LA fires could push home insurance market to crisis

California wildfires put pressure on already unstable home insurance market

What you probably already know: At least five wildfires were burning over 30,000 acres in Los Angeles County and the surrounding area on Thursday, powered by strong Santa Ana winds that have, at times, reached hurricane strength. Thousands of homes have been destroyed and at least five people have died. Tens of thousands of people have been displaced and power outages have spread throughout the region. The devastation is already prompting questions about what will happen in the aftermath. California is the largest home-insurance market in the country, and it was already in crisis before this tragic wildfire began to rage.

Why? Consumer-friendly laws in the state have kept home-insurance rates relatively low but that has also prompted many insurers to pull out of the state, where wildfires are increasingly resulting in more claims than the companies can handle. State Farm and Allstate stopped selling in the state after wildfires in 2017 and 2018 resulted in losses that exceeded what rates would cover. That had many turning to California’s Fair Plan, a state-funded insurer that essentially functions as a last resort for homeowners who can’t get coverage.

What it means: The Palisades Fire and others raging in Los Angeles are likely to result in massive claims with the Fair Plan, which could put the state-run insurer in dire straights. A Fair Plan spokesperson told the Wall Street Journal that it was too soon to say what the loss estimates will be, but in the Palisades area, residential policies were up 85% in the 12 months through September. Many of the homes that have been destroyed are in wealthier areas of the city, and celebrities are starting to come forward to share their losses. Actor Billy Crystal and his wife lost their home, which they’ve owned since 1979, and reality TV star Paris Hilton posted photos of her destroyed home on Instagram. That means, not only were thousands of homes destroyed, but those homes were expensive, so the insurance claims will be significant.

What happens now? There had been some home in recent years that insurers might return to California as regulators and worked to woo them back. But after a widespread loss like this, it’s unlikely insurers will return to the state any time soon. Without insurance, people can’t get mortgages and thus, won’t be able to buy homes. This could exacerbate already high home prices in the state.