Southern California wildfires pose major threat to economy and insurance – Moody’s

Rising claims and property damage could spike premiums

Southern California wildfires pose major threat to economy and insurance – Moody’s

Insurance News

By Kenneth Araullo

The ongoing wildfires in Southern California are on track to become the most damaging in US history, with significant implications for the regional economy and the insurance industry, according to analysis from Moody’s.

The fires, which remain uncontained in Los Angeles, Riverside, San Bernardino, and Ventura counties, are causing unprecedented destruction in densely populated and high-value property areas.

Moody’s noted that while the fires are unlikely to impact the national economy, their regional effects could be profound. Even if contained soon, the current wildfires are projected to generate greater economic losses than any previous US wildfire event.

Preliminary estimates suggest that the disruption to economic activity could result in losses between $2 billion and $3 billion, with the potential for much higher costs depending on how the situation develops.

The fires’ geographical footprint distinguishes them from past California wildfires, which were typically concentrated in less populated inland regions. This time, fires are impacting urban and affluent communities in Los Angeles County, significantly raising the cost of property damage and insurance claims.

Moody’s highlighted that California’s historically dry climate, worsened by climate change, has transformed wildfire risk into a year-round threat. The current fires are affecting coastal regions during what is typically the wet season, exacerbated by extreme winds and severe drought conditions. As of early January, 60% of Los Angeles County was classified as experiencing severe drought, according to the US Drought Monitor.

Impact to the economy

The fires are already impacting Southern California’s economy. Moody’s pointed to real-time data showing consumer activity declines, including a more than 60% year-over-year drop in restaurant reservations in Los Angeles and a 50% decline in Beverly Hills on Jan. 8.

Power outages and water shortages across Ventura and Riverside counties have further disrupted daily life and business operations.

Damage to homes and infrastructure is likely to drive long-term economic consequences. Los Angeles and Ventura counties have median home prices more than double the national average, meaning rebuilding costs will be substantial.

Moody’s suggests that some homeowners may permanently relocate rather than rebuild, potentially accelerating out-migration and reducing local housing demand.

The insurance industry’s response will be critical in shaping the region’s recovery. Moody’s warned that rising wildfire-related claims could drive up homeowners’ insurance premiums in California, similar to how hurricanes have affected premiums in Florida.

Higher premiums could weigh on property values and hinder future housing market growth, particularly if insurers reevaluate their exposure to wildfire-prone regions.

Additionally, California’s FAIR Plan, which offers fire insurance to high-risk properties, may require increased taxpayer funding to sustain coverage, potentially affecting homeowners statewide. Elevated insurance costs, coupled with rebuilding challenges, could worsen California's existing affordable housing crisis.

Stringent zoning regulations and potential construction labor shortages, intensified by federal immigration policies and tariffs on construction materials, may further complicate recovery efforts.

Moody’s emphasized that the full economic and insurance impact of the Southern California wildfires remains uncertain as the situation continues to evolve. However, early indicators suggest that the fires will have lasting implications for the region’s economy, housing market, and insurance industry.

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