To rebuild, many residents will need mortgages, and lenders won’t give them a penny unless they can afford the cost of the mortgage and the cost of insuring the property. What’s more, buying insurance requires first that there is insurance to buy. That’s looming as perhaps the biggest barrier to building L.A. back.
There are several options, none of them ideal and most of them impractical.
First, let the market do it. That won’t work. For hundreds of years, there have been companies to insure potential risks and pocket a healthy profit. But when it comes to mega-risks like wildfires, we’re far past that. No company wants to write policies where a single big event like the L.A. fires would put them under, so there’s no hope for this option.
That leads to the second option: reinsurance. After a great fire in 1842 left 20,000 residents of Hamburg homeless, German insurance firms decided they needed to buy insurance for their insurance. Reinsurance, first in Germany and then in Switzerland, emerged to protect the market. That’s where Bermuda, Zurich and London come in. Insurance companies selling homeowners policies in California have relied on the global reinsurers in those places to cover big losses they might suffer, and they’ve folded the reinsurance costs into the premiums they’ve charged their customers.
Even before the big L.A. fires, however, reinsurance costs were skyrocketing. Gallagher Re, based in London, increased its rates 50 percent from April to July of 2023. The losses from the L.A. fires are sure to push American companies far past their reinsurance limits, and then they’ll need to pay an additional premium just to get their original reinsurance coverage back. That, in turn, will increase the costs of future premiums charged to consumers, on top of the extra premiums the companies will charge to cover possible future losses. And future losses are certain, even in L.A.; when it does rain again, mudslides are inevitable across slopes now without vegetation.
State Farm and Allstate announced long before the fires that they would no longer write new policies in California. Other companies have followed suit and, if reinsurance costs go higher, more will surely leave the Golden State. With reinsurance, the bills for homeowners are sure to soar, leaving most of those displaced from the fires only bad choices: downsizing their homes; “going naked” with extremely limited coverage or without any insurance at all; or moving out of neighborhoods that many residents had cherished for decades.
We’ve already seen what this might look like. Before the fires, one homeowner saw the quote for renewing his policy jump from $4,500 to $18,000 per year. He decided to take his chances, only to see his property burn to the ground. Thousands suffered the same fate.
Another homeowner was told that his policy would be canceled because of a tree hanging over his house. He trimmed back the tree, only to be told next that he needed to repair his stucco, repaint his house, and then replace his roof. After spending $30,000, he still was refused insurance by “company after company,” he said. He finally was able to get coverage, but his home, valued at $1.13 million, was insured for only $300,000.
A third option: getting a public subsidy. The state of California created a Fair Access to Insurance Requirements (FAIR) plan 50 years ago, creating a private insurance pool regulated by the state for residents who couldn’t otherwise get private coverage. The plan caps coverage at $3 million, less than the value of many homes in the pricey L.A. market.
With the growing damage from wildfires across the state, the plan is problematical. The number of homeowners who depended on FAIR rose from 1.4 million in 2020 to 2.3 million in 2022, and then increased again to 2.7 million in 2023. FAIR premiums are expensive, often double what a standard policy would cost.
And FAIR itself is in trouble. Before the L.A. fires, FAIR had just $200 million in the bank and $2.5 billion available from the reinsurance firms. This could lead to a future surcharge on all California policyholders of between $1,000 and $3,700.
A Democrat in the state Assembly, Jim Wood, put it plainly early in 2024: “We’re like one bad fire away from complete insolvency.” And Michael D’Arelli, executive director of a national insurance trade association, warned almost a year ago, “It’s a ticking time bomb.” That time bomb has gone off.
Then there is a fourth option: go national. This has problems as well. The insurance companies could create a nationwide risk pool, but it’s hard to operate nationally in a business that’s regulated state by state. The federal government could create a national wildfire insurance program, but its National Flood Insurance Program has had its own huge financial problems. The Trump administration wants to push the response to natural disasters back onto the states, so a larger federal role isn’t in the cards right now.
There is one last option: a multilevel, multisector collaboration— reducing risk by better local zoning, reforming regulations by streamlining the state processes, improving the financial practices of insurance companies, and increasing incentives for better resilience planning by everyone. It’s not a silver bullet, but it’s the best and (for now) the only practical option we’ve got.
