Even if you live thousands of miles from the catastrophic wildfires sweeping greater Los Angeles, you should brace yourself for sticker shock the next time your homeowners insurance comes up for renewal.
“Homeowners outside California should not get a false sense of security about their situation vis-à-vis homeowners insurance,” says Cathy Seifert, a senior vice president and equity analyst at CFRA Research. Price, adequacy and even availability could be negatively affected, she adds.
Loss of property pales in comparison to lost lives and livelihoods, but the economic toll of the recent fires will nevertheless be staggering. With thousands of homes already burned even as multiple fires continue to burn uncontained, projections of damages are climbing fast: On Thursday, J.P. Morgan estimated a total economic loss of nearly $50 billion, more than double the estimate it had calculated just a day earlier.
Insured losses alone could top $20 billion, analysts said in a research note. And the costs could be even greater if the fires continue to burn.
Insurance-market dysfunction has become a ‘crisis’
The extent of the destruction in one of the United States’ most expensive real estate markets will make rebuilding or reimbursing homeowners extremely costly for insurers. While California homeowners will certainly face higher premiums in the future, the size and scope of the disaster means that homeowners across the country will share in the financial pain.
The homeowners insurance market is regulated at the state level, although big insurance companies have a national footprint. Each state has rules insurance companies have to follow about how and how much they can raise rates.
As a state known for strong consumer protections, California’s rules historically have been especially stringent. This kept insurance costs lower than they otherwise would have been for homeowners, but created a scenario of insurers fleeing the state in droves. Just since 2022, seven of the 12 biggest insurers either dropped customers or stopped writing policies in California entirely.
The number of homeowners piling into California’s FAIR plan, the state’s insurer of last resort, has been skyrocketing as a result. In affluent Pacific Palisades, where wildfire devastation has been especially acute, the number of FAIR policies jumped by roughly 85% between 2023 and 2024.
These fires could be the last straw.
“This turned it from an urgent issue into a crisis,” Seifert says.
While other natural disasters have prompted insurance companies to raise rates, the impact on insurers’ bottom lines has been growing, with escalating wildfire activity a main culprit. Disasters like hurricanes can also be catastrophic and costly, but insurers tend to make out better because flood damage is excluded from typical home insurance coverage.
Starting Jan. 1, California’s insurance regulators gave insurers permission for the first time to use catastrophe modeling predictions to price policies. (Previously, regulators had required insurers to set rates based on historical data only.) The move was a concession to try to woo back insurers; the trade-off for using these models is that insurance companies are required to sell home insurance in fire-prone areas.
Using forecasts is common practice in some other states. Given the escalating severity and cost of natural disasters — and the expectation that climate change will continue this trajectory — insurers argue that historical data no longer provides an accurate assessment of future risk.
In other words, California homeowners were looking at steep premium hikes even before some of the most expensive real estate in the country burned to the ground.
“California is a significant percentage of our overall economy — it’s not good for the rest of the country to have such a significant economic base with this level of dysfunction,” Seifert says. “The rest of the country can’t ignore” its challenges, she cautions.
California’s woes are our problem, too
Where you live does make a difference, but not necessarily in the way you might expect. Your premium might effectively be subsidizing homeowners in another state. A 2022 Harvard Business School study found that, when insurers are prohibited from raising rates as much as they want after losses, they make up the difference by hiking policy premiums in less-regulated states in a process researchers characterize as “cross-subsidizing.”
“It’s spread all over the country, and it spreads in a disproportionate way, where some people are bearing an overwhelmingly higher cost,” Ishita Sen, a Harvard finance professor and one of the study’s authors, told the Wall Street Journal this week.
Researchers found that, in years immediately following a big disaster, premiums rose by up to 6.5 percentage points higher in states with laxer regulations than in similar states with more stringent regulators.
On Thursday, California insurance commissioner Ricardo Lara announced a one-year ban on insurance companies canceling or not renewing customers in the most severely fire-impacted zip codes. In a Friday press conference, Lara also urged insurers to pause pending cancellations or non-renewals issued between Oct. 9 and Jan. 7, when the blaze started.
While this might give California homeowners a reprieve in the immediate aftermath of the fires, they’ll certainly face higher home insurance bills in the future — and they might wind up with skimpier coverage, to boot.
Nationally, in addition to rising premiums, Seifert predicts that insurers also will get creative with ways to mitigate homeowners’ sticker shock. What’s typically covered in a “standard” home insurance policy could shrink; for instance, coverage might only include the cost to rebuild the structure, not to replace the personal items — from appliances to furniture to electronics — inside a home destroyed by fire.
“Homeowners are going to have to rethink and be a lot more aware of what they’re actually covered for in their homeowners policy,” Seifert says. “There may be some homeowners in certain states that are going to have pretty significant gaps in coverage for the sake of their financial well-being.”
And they’ll be the lucky ones. A growing number of experts have expressed the previously unthinkable: that some places will be uninsurable at any price.
“We’re marching toward a future where insurance is not going to be available or affordable,” Dave Jones, director of the Climate Risk Initiative at the University of California at Berkeley’s School of Law, told the Washington Post.
It’s a sobering prospect.
More from Money:
Climate Change Just Caused the Biggest Home Insurer in This State to Stop Accepting Applications
How to Help California Wildfire Victims — Without Getting Scammed
What Is Flood Insurance and How Does It Work?
Alice J. Roden started working for Trending Insurance News at the end of 2021. Alice grew up in Salt Lake City, UT. A writer with a vast insurance industry background Alice has help with several of the biggest insurance companies. Before joining Trending Insurance News, Alice briefly worked as a freelance journalist for several radio stations. She covers home, renters and other property insurance stories.