LA wildfire losses underscore urgency for insurance changes

Although regulatory changes were already underway in the California home insurance market, losses from January wildfires in the state underscore the need for further reform, a Morningstar DBRS report said. 

As of March 5, insurers had already paid out more than $12 billion worth of property claims in the aftermath of January's wildfires in Los Angeles, according to California state officials. Almost 38,000 claims had been received by that date, the state department of insurance also reported. Total insured losses from the weeks-long event could reach as high as $45 billion, UCLA Anderson School of Management economists recently predicted. 

Among insurers in the state, State Farm General is expected to see the largest amount of gross losses at $7.6 billion. However, because of reinsurance coverage from its parent, the net loss will come in substantially lower at approximately $612 million, Morningstar ratings analysts said. 

"The large wildfire losses are manageable for most national players but will add to the concerns about their capital allocation and profitability in the California insurance market," they wrote.

By comparison, the state's provider of last resort, the Fair Access to Insurance Requirements plan, will likely see over $4 billion of total gross losses, while on a net basis, the number will approach $2.6 billion. The FAIR plan is subject to a "disproportionately large loss" based on the extent of exposure to high-risk areas, the report continued. 

The numbers highlight the risks and challenges felt by insurance providers operating in California, with the cost of doing business leading several, including State Farm, to cease renewing or issuing new homeowners policies in the state this decade. The pace of such exits elevated the financial burden on the state's FAIR plan and underscores the need for changes that will allow insurers to hike premiums, Morningstar's report said. 

Regulations kept the average premium level in California ranks below the national average, despite the Golden State's ranking in the top five for severe weather-related financial losses. 

"Appropriate risk-based pricing is critical for insurers to achieve sustainable operations; however, the restrictive regulatory environment in California has materially discouraged appropriate pricing actions, leading to unsustainably low premiums," the agency's ratings analysts wrote.

Before 2025, the California Department of Insurance prohibited providers from passing on reinsurance costs to customers and using catastrophe risk models in predicting wildfire risk. Regulators announced changes to the policies just days before the Southern California wildfires erupted to encourage more private insurers to enter the market and ease stress on the FAIR plan. 

Since 2021, FAIR property coverage grew by more than 300% due to the rising number of homes located in areas deemed at high risk and an influx of new customers, who signed up after their previous providers exited. In September of that year, the total value of residential risk exposure the plan faced came in at $160.4 million, but by the end of 2025, the number is expected to top off at $496.2 million, its provider said.

Last month, State Farm received backing from California's insurance commissioner for a 22% rate increase on homeowners' policies, scheduled to go into effect in June if approved. Other insurers are expected to make similar requests, with the approval process requiring scheduled public hearings for hikes above 7%.   

"While the state has taken steps to improve the insurance market conditions, we believe the burdens of a strict regulatory environment and high insurance risk remain heavy and may require more dramatic changes to make the insurance market sustainable," Morningstar said. 

Passing on reinsurance costs to consumers would also effectively elevate challenging affordability levels that are already straining many homeowners, the analysts added. 

Reinsurance firms provided protection for many of the largest primary providers, but costs remain high since shooting upward two years ago. In response, some insurance companies took on higher risk levels, increasing potential exposure to natural disasters. They also contributed to some of the exits from California and other disaster-prone states, such as Florida, Morningstar said. 

Although State Farm is reinsured by its parent company, other providers seek coverage from overseas firms. Estimated losses from the Southern California wildfires on seven of the largest global reinsurers came in at approximately $5 billion, according to the analysis.