Wildfires in California may cause more than double the insured losses of Canada’s worst catastrophe year ever in 2024, credit ratings agency Moody’s reports today. They also highlight ongoing insurance affordability and accessibility issues in California.
The impact of the tragic loss, which so far has killed 16 people, also illustrates why P&C insurers in Canada are calling for federal government backstops for earthquakes, floods and wildfires north of the 49th parallel.
California wildfires
“This wind and fire event is on a massive scale and the full scope of damage is unclear,” the American Property Casualty Insurance Association (APCIA), the primary national trade association for home, auto, and business insurers in the U.S., stated Jan. 9. “Preliminary insured loss estimates are upwards of $20 billion, which would make this the costliest insured loss due to wildfires in history, globally.”
Fanned by hurricane-force winds of 80 miles per hour (mph) to 100 mph, California’s Palisades Fire grew rapidly on Jan. 8, burning about 20,500 acres. It’s already destroyed a total of more than 5,300 structures, Moody’s reports in a blog post today.
The Eaton Fire, now burning about 10 miles northwest of Los Angeles, currently threatens about 13,000 buildings after expanding to nearly 14,000 acres. It has reportedly destroyed as many as 5,000 structures in the Altadena area, the credit rating analyst says.
Effect on California’s state backstop
Damage caused by six California wildfires thus far will likely strain the state’s public backstop, Moody’s comments further. Established 50 years ago, California’s FAIR Plan is available to California residents and businesses in urban and rural areas who cannot obtain insurance through a regular insurance company.
As of 2020, the FAIR Plan covered less than 3% of residents, meaning more than 97% of Californians had a competitive option for insurance, per the California Department of Insurance. But FAIR’s market share has expanded over recent years, as private insurers have shown less appetite to write California wildfire, Moody’s says.
“For insurers, the series of significant wildfire events in California over the past five years, combined with regulatory constraints that prevent the incorporation of wildfire loss costs based on catastrophe models into rate-making, have led to a position of heightened caution,” writes Firas Saleh, director of product management for Moody’s.
“As private insurers have withdrawn, the state-backed California FAIR Plan has grown, and as of Sept. 30, 2024, the exposure in Los Angeles County was US$112.2 billion, with a year-over-year growth of 53%. Los Angeles County exposure represents approximately 23.1% of the entire California FAIR plan portfolio.”
The City of Pacific Palisades, an area where the worst of the wildfires is located, has a US$5.9- billion exposure, Moody’s states.
“The FAIR Plan, working far beyond its original brief, recently issued a warning that should a major catastrophic wildfire occur, it may need to impose an assessment on all carriers in the state,” Saleh writes in his blog.
That situation would potentially mirror a precedent set in 1996, “when the FAIR Plan had to assess US$260 million on carriers, at a time when the plan’s total exposure was only around US$22 billion, less than 5% of the total FAIR Plan exposure of US$458 billion as of September 2024.”
Accessibility and affordability
Insurance accessibility and affordability are not just issues linked to California wildfires and hurricanes in Florida. They could migrate north of the border as the frequency and severity of natural catastrophes increase in Canada as well.
Canadian P&C insurance sources tell Canadian Underwriter that, absent any federal government backstop for earthquake, flood, and wildfires, the same issues could appear in Canada as well. Canada is the only G-8 country that does not have a government flood insurance program.
In California, the state insurance regulator announced on Jan. 9 that insurers are “prohibited from cancelling or [refusing] to renew residential property insurance policies located in any ZIP Code within or adjacent to the fire perimeter, for one year after the declaration of a state of emergency, based solely on the fact that the insured structure is located in an area in which a wildfire has occurred.”
Sources tell CU if underwriters aren’t sure of the total extent of exposure to a peril, the policy is to assume the worst, and price the product accordingly. The argument for backstops has always been that if private insurers know their exposure has a limit — beyond which the government covers the losses — they are able to lower premiums prices, because their loss costs are known.
As noted by Moody’s, California insurers have been showing less appetite for writing the state’s wildfire risk. Leading up to the current wildfires, the state regulator introduced two reforms allowing insurers to determine more accurate pricing for wildfire loss.
Under Proposition 103 in California, insurance companies are allowed to raise rates on homeowners, businesses, and consumers, but are not legally required to offer coverage in wildfire-prone areas. California is now introducing a requirement for insurers to increase their policy offerings in underserved areas.
In exchange, the state regulator is allowing insurers to incorporate catastrophe modelling into their ratemaking. Also, it will permit insurers to factor the cost of reinsurance into their rate calculations.
The APCIA notes these reforms are not yet finalized.
“Recent reforms to stabilize California’s insurance market are important, but they have yet to be finalized or implemented,” APCIA said in a public statement about the California wildfires on Jan. 9, 2025.
“The fires will no doubt pose additional challenges and delays in rebuilding a healthy insurance market in California. The market’s future recovery depends on the legislative and regulatory decisions made by California officials in the days ahead.”
Photo Credit: Homes along the Pacific coast are burned to the ground in the aftermath of the Palisades Fire Monday, Jan. 13, 2025 in Malibu, Calif. (AP Photo/John Locher)
