The Los Angeles wildfires, with damages and economic losses exceeding $250 billion according to AccuWeather, mark a turning point for the insurance industry. This single event surpasses the total losses from the entire 2020 wildfire season, exposing critical gaps in risk models and policy structures. As climate risks escalate, insurers face mounting pressure to adapt or risk being overwhelmed by the financial fallout of an increasingly volatile environment.
An Unprecedented Loss for Insurance Companies
The LA wildfires have forced the evacuation of 200,000 residents and caused extensive destruction, with over 17,000 structures lost. Major fires, including the Palisades and Eaton Fire, have burned tens of thousands of acres, creating a dire situation. While saving lives remains the top priority, property insurers face immense challenges. As of January 17, 2025, Moody’s projects insured losses from these wildfires to be between $20 billion and $30 billion, highlighting the significant financial strain on the insurance industry.
The extent of economic losses underscores the urgency of rapid response measures and long-term strategies to mitigate future wildfire impacts. BofA also estimated the impact of wildfires on the EPS of life insurers. The worst hit in terms of percentage decline will be Cincinnati Financial, with a 20% decline. In absolute terms, Chubb will experience the highest.
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Figure 1: BofA Estimate of LA Wildfire Impact on EPS
Source: Bank of America
Historical Impact of Wildfires on the Insurance Industry
Wildfires were historically viewed as secondary perils by insurers, posing less financial risk than storms or earthquakes. This changed after the 2016 Fort McMurray wildfire caused $3 billion in losses. In 2017, California wildfires caused $14.6 billion in losses, and the 2018 Camp Fire added $12.5 billion. Since 2017, wildfires have caused $67 billion in insured losses. The LA wildfires are expected to rival the financial and industry impact of the 1992 Hurricane Andrew, a Category 5 hurricane.
Insurer Withdrawals from the LA Market
Even before these devastating fires, California’s property insurance market, serving 40 million residents, faced challenges from growing wildfire risks, rising construction costs, and regulations limiting rate hikes. Major insurers have been withdrawing and halting new policies and renewals. This latest disaster will likely hasten the exit of insurers, drive up premiums, and further complicate access to affordable coverage for homeowners in the state.
Two of California’s largest home insurance providers, State Farm and Allstate, stopped issuing new policies in the state, citing high reinsurance costs and rising construction expenses. Insurers have consistently argued that California’s regulations hinder premium adjustments to cover escalating losses. To address this, insurance commissioner Ricardo Lara introduced rules in December allowing reinsurance costs to be passed to consumers. However, the changes have to take effect.
Low Reinsurance Rates Fuel Coverage Gaps
California’s insurance system faces critical challenges, as gaps in coverage for the LA fires will likely result in widespread losses. Despite their role in spreading risk, reinsurance companies are largely unaffected, with Citi analysts estimating they will absorb less than 3% of insured losses from the blazes. Over recent years, reinsurers have scaled back their exposure to natural catastrophe risks by increasing coverage thresholds and raising prices. This shift has pushed major insurers out of the California market, leaving many homeowners reliant on the state’s last-resort insurance program.
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As a result, many homes destroyed in this month’s fires were left uninsured. The retreat of insurers and reinsurers forced numerous homeowners to rely on California’s state-backed Fair Plan, which offers coverage of up to $3 million per residential property, which is a modest amount given the high real estate values in these areas. Rebuilding costs are expected to surge due to heightened demand, and once rebuilt, new insurance premiums will likely become unaffordable for many homeowners as more companies adjust policies to account for the increased fire risk.
Start-ups Step in Amid Persistent PE Interest
The coverage gap created by the exit of legacy insurers and the devastation from the LA fires led to an accelerated demand for insurance, increasing business for a startup called Stand by 5−10x. Founded by Dan Preston, Stand leverages AI and physics-driven insights to provide property-specific wildfire mitigation recommendations, such as pruning trees or replacing wood fencing. It aims to make high-risk properties insurable and affordable by encouraging proactive risk reduction measures from homeowners. The company launched its first product and announced a $30 million funding round in mid-December 2024.
Though there has been a scale-back by insurers and reinsurers alike in the LA insurance market, it is unlikely to deter private equity (PE) firms from investing in the property and casualty (P&C) sector. This is primarily because their investments often target areas such as insurance brokers and managing general agents, which remain unaffected by the wildfires. According to Pitchbook, at the end of 2024, PE firms held 14 P&C platform companies, while investments in P&C insurance providers accounted for only a small fraction of overall PE deal activity.
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Final Thoughts
Efforts to contain the wildfires continue, with Governor Newsom announcing on January 19 the deployment of additional personnel, engines, and aircraft to swiftly combat new outbreaks as extreme weather persists. As the wildfires subside, LA faces a pivotal moment in rebuilding. Insurance costs will skyrocket, leaving the market unattractive for private providers, prompting calls for innovative public-private partnerships involving insurers and mortgage lenders. The state must step in as a financial backstop, funding stricter rebuilding standards and retrofitting surviving properties. Governor pledging of billions and streamlined rebuilding efforts are steps in the right direction. However, this disaster is a stark reminder that political leaders, public authorities, and businesses must accelerate climate adaptation before the next crisis strikes.
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