LA Wildfires Accelerate the Looming Crisis of Uninsurable Homes “`
Even before the recent devastating wildfire, insurance providers expressed significant concerns about the insurability of many homes in Los Angeles’ Pacific Palisades. The neighborhood’s proximity to the Santa Monica Mountains and the high property values created an unacceptable fire risk, making profitable insurance coverage impossible at standard rates. Several insurers, including State Farm (which withdrew from Pacific Palisades in July 2024), refused to offer new policies or renew existing ones.
Consequently, numerous homeowners were compelled to secure coverage through the California Fair Access to Insurance Requirements (CA FAIR) Plan, the state’s insurer of last resort. In the Pacific Palisades zip code (90272), CA FAIR Plan policies surged 85% between 2023 and September 2024. While offering fire insurance, the FAIR Plan levies higher premiums than traditional insurers and caps residential property damage coverage at $3 million.
Like many similar state-run insurance programs across the U.S., the California FAIR Plan is struggling under the strain of increasingly frequent and severe natural disasters exacerbated by climate change. A previous statement by then-California Assemblyman Jim Wood highlighted concerns about the plan’s financial stability, citing only $200 million in cash reserves against $450 billion in potential liabilities.
This recent wildfire season has brought those concerns to the forefront. With wildfires consuming at least 28,000 acres in Los Angeles County, Accuweather analysts project substantial property losses. This poses challenges for California’s insurance industry, particularly for the state’s insurer of last resort. This situation underscores the instability of the home insurance market, both in California and nationwide. Increasing risks from various natural disasters—fires, floods, severe storms, and hurricanes—are rendering insurance financially unviable for some individuals and regions. In 2023, insurers reported losses on homeowner coverage in 18 states, a significant rise from 12 states just five years prior.
A similar number of states are experiencing both escalating home insurance premiums and increased policy cancellations, according to Dave Jones, former California insurance commissioner and current director of the Climate Risk Initiative at UC Berkeley School of Law. Jones emphasizes that the underlying issue of greenhouse gas emissions isn’t being sufficiently addressed, resulting in increasing insurance unavailability across the U.S. He warns that the country is moving toward a future where comprehensive insurance coverage is no longer feasible.
As private insurers withdraw, homeowners are turning to insurers of last resort—often called Beach and Windstorm Plans in the Southeast—which frequently lack the resources to adequately insure these high-risk properties. Despite this, more states are establishing these plans to support their private property insurance markets. Nationwide, the number of FAIR Plan policies nearly doubled between 2018 and 2023, reaching 2.7 million (AM Best data). The California FAIR Plan alone experienced a nine-fold increase in exposure over the past six years.
Benjamin Collier, a risk management and insurance professor at Temple University, notes that the plan of last resort is becoming the standard in many states.
The situation affecting the California FAIR Plan has implications for all residents of the state. Insufficient funds to cover claims would result in increased costs for every policyholder. While insurers are responsible for the first billion dollars in claims, subsequent costs are distributed among all insurance policyholders, effectively making everyone responsible for subsidizing high-risk areas.
Florida serves as a prime example: when Citizens, Florida’s state-run insurer of last resort, faced payment shortfalls after Hurricane Ian (2022), policyholders bore the additional burden, resulting in significant additional household costs due to the $113 billion in damages.
David Marlett, managing director of the Brantley Risk and Insurance Center at Appalachian State University, characterizes the FAIR Plan system as a symptom of widespread market failure.
Collier suggests that the higher costs and reduced coverage associated with FAIR Plans might indirectly encourage people to avoid high-risk areas. However, as the insurance market becomes increasingly untenable across broader regions, FAIR Plans will prove unsustainable. He advocates for a fundamental re-evaluation of homeowner’s insurance practices and coverage.
Jones proposes potential solutions such as federal reinsurance for FAIR Plans to provide financial backstops and reduce their reliance on the private market. He also suggests creating a subsidized home insurance marketplace similar to the Affordable Care Act to assist low- and moderate-income households.
Experts agree that maintaining the status quo is not a viable option. Jones emphasizes that insurers cannot resolve the increasing risks associated with climate change.
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