California’s Insurance Crisis Just Got A Whole Lot Worse

As Californians already face significant challenges finding home insurance, the fires ravaging Los Angeles County could make it even more difficult and costly to insure properties in the future.

Deadly fires erupted beginning Jan. 7, causing at least 11 deaths, leading to the ongoing ordered evacuation at one point of more than 180,000 individuals, with another 200,000 warned to get ready for possible evacuation.

More than 10,000 buildings are damaged or destroyed across the county, according to the latest estimates, with the number expected to rise as fires are minimally contained, in what some are describing as one of the most costly natural disasters in American history. AccuWeather estimates economic losses from the fires to reach up to $150 billion.

As of the latest tally on Jan. 9, the Pacific Palisades fire destroyed nearly 6,000 structures, including oceanfront mansions in neighborhoods north of Santa Monica, where homes sell for between $7 million and $20 million, with an average price of more than $3 million across the city.

The affluent area is made up of primarily white-collar workers, according to Cal Fire demographics data, which shows slightly fewer than half of the structures affected by the Palisades Fire were built since 1970, and about 12,000 are older.

Videos of the aftermath show businesses and homes leveled by fire, with the blocks of some neighborhoods completely demolished by the inferno.

State Farm non-renewed approximately 1,600 policies in the region in 2024, of approximately 30,000 homeowners and 42,000 apartment policies it dropped statewide, citing rising costs and risks.

“This decision was not made lightly and only after careful analysis of State Farm General’s financial health, which continues to be impacted by inflation, catastrophe exposure, reinsurance costs, and the limitations of working within decades-old insurance regulations,” the company said in a statement.

“State Farm General takes seriously our responsibility to maintain adequate claims-paying capacity for our customers and to comply with applicable financial solvency laws. It is necessary to take these actions now.”

Approximately 6,000 structures were lost in the Eaton Fire, as of the most recent count on Jan. 10. The East Altadena and Hasting Heights neighborhoods sustained significant damage.

The average value of homes in the area is approximately $1.4 million, according to the online real estate listing firm Zillow.

Ricardo Lara, commissioner of the state’s Department of Insurance, issued a one-year moratorium on Jan. 10, preventing non-renewals and cancellations for households in and adjacent to the fire sites.

“I am using my moratorium powers … so people don’t face the added stress of finding new insurance during this horrific event,” he said in a statement. “I am working on all fronts to make sure wildfire victims get the benefits they are entitled to, and they get it as soon as possible.”

Insurance Market Stability in Question

With losses mounting, California’s already precarious insurance market could become more challenging if insurers become more hesitant to write policies.

The state is going through what lawmakers and other elected officials have deemed a “genuine crisis” that is affecting millions of Californians.

Supervisors in counties from across the state passed resolutions last year calling for a state of emergency due to a lack of affordable insurance.

“At this point, it’s not an exaggeration to say the state’s facing an insurance crisis of both affordability and availability,” Ray Mueller, San Mateo County supervisor, said during a board meeting on Oct. 8.

Seven of the 12 largest insurers, including State Farm which represents about 10 percent of the market share, according to Department of Insurance data, paused writing new policies since 2023.

A lack of availability has left many Californians with only one option, the so-called FAIR plan—an insurer of last resort financially backed by insurance companies.

In the event the plan goes insolvent, insurers are on the hook to cover the losses, with each company paying out based on market share—thus incentivizing limiting liability by reducing exposure, analysts said.

The number of homes insured with the FAIR plan skyrocketed in recent years—now totaling more than 450,000 policies—overwhelming staff assigned with managing calls, representatives with the state’s Department of Insurance testified to the Senate Insurance Committee last year.

Those stuck with the plans say they’re anything but fair, with some households paying as much as 500 percent more for less coverage.

Coverage was limited to $3 million per structure for residential homes, which could pose a problem for some homeowners in coastal areas impacted by fire where values far exceed the cap.

It is unclear how many homes affected by the recent fires were covered by the FAIR plan.

Regulatory Hurdles

Insurance companies have shied away from doing business in the Golden State because of strict regulations that limit rate hikes and stall application processes, Rex Frazier, president of the Personal Insurance Federation of California, told The Epoch Times.

He called for an expedited approval process and said the higher construction, labor, and reinsurance costs dictate the need for more expensive premiums.

Some of the largest insurers recently requested price hikes of 30 percent or more, and the insurance department is processing the applications.

“The problem is that the solution to the problem is going to be higher premiums, and people aren’t going to like that,” state Sen. Roger Niello, vice chair of the Senate’s Insurance Committee, told The Epoch Times.

The industry points to a challenging regulatory environment exacerbated by fire risk and inflation as reasons companies are reducing coverage in California.

Other points of contention for insurers are strict rules set in place by Proposition 103—known as the Insurance Rate Reduction and Reform Act—narrowly approved by voters in 1988 to oversee the industry after automobile insurance prices spiked.

“It’s a real issue,” Niello said. “And it’s a problem because we passed an initiative 30 years ago with an extremely small margin of victory … in a market and under circumstances that were completely different than they are now.”

Looking for Solutions

Insurance department officials have agreed that some of the regulations are inhibiting progress.

“Californians in every corner of our state are frustrated with outdated regulations and desperate for change,” Commissioner Lara said in a June 2024 press release. “We are addressing this crisis of insurance availability head-on. For the many Californians who live anywhere where wildfires are a threat, my strategy will increase their options while requiring insurance companies to take their wildfire safety actions seriously,”

He released new guidelines last year that will allow insurers to use models that will allow for higher pricing, and the cap on FAIR plan coverage is raised to $20 million per structure.

To help reduce the number of homeowners relying on the FAIR plan, the new rules require insurers to increase the number of policies written in high-risk areas by at least 5 percent.

One policy analyst said removing government oversight and allowing a free market to determine pricing could be a more effective solution.

“Deregulation is a simpler answer. Hundreds of insurers could then freely compete for Californians’ business, with third parties informing consumers about each company’s financial status and claims-handling behavior,” Marc Joffe wrote in a December analysis for the Cato Institute.

“And there would be an added bonus: by eliminating the Department of Insurance, the state could reduce its 3 percent tax on insurance premiums, part of which funds the department, providing an immediate savings for consumers.”