Wildfires in California, particularly in regions like Los Angeles, are reshaping the homeowners' insurance market, posing challenges for insurers and policyholders alike. According to D'Amore-McKim Assistant Professor Weiling Liu, “Rates on homeowners insurance will likely increase, and more property and casualty insurers may choose to stop servicing the state of California.” This shift highlights the growing difficulty of insuring properties in fire-prone areas as natural disasters become more frequent and severe.

California has recently approved the use of catastrophe modeling in premium calculations to attract and retain insurers. This change allows insurers to incorporate wildfire probabilities into pricing, leading to more tailored rates. “Specific homes facing greater wildfire risk will see a much bigger increase in their rates,” explains Liu. This new approach is expected to create significant variations in premiums, with high-risk properties bearing the brunt of cost increases.

The withdrawal of many insurers from the state has diminished competition, further complicating matters for homeowners. California's FAIR plan, the insurer of last resort, offers coverage for high-risk properties but adds financial strain on remaining insurers. “As fewer insurers stay in the state, the cost of supporting FAIR becomes higher for the remaining insurers, which puts more pressure on them to leave,” says Liu.

Climate change is exacerbating these challenges, driving up the costs of natural disasters and repairs. “Inflation has made repairs and reconstruction more expensive than ever,” Liu notes. To address these rising costs, insurers are pushing for the use of more granular risk models, which could improve pricing accuracy but might also make high-risk properties unaffordable to insure.

Homeowners can take advantage of innovative tools like risk models from First Street and FEMA, which are now available on platforms such as Redfin and Zillow. These resources provide insights into wildfire risks, though Liu cautions that they should “be taken with a grain of salt” due to inherent uncertainties. Beyond individual efforts, community-level strategies, such as controlled burns and vegetation management, are critical for mitigating wildfire risks.

“The most effective way to mitigate disaster risk doesn't just come from the individual property but rather community efforts,” Liu emphasizes. Proactive measures by local municipalities and collaboration between insurers, regulators, and policyholders are essential to navigating the evolving insurance landscape in California.