As authorities struggle to contain wildfires that have wiped out some of southern California’s most expensive real estate, damage estimates continue to climb, adding new urgency to the debate around the future of private insurance in disaster-prone areas.
A new estimate this week from Wells Fargo said losses could climb as high as $30 billion, eclipsing last week’s prediction from JPMorgan Chase that the fires stood to cost insurers roughly $20 billion.
Insurance companies have noted the increasing frequency and rising costs of natural disasters, such as fires, floods and hurricanes, in recent years and hedged their bets. State Farm and Allstate stopped offering new homeowners’ policies in California in 2023 as state regulations limit the amount they can charge. Rival insurers, including Farmers and Liberty Mutual, also have pulled back on their coverage.
The latest disaster, which has so far claimed 24 lives and destroyed more than 12,000 buildings across over 40,000 acres in the Pacific Palisades and Altadena neighborhoods, is on track to be one of the state’s costliest wildfires. The costs are being driven by high property values in the Los Angeles area, with celebrities from Paris Hilton and Steve Guttenberg to Adam Brody and Miles Teller reported to have lost their homes.
But even as costs from such disasters have prompted insurers to pull back, they’re unlikely to retreat completely, experts say.
“The California property markets are huge,” said Max Helveston, a professor at DePaul University College of Law, with an expertise in the insurance industry. “There is a lot of money.”
Premiums for homeowners’ insurance in California have been pegged at $12.1 billion. Insurance companies wrote $90 billion in premiums for all types of insurance in the state in 2022, according to the California Department of Insurance.
Allstate, which has seen its stock tumble 5% since the beginning of the year, has 9.6% of its premiums in California. Both Allstate and State Farm declined to comment on whether the recent disaster will cause them to further change their operations in the state.
“Our priority right now is the safety of our customers, agents and employees impacted by the fires and assisting our customers in the midst of this tragedy,” State Farm said in a statement.
Allstate said it was donating $750,000 to the American Red Cross and the Center for Disaster Philanthropy to assist in recovery efforts.
Under 2018 legislation, insurers in California are prohibited from canceling or not renewing policies for homeowners who live in or near a fire perimeter for one year after the governor has declared a state of emergency. It applies regardless of whether the homeowner has suffered a loss.
In addition to its 2023 halt in taking on new business there, State Farm said in March 2024 that it would not renew 72,000 home and apartment policies in California, accounting for 2% of its policies in the state. The company added it was working with state officials “to establish an environment in which insurance rates are better aligned with risk.”
Insurance companies are regulated by state officials, meaning the U.S. market is actually made up of 50 markets, each with different rules. California is among the most tightly regulated, limiting how much customers can be charged.
Industry analysts said the California regulations do not allow insurance companies to accurately assess the cost of risk.
“They were not letting insurance companies use catastrophe models in their rates,” said Lynne McChristian, director of the Office of Risk Management & Insurance Research at University of Illinois’ Gies College of Business. “Well, the catastrophe models are showing the risk of wildfires greater, and not being able to use that in your rates means that you cannot charge appropriately.”
California has established a state-run plan, called Fair Access to Insurance Requirements, to provide protection for customers who cannot afford rising premiums from private companies. Under the plan, insurance companies must put money into a fund to help pay for coverage shortfalls in the state plan in order to do business in the state.
But losses from the current fires are likely to overwhelm money in the state fund, analysts said.
Insurance regulators in Illinois, and many other states, do not have a cap on price hikes, although they must be informed of the changes.
“Most states just say ‘give us your price, tell us how you got it there,’” DePaul’s Helveston said. “They are mostly concerned with making sure there is not collusion across insurers, making sure competitive forces are driving the market.”
Premiums in Illinois have been on the rise, with concerns about inflation increasing the cost of construction materials and surging labor costs behind much of the increase, instead of worries about disasters like fires or hurricanes that impact large areas in a short period of time.
In 2024, State Farm filed for a 12.5% increase to homeowners’ insurance premiums, while Allstate also filed for a 12.5% hike.
Illinois regulators must be informed of price hikes but typically would not stand in the way of a company’s plans, Helveston said.
The ongoing disaster in California, as well as recent hurricanes in Florida, may indirectly cause insurance prices in Illinois and other states to rise even further as customers may be willing to swallow higher costs as long as it ensures their homes will be protected.
Insurance companies also have pulled back their offerings for homeowners in Florida, where one tornado can cause massive damage across broad swaths of the state in a short time period.
“If this was not happening in California or Florida, companies might not be able to do that,” said Ferhat Akbas, a professor of finance in the college of business administration at the University of Illinois Chicago. “But because this is happening, and it is very visible, people may be thinking that it is better to pay a higher premium than lose their entire house.”
Insurers may be tempted to make up for losses in high-risk areas through price hikes in other states, although the details of any increases are unlikely to point directly to specific events that threaten the companies’ bottom lines.
“If we are having increased wildfires, mudslides, earthquakes, and we are also having increased hurricane damages, eventually these things are going to put a lot of economic pressure on national insurers,” Helveston said.
Allstate’s homeowners business was profitable in the third quarter despite recording $1.2 billion in catastrophe losses, largely from hurricanes Beryl, Debby, Francine and Helene, up from $353 million a year earlier. The company also noted losses of $100 million from Hurricane Milton early in the fourth quarter.
Overall, the company’s net income for the first nine months of 2024 totaled $2.65 billion, compared with a loss of $1.776 billion in the comparable period of 2023.
Bloomberg contributed reporting. This article originally appeared in Crain’s Chicago Business.
