Insurance experts have warned that the Los Angeles wildfires could ultimately increase premiums for homeowners – even for Americans living thousands of miles from the natural disaster.
As states in the southern US also rebuild from last year's disastrous hurricanes, regulators in many states are allowing insurance companies to raise rates to cover the costs of events that happened elsewhere, CNN reported.
Regulators also allow this so insurers can pay for reinsurance, which they buy to insulate themselves from expensive claims, such as those filed by customers during major catastrophic events.
“In a world where we have persistently large shocks, you get large cross-subsidies across the country,” Harvard Business School professor Ishita Sen told CNN. “History suggests that after major wildfires, other states ultimately paid for them.”
Sen was part of a team that conducted a study in 2022 that looked at the effects of natural disasters on national home insurance.
After studying the insurance rates of 34,000 different U.S. zip codes from 2011 to 2020, Sen and her team concluded that companies in states with strict insurance regulation adjust rates less frequently and at a lower magnitude after experiencing large losses.
Insurance companies make up for this by raising rates in less regulated states, leading to a “decoupling of rates from risk,” the study said.
The cost of home insurance has been on the rise in the US for years. An S&P Global Report found that premiums rose 34 percent from 2017 to 2023.
Insurance experts have warned that you could end up paying for California's wildfires by companies raising rates to offset massive losses (pictured: Fire crews battling the Kenneth Fire – now 100 percent contained – on January 9)
Pictured: A Malibu neighborhood that was completely destroyed by the Palisades Fire
The Insurance Information Institute, an insurance industry trade group, disagrees with the findings of Sen's study.
The institute says insurance rates increase based on increased risks and costs across the country, not because of one area experiencing a disaster.
“Rates cannot be increased arbitrarily. Insurance is regulated by the states,” said Loretta Worters, a spokesperson for the trade group.
“If you look at a state like Nebraska, which was mentioned (in the study), their rates are proportional to the risks. “Nebraska experiences frequent severe weather, including tornadoes, high winds, hail and wildfires,” Worters added.
Harvard Business School Professor Ishita Sen, who studies home insurance
Also in California, where risks are extremely high, insurers have been given the green light to raise rates and even cancel policies they deem too precarious.
Before the wildfires, the California Department of Insurance approved Allstate's request to increase rates by an average of 34 percent.
And last March, State Farm was allowed to stop offering insurance to 72,000 California homes, a decision it partially reversed last week after public pressure.
Some Californians, especially those who are retired, cannot afford to insure their homes.
“I'm on a fixed income and I can't afford homeowners insurance,” Laurie Bryant, who lives in Central California, told ABC30 this week. “It's so expensive to live here anymore, it seems.”
“I live alone and I have a disability, so I would be out of luck if anything ever happened,” Bryant added.
Cala Carter with CCIS Bonding and Insurance Services, a Fresno-based company, said homeowners insurance prices are “four times higher” than they were “a few years ago.”
Despite this, she recommends that people get as much insurance as they can afford.
Firefighters are rushing to battle the Hughes Fire, which broke out late Wednesday morning
Pictured: Smoke is seen from the Hughes fire, which is only 36 percent contained
There is no federal framework governing home insurance, according to Jon Schneyer, director of research and content for research firm Corelogic.
“What one state does may be very different from what other states do,” Schneyer added.
This is essentially what Sen and her colleagues found in their research: Several states allow rate increases based on what insurers claim to be their costs.
Carmen Balber, executive director of Consumer Watchdog, said the state's patchwork on regulations is leading to higher costs for customers.
“In states where regulators apply less scrutiny, insurers can charge whatever they want,” Balber said. “If regulations were stronger across the country, we would all have lower rates.”
Schneyer argued that large, national insurers should be able to shift costs and risk assessment, just as they already do.
When asked what he thought about a hypothetical person in the Midwest having to pay more because of hurricanes on the Gulf and East Coast or because of the LA fires, he said, “They have to hope or they need a new home because their house was destroyed.” because their home was destroyed because their home was destroyed, By a tornado, or need a new roof damaged by large hail, their insurer would pay for that. '
'That's risk. That is how risk works in the insurance industry,” he added.
What has become clear to industry watchers is that extreme weather events are becoming more common, driving the need for insurers to adapt their strategies more frequently.
The fires are on top of last year's Hurricane Helene, which cost private insurance companies as much as $11 billion. Two weeks later, Hurricane Milton caused losses of $13 billion to $22 billion (pictured: Homes along Manasota Key, Florida, which were destroyed during Milton)
Three of the costliest hurricanes in U.S. history have come since 2017, according to the National Centers for Environmental Information.
The Southern California wildfires will become the third costliest disaster in U.S. history, behind 2005's Hurricane Katrina and 2022's Hurricane Ian, which caused inflation-adjusted damages of $102 billion and $56 billion, respectively.
The fires are on top of last year's Hurricane Helene, which cost private insurance companies as much as $11 billion. Two weeks later, Hurricane Milton caused losses of $13 billion to $22 billion.
The final cost contract on the LA wildfires has not yet been made, largely because the disaster is not over and insurance claims will take months or even years to continue.
The Hughes fire ignited late Wednesday morning in the Castaic Lake area of Los Angeles County, scorching more than 10,000 acres of land Thursday evening. According to Calfire, it's only 36 percent taken up.
Two other smaller fires, one in Ventura and one in San Diego, started Thursday and have burned nearly 300 acres. Neither fire is contained.
The Palisades Fire, which broke out on Jan. 7, has burned more than 23,000 acres and is 72 percent contained.
