California Wildfires and the Potential Impact on the Insurance Industry

There isn’t an easy way to begin an article discussing the fires that uprooted thousands of lives, destroyed thousands of homes and businesses, and even tragically claimed lives. With a devastation to the state and to the country creating a time filled with such sorrow, it makes us wonder, “what do we do now?” and “how do we protect ourselves from unforeseen future events”?

I want to circle back as to “how did we get here” before we can consciously move forward to protect ourselves and more importantly, our families, from future destruction. It seems simple yet confusing – people were dropped from their insurance companies prior to the fires erupting, leaving people and businesses without insurance and having to deal with the loss on their own. But there is more to the story than just people getting dropped without reason. To put it simply, there is a limit on how much insurance companies can charge people for fire coverage which is designated by the state. According to NPR, this limit was the lowest in the country, causing insurance companies in California to lose money rather than profit. In order to recoup the lost profits, that is where the non-renewals came into play. Many were dropped from companies due to new zoning efforts as a push to recoup lost profit. Sophisticated computer algorithms deemed Altadena and the Pacific Palisades higher risk, therefore leading to nonrenewal in those areas. Now, the request to charge higher premiums requested by carriers has been approved by the state, allowing insurance companies to charge higher rates which in turn allows companies to write more people and businesses, increasing coverage in widened areas of “fire prone zones”. As the rollout of the new premium. 

When the non-renewals happened, what could be a potential solution to this in California and in other parts of the country? Creativity in the form of parametrics aided in the quick payout in damages for the fires.

• When purchasing general insurance, you are insuring a dollar amount for the home/business and items damaged in the wake of a fire. This is why it is important to know how much will be covered for what you are paying for. With increased premiums across the board due to inflation, your dwelling/building has been inflated causing premiums to rise. In this case, the premiums weren’t high enough for insurance companies to regain profits from losses.
• Parametrics is based on the category of disaster from the event. So, if the fire wasn’t destructive enough in the parametric limit, you might not receive anything for damages done. A generic metaphor for this could be related back to fishing. Although at times you catch a fish, if it is not up to the length of state fishing laws, you will have to release the fish back out into the water. This benefited people in this instance, but it is expensive, will not be guaranteed to help based on how large or small the disaster was, and it will only pay you back a certain amount which goes towards the loan of the house, not the items inside increases begins, over time, new coverage will be written for those who can afford it.

Be prepared for 2026. The fires don’t just impact the State of California. Insurance is a shared load, so expect to see premiums rise and further scrutiny on property risks due to not only the fires, but also the hurricane devastation across the Carolinas and the South.