Pacific Palisades, a neighborhood in Los Angeles hit hard by the Palisades Fire, illustrates the growing insurance challenges faced by homeowners in areas prone to climate-related disasters. In July, State Farm dropped around 1,600 policies in Pacific Palisades, according to California Department of Insurance spokesperson Michael Soller. Additionally, data from CBS San Francisco revealed that State Farm terminated over 2,000 policies in neighboring Los Angeles Zip codes like Brentwood, Calabasas, Hidden Hills, and Monte Nido.
State Farm emphasized the safety of its customers, agents, and employees affected by the fires and pledged to assist those impacted. This decision mirrors a trend among private insurers, including Allstate and Farmers Insurance, who have been discontinuing policies or pausing underwriting in California. This leaves homeowners with the option of turning to the California Fair Access to Insurance Requirements Plan (FAIR Plan) or going without coverage altogether. The FAIR Plan offers basic fire insurance for high-risk properties when traditional insurers decline coverage.
As a result, more Pacific Palisades homeowners have turned to the FAIR Plan, with approximately 1,400 out of 9,000 homes covered by the plan in 2024— a significant increase from 2020. The devastating Palisades Fire, which has ravaged numerous costly homes, is poised to become one of the most expensive wildfires due to the extensive property damage.
The insurance market in California, already fragile, faces heightened strain from the recent fires, including the Eaton Fire and several other blazes. This issue isn’t confined to California, as similar challenges exist for homeowners in states like Florida and Louisiana. Experts and lawmakers warn that the collapse of the insurance market, exacerbated by climate-related disasters, could lead to a broader financial crisis.
With climate-related events becoming more frequent, insurers are reassessing their policies in high-risk areas, not only in California but also across the country. The Senate report underscores the urgency of addressing climate change’s impact on the insurance industry. Last year, State Farm announced it was discontinuing coverage for 72,000 properties in California, contributing to over 100,000 Californians losing their insurance since 2019.
As insurance costs and risks escalate, industry players are navigating a new landscape. The Senate report highlights the pressing need for proactive measures to mitigate the impact of climate change on the insurance sector.
“The driving force behind increasing non-renewal rates is multifaceted,” the report pointed out. “Firstly, the data emphasizes that the surge in non-renewals and rising premiums is not confined to Florida, Louisiana, California, and Texas. Other regions grappling with escalating non-renewal rates include Southern New England, the Carolinas, New Mexico, and counties in the Northern Rockies, Oklahoma, and Hawaii.”
The repercussions extend beyond local boundaries. “This trend is anticipated to lead to a decline in property values in areas where obtaining insurance becomes unfeasible or exorbitantly costly — resulting in a property value collapse with the potential to incite a significant financial crisis akin to the events of 2008,” the report underscored.
Explaining the mechanism, the report highlighted, “Climate change introduces unpredictability in risk assessment, which in turn renders insurance unattainable or inaccessible. The absence of insurance impedes mortgage availability, leading to a plummet in property values, thereby echoing the widespread economic repercussions witnessed in 2008,” Whitehouse elucidated on Thursday.
Despite the looming challenges, there is a glimmer of hope for homeowners in California. A new state directive, unveiled on Monday, aims to assist homeowners in wildfire-prone regions by compelling insurers to offer coverage.
The primary objective of the new regulations is to transition homeowners away from the FAIR Plan, as stated by California Insurance Commissioner Ricardo Lara’s office. The average premium on the FAIR Plan stands at approximately $3,200, more than double the standard homeowner’s insurance cost in California, according to Bankrate.
Under the new rule, home insurers will be mandated to extend coverage to high-risk zones, a measure unprecedented in the state’s history, Lara’s office confirmed in a statement. Insurers are required to incrementally increase their coverage by 5% every two years until they reach 85% of their market share. This implies that if an insurer currently insures 20 out of every 100 state policies, they must cover 17 policies in high-risk areas, the office explained.
In return for expanding coverage, the state will allow insurance firms to transfer the costs of reinsurance to Californian policyholders. Reinsurance is typically procured by insurers to mitigate substantial payouts in the event of natural disasters or catastrophic losses. Notably, California is the sole state that does not permit policyholders to bear the cost of reinsurance, as highlighted by Lara’s office.
Critics of the regulation argue that this adjustment could escalate premiums by 40% and assert that the pace at which new policies are issued is insufficient. The state, however, did not furnish a comprehensive cost analysis detailing the potential impact on consumers.
“Californians deserve a stable insurance market that does not retreat from the communities most vulnerable to wildfires and climate change,” Lara asserted in a statement.
On a separate note, authorities in California are currently grappling with evacuation orders as the Sunset Fire rages in the Hollywood Hills.
