Natural disaster home insurance: Lessons learned from LA wildfires

Losing a home and treasured possessions is a heartbreaking scenario for anyone. But when there’s no insurance to cover the losses, heartbreak becomes a catastrophe for the homeowner.

This is the situation thousands of LA homeowners are facing as the scale of the uninsured losses becomes clear.

Why are so many LA homes uninsured?

In Pacific Palisades, a neighbourhood where almost every home has been destroyed by the fires, thousands of insurance policy renewals have been refused in just the last year. State Farm, the region’s biggest insurer with a portfolio of 250,000 homes in LA County, dropped 1,600 policies in the Palisades in July 2024, and more than 2,000 policies in other LA zip codes.

State Farm told Euronews Green that it is currently processing over 5,700 home and auto claims in relation to the wildfires. Their spokesperson added that “California’s insurance market is uniquely complex, but we remain engaged with state officials to improve the availability of insurance for residents.”

The situation with State Farm is echoed by other big insurers in the region. According to data from the California Department of Insurance, between 2020 and 2022, insurance companies declined to renew 2.8 million homeowner policies in the state. Over half a million were in Los Angeles County.

Others have been offered insurance, but at astronomical sums. The LA Times cites one homeowner, Francis Bischetti, who received a renewal quote of $18,000 (€17,600), up from $4,500 (€4,400) the previous year, for his home in Pacific Palisades.

Like many homeowners facing extortionate policy costs or struggling to find an insurer at all, Bischetti decided to ‘go bare,’ and not buy any coverage at all. Bischetti’s home was burned to the ground on Tuesday.

As the impacts of the climate crisis ramp up, it is likely that citizens in more and more cities and countries will find their homes uninsurable.

In the UK, the Bank of England warned three years ago that, should 2050 climate targets not be met, about 7 per cent of UK households would be forced to go without insurance due to unavailability or expense.

In the picturesque Belgium town of Limbourg, which suffered devastating floods in 2021, homeowners have been using insurance payouts to rebuild their homes. But local mayor Valérie Desjardin says these people will be ‘double penalised’ as they invest in homes that are deemed ‘uninsurable.’

Europeans are among the least insured against certain types of extreme weather and other natural disasters in the developed world. Reviewing natural disasters in 2023, including storms and flooding in Italy and Eastern Europe, Munich Re found that 90 per cent of losses were uninsured.

Los Angeles homeowners turn to insurers of last resort

When a homeowner in the US can’t get insurance via conventional channels, the Fair Access to Insurance Requirements (FAIR) plan is a last resort option. FAIR is funded California’s private home insurance companies, not taxpayers.

Until 2020, the nationwide number of homeowners reliant on the FAIR Plan for their insurance was steady at around 1.4 million. However, that number rose to 2.3 million in 2022, and to 2.7 million in 2023. 

But California has been more acutely affected than most. CA FAIR reports 1,430 homeowners in the Pacific Palisades zip code alone being covered by FAIR in September 2024, 85 per cent more than a year before. 

Across the state, the number of policies under the FAIR plan rose from just over 200,000 four years ago to 452,000 last year. In Pacific Palisades, around one in seven homes were insured under FAIR.

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But insuring a home under FAIR is expensive. According to Bankrate, the average cost of a policy on the FAIR Plan is around $3,200 (€3,140), more than double the cost of a standard policy.

Even with these high policy costs, the California FAIR plan is straining under the weight of natural disasters. One lawmaker, Jim Wood, commented at a hearing in March, “I’m concerned that we’re one bad fire season away from complete insolvency.”

That bad fire season, it would seem, is here.

California plans to force insurers to offer policies

The losses related to the California wildfires are still being assessed, but are expected to be the most costly in US history. Accuweather projects insured losses to run into billions of dollars, estimating levels of $135 – $150 billion (€132 – €147 billion).

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“This will be the costliest wildfire in California modern history,” says Jonathan Porter, chief meteorologist at Accuweather. He added that it could even be the most costly wildfire in US history, due to it occurring in “densely populated areas around Los Angeles with some of the highest-valued real estate in the country.”

Credit ratings agency Moody’s notes that the Pacific Palisades area is one of FAIR’s largest exposures, with insured assets valued at approximately $5.9 billion (€5.7 billion). On top of this, claims relating to living expenses and business interruption are likely to push the cost up even further.

Insurers will be counting the costs of the wildfires for years to come, and are likely to refuse more policies as a result. However, California believes it has a solution to the crisis.

Under a new state regulation announced last week, insurance companies will be forced to offer policies to homeowners in wildfire risk areas. Insurers will be required to have at least 85 per cent of their statewide portfolio in risk areas, with the requirement being implemented with 5 per cent increases every two years.

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This rule is the latest from California Insurance Commissioner Ricardo Lara’s Sustainable Insurance Strategy, which aims to offer Californians more options when it comes to insuring their properties. Lara previously said companies would be allowed to use ‘catastrophe models’ to apply higher rates to policies in risk areas.

How is climate change making insurance more expensive?

A US Senate report on the insurance market warned last month that “climate-related extreme weather events will become both more frequent and more violent, resulting in ever-scarcer insurance and ever-higher premiums.”

For Europeans, rising insurance costs due to inflation are just the tip of the iceberg. Unpredictable weather, rising sea levels, wildfires and flooding are placing some properties that were previously low-risk into high-risk zones, further inflating premiums and even leading to policy refusal in some cases.

Last October, climate change was revealed to be behind more than a third of all global weather-related insurance losses. In all, it’s responsible for around $600 billion (€567 billion) of insurance claims, with the cost being passed on to policyholders.

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Risk assessors Swiss Re Institute says that, in 2024, Europe will see its second-highest insured losses from flooding in history. Moody’s estimates that the insured losses in southern Germany from flooding in 2024 would amount to as much as €3 billion. Overall losses from natural disasters are anticipated to exceed $135 billion (€128 billion) in 2024 alone.

Floods and droughts are added extras in insurance policies

In Europe in particular, flood and drought are not covered by policies as a matter of course, and have to be bought as an added extra on the policy.

The European Insurance and Occupational Pensions Authority (EIOPA) conducted research into climate change and insurance in 2022 and found that “a lot of work still needs to be done in order to prepare for these changes.”

Specifically, it found that more than 50 per cent of the companies it works with have not undertaken any climate change analysis. Many were unable to provide the granular data required for such an assessment, despite such risks being considered the ‘new normal’ for insurers.

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The situation in LA should be a wake-up call for European homeowners and insurers alike. Losses from climate change-related natural disasters are only going to increase and making sure your home insurance policy prepares you for the worst is crucial.