The magnitude of these losses is likely to strain California’s already fragile home-insurance market.
The Los Angeles wildfires are expected to become the most costly in US history, with early damage estimates reaching nearly $50 billion, according to a The Wall Street Journal (WSJ) report. This figure, more than double the previous day’s estimate, includes over $20 billion in insured losses, with the potential for even higher costs if the fires continue to spread unchecked, said JPMorgan analyst Jimmy Bhullar.
Other projections, such as from ratings firm Morningstar DBRS, also place the financial impact among the nation’s most expensive disasters, with insured losses exceeding $8 billion.
The final cost of insurance losses from the wildfires may vary significantly as the event unfolds. Analysts typically estimate costs by comparing the number and value of properties destroyed with past wildfires. For context, the 2018 Camp Fire in Northern California, the most destructive wildfire until now, caused $12.5 billion in insured losses, adjusted for inflation.
Hurricanes, earthquakes dominate insurance losses
Historically, hurricanes and earthquakes account for the highest catastrophe losses, with Hurricane Katrina in 2005 holding the record at $102 billion in insured losses, followed by Hurricane Ian in 2022 ($56 billion) and the 2011 Japan earthquake and tsunami ($48 billion).
The magnitude of these losses is likely to strain California’s already fragile home-insurance market. Moody’s senior analyst Denise Rappmund warned that the fires will likely result in higher premiums and reduced availability of property insurance.
The report also states that high losses may also force private insurers to help bail out California’s Fair Plan, the insurer of last resort for homeowners who can’t get coverage from private companies. As of September, the Fair Plan had close to $6 billion in potential exposure to areas severely impacted by the fires, including Pacific Palisades.
This could push the state’s Fair Plan into a crisis, as President Victoria Roach noted, highlighting the risk of needing a large payment from the industry to cover the claims. Despite having reinsurance mechanisms in place, the plan faces significant pressure.
In the short term, high losses will likely affect insurers’ earnings, but they could also drive future price increases, Bhullar added. Reinsurers, who provide coverage to insurers for losses exceeding certain thresholds, are also expected to feel the impact of these elevated losses.