under Trump
Beyond the Blueprint: How Federal and State Regulators Will Reshape the Housing Industry
Insurer Checkup: PE Scrutiny Grows, But Annuities Gain from Deregulation

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