California fires have insurers, reinsurers on notice

Less than two weeks into the New Year, and the world is getting to grips with what promises to be one of the worst natural catastrophes on the 2025 calendar.

California up in flames, again

By mid-January 2025, fire fighters were tracking five significant wildfires affecting Los Angeles County, including areas within the City of Los Angeles, suburban neighbourhoods and so-called unincorporated zones. Updates at the time of going to ‘print’ include: 

• Palisades Fire: Originating in the Pacific Palisades area, this fire had consumed over 23713 acres and was approximately 11% contained at the time of writing. By 13 January, the New York Post had reported 16 deaths from this fire, with other news sources noting around 5300 structures razed. 

• Eaton Fire: Burning in the Altadena and Pasadena regions, the Eaton Fire scorched more than 14117 acres, resulting in the destruction of approximately 7000 structures. News reports confirmed that eight lives had been lost in this fire, correct on 13 January. 

• Hurst, Kenneth, and Lidia Fires. These fires affected 771, 1052 and 395 acres respectively and had not caused significant damage at the time of writing. 

Reflecting on the Knysna experience

Seven years and seven months ago, your writer spent some time in Knysna, mere days after the Knysna wildfires laid waste to over 1400 buildings, claiming seven lives, and causing billions of rand in economic and insured losses. 

The power of uncontrolled fire, spurred on by high winds, was on naked display, with eyewitness accounts of how burning embers flew hundreds of metres from the main fire, contributing to its rapid spread. In a post event assessment, Aon Benfield estimated insured losses at around USD275 million, or ZAR3.5 billion at the time; but this fire hardly features on global loss tables. 

Some areas are more prone to wildfire than others. Quoted in an article run by Bloomberg, Michael Wara, a senior researcher and wildfire expert at Stanford University, said the Pacific Palisades was “like the bullseye in terms of locations where the insurance industry could lose the most money in 24 hours.” The article delved into the results of a five-year-old risk analysis that had singled out Silicon Valley’s Los Altos Hills and the Moraga and Orinda area east of San Francisco as high risk. The perfect storm of high value homes, difficult topography for fighting blazes; and dry, windy weather could not be ignored. 

Staggering average house prices

Before the fires, the average house price in Pacific Palisades topped USD4.5 million. It should, therefore, come as no surprise that by 9 January, JPMorgan Chase & Co was putting an ‘over USD20 billion’ estimate on insured losses, setting this up to be the costliest wildfire in United States history. 

A quick Google search reveals two other mega wildfire loss events in the state of California: In 2017, the Wine Country Fires caused approximately USD14.5 billion in economic and USD11 billion in insured losses, in 2017 dollars, and a year later, the Camp Fire event caused an estimated USD16.6 billion in economic and USD10 billion in insured losses, in 2018 dollars. 

Insurers and reinsurers have long been concerned about risk exposures due to the rising frequency and severity of loss events coupled with the concentration of assets in high risk areas. In the US, the tug of war between insured and insurer is nothing new. The past two decades have been punctuated by reduced insurance coverage or outright withdrawals from high-risk markets due to catastrophic flood, hurricane and wildfire events. For instance, after Hurricane Katrina in 2005, many insurers significantly scaled back coverage or exited coastal markets, citing unsustainable losses. 

Similar patterns emerged following Hurricanes Harvey, Irma and Maria in 2017, where policyholders faced increased premiums or coverage exclusions for storm surge and wind damage. Wildfires in California, such as the Camp Fire in 2018, further intensified this trend, as insurers like State Farm and Allstate reduced their footprint in wildfire-prone regions. As a consequence, flood and wildfire risk exposures have been gradually pushed from private insurers to government-backed programmes such as the National Flood Insurance Program (NFIP) and the Californian FAIR Plan. 

State-backed insurer of last resort

The FAIR Plan, an insurer of last resort for Californian homeowners, has seen significant growth over 2023 and 2024, with the result it could be short of assets and reinsurance to indemnify all of its policyholders following January’s wildfire catastrophe. 

It faces a scenario similar to that faced by South Africa’s special risks insurer, Sasria SOC Limited, following a looting event in July 2021. Faced with over ZAR32 billion in claims, government had to step in to ensure Sasria’s solvency. Ironically, it took a mega loss event to get the analysts talking about how the FAIR Plan would divvy up claims costs between other insurers and homeowners. 

Whatever happens, Californian homeowners will continue grappling with higher insurance costs, and fewer alternatives. In a recent note, prominent global investment banking and securities firm, Jeffries, shared that major US primary insurers have significantly reduced their exposure to California. And on the topic of wildfire coverage, Bloomberg noted that seven of the 12 largest US home insurers had restricted their coverage over 2023 and 2024; this despite (and ironically, also because of) ongoing interventions by the regulator. This will get far, far worse as the extent of the January 2025 losses become clearer. 

The Bloomberg article expanded on FAnews’ bracketed allegation, witing that, “Insurance is supposed to communicate [higher] risk through higher prices; but in California that feedback loop has been broken in part by Proposition 103, a law that limits the amount insurers can raise prices without extensive reviews.” For the layperson, regulators have intervened in the setting of sensible insurance premium, contributing to a mismatch in risk exposure versus how much money is available to pay claims following a loss event. 

One step forward, two steps back…

Over the past couple of years, the California Department of Insurance, a consumer protection agency for the largest insurance marketplace in the US, has made concessions for insurers operating in wildfire affected regions. 

For example, insurers have been allowed to include climate change related forecasts in setting premiums rather than relying solely on historic data, and they have been allowed some scope to pass on fire-related reinsurance costs to insureds. These interventions partly address the constraints introduced by Proposition 103; but further directives following the latest catastrophe will have the opposite effect. 

In a media release dated 9 January 2025, California Insurance Commissioner Ricardo Lara introduced further protection for Southern California homeowners by issuing a mandatory one-year moratorium on insurance non-renewals and cancellations. “My heart goes out to my fellow Angelenos. Our top priority is protecting Californians during this crisis and helping us recover,” said Commissioner Lara. ‘I am using my moratorium powers to prevent insurance companies from cancelling or non-renewing policies in wildfire-impacted areas, so people do not face the added stress of finding new insurance during this horrific event.” 

The intervention is welcome news, but it may prove too little too late as insurers feel the pinch. Another article, published on Reuters, shares the gloom in a headline reading ‘US insurers slump as Los Angeles wildfire loss estimates hit USD20 billion’. This article estimated total economic losses following the fires at USD150 billion, which is not hard to do if you spend a few minutes watching the apocalyptic landscapes being broadcast from the event epicentre. “The Pacific Palisades area is one of the most expensive neighbourhoods in the US, home to Hollywood A-Listers and multimillion dollar mansions,” Reuters wrote. 

Two-year-long rebuilding process

With some estimating it will take at least two years for the rebuild, policyholders will have to wait some time to find out whether insurers and the FAIR Plan are able to make good on their claims. The consensus concerns are captured in the following comment by an affected homeowner, shared by Bloomberg. They report that a 49-year old lawyer and affected homeowner said: “I am very concerned. No one chooses the FAIR Plan. Are we going to be made whole here? And ultimately are we going to get the type of coverage that is going to allow us to move forward?” 

The implications of these fires extend far beyond the United States. For South Africa, changes in global catastrophe pools and reinsurance markets could lead to ripple effects on pricing, capacity and underwriting practices. 

Local insurers and reinsurers participate in global risk-sharing mechanisms, which means escalating losses from events like the Los Angeles wildfires could result in higher reinsurance premiums and stricter terms for local players. This, in turn, may drive up costs for South African policyholders, particularly for high-risk policies such as those covering flood or wildfire-prone regions. 

Government, private sector collaboration

As experienced by Sasria, mega-loss events strain even the most resilient insurance structures, necessitating increased government and private sector collaboration to ensure long-term insurance market sustainability. The lessons from California’s regulatory challenges and market responses offer valuable insights for South Africa as it navigates its own risk landscape. Global catastrophe events reinforce the need for proactive risk management and innovative solutions to safeguard insurance and reinsurance markets against an uncertain future. 

Writer’s thoughts:
The staggering costs of wildfires in California highlight how global reinsurance markets might impact local insurance premiums and capacity. How can you better prepare local clients for rising risks and insurance premiums? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.