Devastating wildfires in Los Angeles are expected to rack up billions in insured losses. However, one former California insurance commissioner said he expects the catastrophe to be an “earnings event” for carriers, thanks to key regulatory reforms made in the state last year.
Dave Jones (pictured below), who served as insurance commissioner between 2011 and 2019, called on insurance companies to step up and take further action to help stabilize California’s insurance market, including factoring mitigation efforts into their risk pricing.
“This isn’t just about insurance,” Jones stressed. “It’s about how we adapt to a changing world. And right now, we’re not doing enough.”
According to Jones, insurers will be adequately reserved to cover the losses, currently estimated between $10 billion to $20 billion.
“They're not going to make underwriting returns this year, that's for sure,” said Jones. “But they have very sophisticated capacity to model the likelihood of these events. They use that modeling to decide how much they want to ask for (in premium).”
Jones compared the ongoing fires to the 2018 Camp Fire, which occurred during his term as insurance commissioner.
That fire, which began in northern California’s Butte County, killed 86 people and obliterated around 18,000 structures.
“In terms of the number of structures burned and lives lost, these fires are not as devastating as the Camp Fire,” Jones said. “But the current fires are arguably more stressful for insurers. Property values in areas like Palisades, Altadena, and Sylmar are much higher, and the payouts will reflect that.”
The Los Angeles wildfires reflect insurers’ increasingly difficult balancing act between maintaining profitability and meeting the needs of an increasingly vulnerable population. Homeowners, meanwhile, must navigate a system that often feels stacked against them, even as they invest in mitigating risks.
At the same time, Jones expected the FAIR Plan to be able to pay claims through its reserves and reinsurance.
Jones spoke to Insurance Business about the state’s ongoing property insurance dilemma, weighing in on whether the ongoing wildfires would deter carriers from bringing capacity back to California’s struggling market.
Over the past few years, California’s insurance market has struggled under increasing pressure from wildfire risks. Though national carriers have not completely abandoned the state, many have paused writing new policies or accelerated non-renewals in high-risk areas.
For Jones, the situation hasn’t reached Florida’s level, where major insurers have almost entirely stopped writing new policies. But he acknowledged that California’s market remains fragile.
“The big insurers didn’t leave completely,” Jones said. “But they’ve been clear that without regulatory changes, they can’t keep operating as they have.”
To address insurers’ concerns about sustainability, Insurance Commissioner Ricardo Lara enacted significant reforms last year. Insurers were granted three critical requests: permission to use forward-looking probabilistic models for wildfire risk, the ability to include reinsurance costs in their rates, and reduced exposure to shortfalls from the state’s FAIR Plan, which serves as a last-resort insurer for high-risk properties.
These changes fundamentally alter how risk is priced and distributed. “They’ve been asking for these changes for years,” Jones said. “And now they’ve got them. The question is, will they follow through on their promise to write more policies?”
At the same time, the restructured FAIR Plan marked an important shift, according to Jones. Previously, if the FAIR Plan ran out of funds, all insurers in the state were assessed based on their market share, potentially destabilizing smaller players.
Under the new rules, insurers will collectively cover the first billion dollars of any shortfall, half of which they can pass on to policyholders. Beyond that, policyholders will bear the full burden. This change, Jones said, aligns California’s model with those in Florida and Louisiana.
“Historically, we spread the risk across insurers,” he said. “Now, much of it falls directly on homeowners.”
While regulatory adjustments may also stabilize the market in the short term, but Jones stressed that they don’t address a deeper, more frustrating issue: insurers’ reluctance to account for mitigation efforts.
He claimed billions of dollars are being spent annually on wildfire prevention, home hardening, and community-level risk reduction, yet homeowners who invest in these measures often see no corresponding benefit in their insurance rates or renewals.
“It’s extraordinarily frustrating,” Jones told Insurance Business. “People are doing exactly what fire officials recommend. They’re creating defensible space, hardening their homes, paying taxes for fuel reduction projects. But their insurance companies still say no.”
The problem is that wildfires are no longer an occasional crisis; they’re a constant threat. While the insurance industry has sophisticated tools to model these risks, it must take more long-term actions to help communities mitigate and prevent exposures.
“(Insurers) think they can rate-increase their way out of climate change,” Jones said. “But that’s a losing strategy. Climate change will outrun their ability to adapt if we don’t take stronger action. These wildfires were not a question of if – they were a question of when.”
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