Insurance crisis: Los Angeles wildfires prompt record losses, California’s market in turmoil

Major insurers are facing billions of dollars in losses from the devastating wildfires in Los Angeles, despite taking steps to reduce their exposure in California in recent years.

According to the latest analysis by Financial Times, AIG and Allstate are among the national insurers that reported significant losses from the January firestorms, even after scaling back their operations in the state, per Caliber.Az.

AIG, which sharply cut its exposure in 2022 by ceasing to offer new policies to most homeowners, estimates losses of approximately $500 million from the fires, which destroyed over 16,000 homes and businesses. The company had previously focused on providing policies for businesses and high-net-worth individuals in California.

Travelers also projected a $1.7 billion loss from the fires, while Chubb, based in Zurich, pegged its losses at $1.5 billion last month. Allstate, which reported losses of $1.1 billion last week, disclosed that it has reduced its market share in California by more than half since 2008.

Risk modelers anticipate that the global insurance industry will incur about $40 billion in losses from the wildfires, out of more than $250 billion in total disaster-related losses. The widespread damage highlights the severity of the crisis in California’s insurance market, where insurers have been retreating due to stringent consumer regulations and the rising frequency of intense natural disasters.

In response, insurers have stressed that they limited their exposure to risky areas by reducing the number of policies in high-risk regions. Chubb's CEO, Evan Greenberg, noted, "In the area where the wildfires occurred, our exposure has been reduced by over 50 per cent." He emphasized that the company would not offer insurance in areas where it cannot achieve a reasonable risk-adjusted return.

Insurers have also pointed to California's consumer protection laws, which they argue have made it difficult to operate profitably in the state, leaving residents more vulnerable. Between 2016 and 2023, the average homeowners' premium in California rose just 2.6% annually, adjusted for construction inflation, according to Howden, a UK-based reinsurance broker.

The number of policies written by California’s “admitted” insurers — those requiring state approval for rate increases — fell by 340,000 from 2019 to 2023, as per Howden's report. AIG’s loss of around $500 million also involves the “non-admitted” market, which is less regulated than the admitted market and not subject to price controls by the state insurance commissioner.

In response to the growing crisis, State Farm, California's largest private insurer, has requested a 22% emergency rate increase from the state's insurance regulator to help cover its costs from the January wildfires.

Additionally, the California Fair Plan, a state-established pool of private insurance, will collect $1 billion from insurers operating in the state, as confirmed by the state insurance commissioner on Tuesday. Insurers are allowed to pass on half of this assessment to their policyholders.

By Tamilla Hasanova