XPost: alt.wildland.firefighting, alt.home.repair, alt.los-angeles
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https://www.sfchronicle.com/california-wildfires/article/home-insurance- disaster-prices-20022809.php

By Megan Fan Munce,
Reporter
Jan 8, 2025

Ethan Swope/Associated Press
As Los Angeles confronts a series of wildfires some experts say could be
the most expensive in California history, the state’s beleaguered
insurance industry also faces the possibility of further destabilization —
with implications far beyond the fire zone.

It’s the type of perfect storm situation that experts have worried about: massive fires burning through expensive homes, many of which are insured through the California FAIR Plan, the state insurer of last resort.

Related: State Farm sought huge number of Pacific Palisades nonrenewals
months before fire
So far there has been no comprehensive estimate of the damage and the
potential costs: With strong winds continuing to fuel the flames,
firefighters are focused on saving lives and structures, with a full
damage tally to come later.

Climate scientist Daniel Swain believes it could be the costliest
firestorm the nation has ever seen. The number of buildings burned is
likely far higher than the initial estimate released Wednesday morning of
1,100 structures destroyed. Importantly for insurance, the destruction
includes plenty of high-end homes, with significant replacement costs, belonging to celebrities and other wealthy people.

“We’re having one of the worst-case scenarios play out right now,” said
Michael Wara, director of the Climate and Energy Policy Program at
Stanford University.

The ramifications could well be felt across California. Most obviously,
the massive losses that insurers face could translate to increased rates
for people across the state — particularly in the areas affected by the
fires but also beyond.

It’s also possible that more companies would instead choose to leave the
state, Wara said — an option that a handful of smaller insurance companies
have elected to take over the past two years.

California’s insurance crisis was sparked by the mega-fires of 2017 and
2018, and these new blazes come just as regulators were trying to ease the situation by encouraging more insurers to stay in, or return to, the state
and provide wider coverage in wildfire-prone areas. State Farm and
Allstate do not currently write new policies in the state, and regulators
had hoped they would reverse their stance.

New state rules that just took effect will make it much easier for
insurers to hike rates by permitting them for the first time to
incorporate the cost of reinsurance — insurance for insurers — into their
rates and rely on forward-looking catastrophe models to assess risk.

In the wake of the ongoing fires, those rate hikes may be even larger than insurers might have otherwise planned, said Wara.

An overarching worry is the stability of the FAIR Plan, California’s
insurer of last resort. Los Angeles County, where the Palisades, Eaton and Hurst fires have burned, has a large concentration of policies with the
FAIR Plan as traditional insurers have dropped policyholders due to the
high risk. The plan has an estimated $24.5 billion in exposure across
15,300 residential and commercial policies in the ZIP codes impacted by
the Southern California wildfires, according to a Chronicle analysis of
FAIR Plan data.

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Over the summer, FAIR Plan President Victoria Roach told the Chronicle the
plan had only about $385 million in reserves to pay for claims. Financial losses beyond that money and what it can recover from reinsurance, could
burden all of the state’s insurers.

Under state law, if the FAIR Plan were to be overwhelmed, it would be able
to charge regular insurers operating in the state — charges that could
well get passed onto policyholders. On Wednesday, a FAIR Plan spokesperson wrote in a statement the insurer is “well prepared” for catastrophes such
as these fires.

“It is too early to provide loss estimates as claims are just beginning to
be submitted and processed,” the spokesperson said. “The FAIR Plan has
payment mechanisms in place, including reinsurance, to ensure all covered claims are paid.”

The California Department of Insurance was not immediately available for comment.

State officials have long worried about how bad things could get in Los
Angeles County, according to Wara.

In 2019, the year after electricity lines sparked the deadly and
destructive Camp and Dixie fires in Northern California, Wara consulted
with the California Senate as they worked to establish the California
Wildfire Fund. The fund would be used to pay back residents who lose their homes and property in future utility-caused wildfires. As part of that
work, legislators needed to know just how costly wildfires in the state
could get.

So they used a wildfire catastrophe model to predict what the worst
possible scenarios would be and came up with three options: a massive fire
in the Moraga-Orinda area, the Los Altos Hills or in Pacific Palisades.

The estimated losses from a megafire burning every single home in Pacific Palisades were somewhere around $30 billion, Wara recalled, without
factoring in post-pandemic inflation rates and inflated reconstruction
costs.

How close a parallel the Palisades Fire is to that scenario remains to be
seen. A full accounting of the insured damage will likely take weeks to
months, and the final bill will determine just how bad things could get.

But California has already shown that the devastating fires of 2017 and
2018 are no longer a fluke — they’re a feature.

“We have been acting as if something like the current or the past approach
to homeowners insurance was a sustainable strategy,” Wara said. “That assumption may no longer be true, after yesterday and today. That will
change how home ownership works in California, because insurance is
fundamental to home ownership. This is no longer an insurance problem;
this is a home ownership problem.”

Reporter Susie Neilson contributed to this report.

Reach Megan Fan Munce: megan.munce@sfchronicle.com


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