In the days leading up to wildfires ravaging the Los Angeles area, California’s insurance commissioner announced a new regulation aimed at increasing coverage in high-risk areas. In exchange for expanding coverage, insurers would be given more flexibility in how much they charge homeowners.
On December 30, 2024, California introduced a rule designed to help homeowners in wildfire-prone areas secure more insurance access. The regulation, which will take effect later this month, mandates that insurance carriers gradually offer coverage in wildfire-risk zones, increasing by 5% every two years until they cover at least 85% of the statewide market share. In return, insurers will be allowed to factor reinsurance costs into their rate calculations.
“Californians deserve a reliable insurance market that doesn’t retreat from communities most vulnerable to wildfires and climate change,” said Insurance Commissioner Ricardo Lara in a statement. He also noted that other states allow insurers to pass on reinsurance costs to consumers.
This move comes as many carriers have been pulling back from the state due to increasingly severe weather events and costly wildfires that have eroded profits. For instance, State Farm dropped nearly 70% of its policies in Pacific Palisades last year.
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However, just over a week after the announcement of the new rule, powerful winds fueled devastating wildfires in Pacific Palisades, Altadena, and the San Fernando Valley. These fires have damaged or destroyed around 12,000 structures, with damages estimated between $135 billion and $150 billion, making it one of the worst wildfires in modern U.S. history.
Consumer advocacy group Consumer Watchdog had warned that the new regulation could lead to rate hikes of 40% to 50% for homeowners, without ensuring a significant increase in coverage for wildfire-prone areas.
California’s insurance department has not yet responded to requests for comment, but Lara told CNN this week that he disputes those rate hike estimates.
Meanwhile, homeowners who lost their policies when insurers pulled back from the state have either gone without coverage or turned to the state-run FAIR Plan, an insurer of last resort. As of September, FAIR’s exposure to residences had risen to $458 billion, a 61% increase from the previous year. Nearly $6 billion of that exposure was from properties in Pacific Palisades alone.
FAIR has assured policyholders that it can pay claims, as state laws allow it to recoup its costs from primary insurers. However, these costs are likely to be passed on to consumers.
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As a result, whether homeowners are covered by private insurers or the state’s FAIR Plan, the prospect of higher rates looms over California’s residents.
