California’s new insurance regulations tested by L.A. wildfires
On Jan. 2, 2025, the California Department of Insurance began accepting pre-application materials that would change how home insurance companies can price policies. Five days later, Los Angeles erupted in flames. The full scope of the damage is still being calculated, but insured loss estimates hover around $40 billion. If accurate, this would make the firestorms the most expensive in the state’s history — topping even the deadly 2018 Camp Fire, a fire so catastrophic it’s credited with igniting the California home insurance crisis.
The Sustainable Insurance Strategy (SIS), California Insurance Commissioner Ricardo Lara’s response to the crisis, is the most extensive revision to the state’s insurance guidelines in three decades. It is designed to encourage major insurance companies that exited California in recent years to return, in theory making insurance more accessible and affordable. But the widespread fire damage in and around L.A. could have the opposite effect.
“It is too early to evaluate potential impacts to property valuations or other credit implications for individual local governments,” Denise Rappmund, vice president and senior analyst at Moody’s Ratings, said in a statement. “These events will continue to have widespread, negative impacts for the state’s broader insurance market. Increased recovery costs will likely drive up premiums and may reduce property insurance availability.”
Historic fires, historic damage and historic insurance changes all create an uncertain future for California homeowners. Here’s what you need to know.
- On January 7, Insurance Commissioner Ricardo Lara declared a one-year home insurance moratorium on cancellations and nonrenewals for ZIP codes in or adjacent to the wildfires. Meaning, if your home is one of these affected areas, your insurance company cannot drop you or cancel your policy for one year.
- The two largest blazes, the Palisades and Eaton fires, began burning the same day. To date, they have burned through more than 37,000 acres. Damage estimates suggest that they are the most expensive fires in California history.
- The Palisades and Eaton fires destroyed more than 16,000 structures.
Learn more: How Los Angeles fire victims can access home insurance resources for evacuation
How did California’s insurance rules change?
One major facet of the Sustainable Insurance Strategy pertains to how the California Fair Access to Insurance Requirements (FAIR) Plan deals with major, widespread losses. The FAIR Plan is the state’s insurer of last resort — if you can’t get a policy anywhere else, you can apply for one through the FAIR Plan.
The program is run by the state but funded by private, licensed insurance companies in California. When the FAIR Plan receives an influx of large claims — like it has in the wake of the Palisades and Eaton fires — and cannot cover them through its reserves, catastrophe bonds and reinsurance, it can levy what’s called an assessment on the private companies that support it. When this happens, the private insurance companies contribute to helping pay out claims. How much each company is required to pay is determined by its market share.
But now, homeowners may need to chip in too. The Sustainable Insurance Strategy limits the amount insurers are on the hook for. Under the SIS reform, insurers can only pay up to half — $1 billion for residential claims — in FAIR Plan losses. The other half would be recovered from California home insurance policyholders with permission from the California Department of Insurance. Policyholders would typically see their portion of the assessment reflected in their home insurance premiums.
Wrong place, wrong time: Why the Palisades and Eaton fires could spell disaster for the FAIR Plan
The FAIR Plan hasn’t needed to make an assessment since the 1994 Northridge earthquake, which caused more than $32 billion in estimated damage (in 2023 dollars). But, given the extent of the recent wildfire damage, it’s within the realm of possibility that an assessment could be necessary.
Pacific Palisades, one of the Los Angeles neighborhoods devastated by the Palisades Fire, was home to some ultra-expensive real estate. The San Francisco Chronicle’s analysis of Zillow data found that the homes within the perimeter of the Palisades Fire have a combined value of around $32 billion. Granted, not every single home within the fire perimeter has been destroyed, nor can we assume that every destroyed home was insured.
We do know one thing about Los Angeles’s insurance situation: it has an extremely high amount of FAIR Plan exposure. The FAIR Plan insured about 22 percent of the structures affected by the Palisades Fire and 12 percent of structures in the Eaton Fire. These may seem like low numbers, but they are astronomical in terms of insured losses. The FAIR Plan has about $4 billion in exposure from the Palisades Fire and $775 million from the Eaton Fire.
The high value of real estate in some of those areas will likely generate large economic losses with insured losses depending on the respective coverage. On the back end, demand surge and rising inflationary pressures are additional factors that could drive claims-related costs upward.— Sridhar Manyem, AM Best’s senior director of Industry Research and Analytics
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What’s next for California home insurance?
Much of the specifics will depend on whether or not the California FAIR Plan makes an assessment on the private home insurance companies that support it. Regardless, insurance is looking more expensive for Californians down the line.
In order to entice more insurance companies to serve the state, the California insurance market must prove profitable. One way the Sustainable Insurance Strategy aims to address this is through catastrophe modeling.
Insurers can now implement catastrophe modeling and consider reinsurance costs when setting rates — a practice that’s likely to drive premiums up. But, to get the green light to do this, companies must agree to write 85 percent of new policies in historically underserved areas.
“I wouldn’t say we are ‘balancing’ affordability and availability,” said Joel Laucher, program specialist at United Policyholders. “I would say we are sacrificing a great degree of affordability to achieve greater availability… Hopefully, this opens the door to a marketplace where many insurers are competing for business.”
However, Laucher expressed concern for potentially higher insurance prices, coupled with escalating mortgage costs and HOA dues: “Many people may find it very challenging to afford that combination.”
Micheal Wara, director of the Climate and Energy Policy Program at Stanford University, expressed a similar concern. He told the San Francisco Chronicle, “This is no longer an insurance problem; this is a homeownership problem.”
Home insurance tips from a licensed broker: How to get and keep your home insurance policy
If you own a home anywhere in California, getting dropped by your home insurance company probably keeps you up at night. We asked Mandy Wright, assistant vice president at NFP, an insurance broker that specializes personal insurance lines for high-net-worth clients, for advice on how homeowners can navigate the insurance crisis. Here are her top tips:
“Make sure you have a high enough dwelling coverage limit to rebuild your home.”
“Most clients don’t know what it costs to rebuild their home,” Wright told Bankrate. She suggests that homeowners be generous with their dwelling limits.
Your home’s rebuilding cost is not the same as what you paid for your home or its assessed value. Instead, it can change based on a myriad of factors, like the cost of labor, lumber, concrete and general inflation. If your home sustains serious damage, and your dwelling limit isn’t high enough, you could end up needing to dip into your own pockets to finance the repairs. Plus, if you’re facing a total loss, you likely don’t have the option to cash out.
“Most contracts require that you rebuild your home,” says Wright. “They don’t give you a check.”
“Don’t file a small claim.”
“If you file a small claim, you’re probably going to get non-renewed,” says Wright. “If [the damage] is around 10 or 20 grand, figure out something else. Maybe get a HELOC to pay for it.”
Your home insurance company looks at many things to determine risk, one of which is your claims history. Filing a smaller — smaller, meaning non-catastrophic — claim could be enough to prompt your insurance company to reconsider your policy. It can be helpful to think about your home insurance policy this way: It’s there for major problems, not little fixes.
“Find a broker.”
If you’re struggling to find a company to write you a policy, Wright suggests seeking out a broker.
“The larger the broker, the more options they’re going to have there,” says Wright.
An insurance broker is different than a captive agent. The former writes with multiple companies, while the latter only writes with one. A broker could help you cast a wider net in your insurance search and even help you customize your policy.
“Don’t give them a reason to cancel you.”
“We have drones now… [your insurance company] will look and see if you have a bad roof. Don’t give them any excuse, because they will slap a nonrenewal,” says Wright.
Drones have become an increasingly popular way for insurance companies to evaluate a property’s risk. In a difficult insurance market like California, it can help to go above and beyond what your insurer asks you to do for wildfire mitigation, suggests Wright. Clear the brush surrounding your home, ensure you don’t have tree limbs hanging over your roof and trim your palm trees.
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