A chimney remains standing next to a destroyed home during the Eaton Fire in Altadena, Calif., on Wed., Jan. 8, 2025. The most destructive wind storm to strike the Los Angeles area in 14 years is fanning wildfires and has sent thousands of residents fleeing for their lives, with dangerous gusts expected to persist for at least another two days. (Credit: Michael Nigro/Bloomberg)
More deaths; more fires; more homes, businesses and communities leveled; and more Santa Ana winds.
The firestorm event affecting swaths of southern California continues to be a story of evacuation and defense, with local officials likening the aftermath in some areas to a wartime bombing.
The California Department of Forestry and Fire Protection (CAL FIRE) reported 92 fires total on the morning of Fri., Jan. 10, 2025, and nearly 30,000 acres burned. The largest of the fires are in Los Angeles County: the Palisades Fire, at 6% containment; the Eaton Fire, at 0% containment; the Kenneth Fire, at 0% containment; the Hurst Fire, at 37% containment; and the Lidia Fire, at 75% containment.
The devastation — now top news nationwide — spotlights insurance, risk management and regulatory challenges that professionals in these sectors know all too well.
“The California homeowner's insurance market is under a great deal of stress,” Mark Browne, chair of the Maurice R. Greenberg School of Risk Management, Insurance, and Actuarial Science at St. John’s University business school, said in a press release. “As public policy makers in California seek solutions, they need to be careful not to make the situation worse by disconnecting the cost of risk from the prudent management of it.”
AM Best said the ultimate insured losses will depend largely on the coverage secured by homeowners, many with high-value real estate, as well as the level of protection obtained by business owners. Demand surge and ongoing inflationary pressures also may drive up insurance claims-related costs.
AM Best also highlighted that fact that California recently implemented regulations that would allow the cost of reinsurance as a factor in pricing and also allow the use of catastrophe models to account for mitigation efforts by homeowners, businesses and communities. “A wildfire catastrophe model currently under review by the state could enable insurers to better price this risk going forward, but the risk of wildfire is very high and very persistent. The effectiveness of the program in reducing insured losses will boil down to affordability and the availability of appropriate coverage,” said Sridhar Manyem, senior director, Industry Research and Analytics, AM Best.
“California residents have dealt with an increasing variety of severe weather events in recent years such as wildfires, along with a prolonged drought and multiple flooding events caused by atmospheric rivers,” said David Blades, associate director, Industry Research and Analytics, AM Best, in a prepared statement. “The changing weather patterns and climate conditions have resulted in increased volatility that has negatively impacted the results of insurers in the homeowners and commercial property lines.”
Acrisure Re noted the historic nature of this firestorm: “Between the Palisades and Eaton fires, upwards of 17,000 structures are within the fire footprints. Households without power have decreased from about 1.5 million on Wednesday to about 200,000 on Thursday according to PowerOutage.us. It is very likely both fires will be in the top 5 most destructive and costliest fires in California history,” the firm said a statement.
Moody’s Rating underscored the lasting impact the event is likely to have on California’s already struggling insurance market: “We expect insured losses to run well into the billions of dollars, given the high value of homes and businesses in the affected areas, and to cause large losses for P&C insurers with significant homeowners and commercial property market share in Los Angeles.” Jasper Cooper, Moody’s vice president and senior credit officer, said in a statement. “It will take weeks or months to determine the magnitude of the insured damages.”
Moody’s also noted:
- Losses will be shared among standard homeowners insurers, insurers specializing in high-value excess and surplus lines (E&S) homeowners policies, the California FAIR Plan and commercial property insurers. Reinsurers will also assume losses through quota share, per-risk and excess of loss contracts.
- The allocation of losses among insurers will depend on their market share for the affected areas, which may differ from market share in the state.
- Beyond property losses, homeowners’ insurers also face additional living expense claims, typically capped at 30% of a dwelling's value, while commercial lines claims will likely include business interruption losses.
- In California, the FAIR Plan, the insurer of last resort, has grown rapidly in recent years, but FAIR Plan coverage is often more expensive and offers limited coverage compared to the private market.
Denninger added that these events will force insurers, particularly high-net-worth (HNW) insurers, to further control the capacity they provide to high-wealth enclaves. The losses here for the HNW insurers (and there are only a few) and their reinsurers will be significant. “The insurance impact on all of this will be simple: higher premiums, more restrictive underwriting, and less available insurance.”
Insurers also will see their own operating costs increase.
“In addition to direct damages, insurers face rising reinsurance costs and increased claims volume, which can lead to higher premiums,” Insurity CEO Chris Lafond said in a statement. “However, advancements in catastrophe modeling, geospatial analytics, and predictive risk assessments are enabling more precise decision-making and helping insurers find ways to responsibly maintain coverage in wildfire-prone regions.”
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