The devastating wildfires sweeping through the Los Angeles region in January 2025 have not only caused widespread destruction but also triggered a major upheaval in California’s already strained home insurance market, according to a new report from the UCLA Anderson School of Management.

UCLA Anderson Report: Potential Future Consequences

The report details the potential consequences for:

• Insurers. While now permitted to use more sophisticated risk models and include reinsurance costs, insurers still face the long-term threat of escalating wildfire losses. They may also offer incentives for homeowners to invest in fire-resistant measures.
• California’s FAIR plan. The FAIR Plan (Fair Access to Insurance Requirements), which provides basic fire insurance in high-risk areas, faces significant exposure. With limited reserves and reinsurance, a large-scale disaster like the L.A. wildfires could trigger assessments on insurers and potentially all policyholders in the state. The report notes the FAIR Plan’s significant exposure in areas like Pacific Palisades, where billions of dollars of property are at risk.
• Homeowners. In the short to medium term, homeowners can expect substantial insurance rate hikes. However, the report suggests that the new regulations, by attracting more insurers to high-risk areas, could lead to a more competitive market in the long run, potentially offering more comprehensive policies at more affordable rates.
• Various stakeholders. The report paints a complex picture of the California insurance landscape. The most recent wildfires have acted as a catalyst, accelerating the impact of new regulations and highlighting the urgent need for solutions to the state’s insurance crisis. While rate increases are likely in the near future, the long-term effects of the regulatory changes and market adjustments remain to be seen.

Beyond the immediate financial impact, the report highlights several key concerns, including housing affordability, fiscal strain on local governments, health and environmental impacts, and long-term economic effects.

The fires, estimated to have caused $75 billion in insured losses, are expected to lead to significant insurance rate increases for homeowners across the state. A complex interplay exists between the wildfires, existing insurance challenges, and recently implemented regulations today versus the past. California has been grappling with an insurance availability crisis for years, with insurers increasingly canceling policies and limiting new coverage in high-risk wildfire areas.

This has led many residents to rely on the FAIR Plan, a state-backed insurer of last resort. Additionally, just prior to the wildfires, the California Department of Insurance introduced the Sustainable Insurance Strategy, designed to address this crisis. The new regulations allow insurers to utilize forward-looking risk models, include reinsurance costs in their rates, and potentially assess all state policyholders if claims exceed the FAIR Plan’s capacity. In return, insurers are required to expand coverage in high-risk areas.

The wildfires have dramatically amplified the impact of these regulations. Already facing significant losses from disasters, insurers are now expected to request even larger rate increases to recoup their losses and account for future risks. While the new regulations give them more flexibility in setting rates, they also face the ongoing challenge of increasingly frequent and severe wildfires.

The report emphasizes the urgent need for substantial investments in wildfire mitigation strategies. The authors argue that all mitigation efforts, including improved firefighting techniques, forest management, infrastructure upgrades, stricter building codes, and home hardening initiatives, are justified. They also suggest that property insurers can play a more active role by incentivizing homeowners to adopt fire-resistant measures.

NABE Experts Discuss Wildfire Insurance Crisis at Webinar

A panel of experts also convened this week to discuss the growing challenges of insuring against wildfire risk in the face of climate change. You can view the YouTube archived video/presentation here.

The National Association for Business Economists (NABE) webinar, titled “Facing the Future: Wildfires, Climate Change, and Insurance Challenges,” highlighted the increasing economic and public health impacts of wildfires, particularly in states like California.

The discussion, featured John Abatzoglou, professor at UC Merced; Michel Leonard, chief economist and data scientist at the Insurance Information Institute; and Michael Wara, senior director of policy at Stanford University’s Sustainability Accelerator. The panel explored the rising costs of insurance premiums and the increasing difficulty in obtaining coverage in high-risk areas. They also addressed the urgent need for solutions to promote rebuilding, resilience, and a transition to a more secure environment.

The webinar underscored the complex interplay between climate change, wildfire risk, and the insurance industry, emphasizing the need for innovative strategies to mitigate future losses and protect vulnerable communities.

March 4 Webinar: Property Insurance in an Era of Urban Wildfires

The Fisher Center for Real Estate and Urban Economics (UC Berkeley Haas School of Business) is hosting a free webinar on March 4. This program will examine and focus on the increasing challenge of providing affordable insurance in the aftermath of natural disasters throughout the state, including the latest Pacific Palisades and Altadena fires.

The webinar will explore several key issues, including:

• Policies to mitigate the impacts of urban wildfires on residential affordability and availability.
• Modified approaches to urban planning and development that reduce both the probability and magnitude of losses from urban wildfires.
• California property insurance complexities related to the FAIR plan, methods of reinsurance, and the use of backward-looking models for rate setting