The fires that have ravaged large swaths of homes and businesses in Los Angeles are likely to significantly alter the California commercial property insurance market. Policyholders may need to brace themselves for surging premiums, policy non-renewals and uncertainty.
These wildfires will result in record payouts by insurers. Moody’s RMS estimates insured property losses from the fires will be up to $30 billion, and uninsured property losses will be billions of dollars more.
So many insurers have in recent years left the state or curtailed the number of policies they write due to the wildfire threat. It’s unclear if the latest fires will prompt more to do the same.
The L.A. fires are likely to have severe consequences for the state’s market of last resort, the California FAIR Plan, which may see more than $3 billion worth of claims from the fires.
The FAIR Plan does not have the resources to cover damages above $2.3 billion at this stage. If its ultimate claims exceed that, all property insurers in the state will be surcharged — and likely will pass those fees on to policyholders.
This report looks at the current state of the market and how commercial property policies may be affected.
The State of the Market
The state’s homeowner’s and commercial property insurance market is in a state of crisis.
Mainstays like State Farm and Allstate have stopped taking on new customers and have been shedding others they deem too risky. State Farm has dropped more than 100,000 policyholders in the last year alone.
Some common factors that can prompt a carrier to refuse coverage are the age of the roof or the age of the property.
Commercial property owners who have recently filed claims are often dropped as well by their insurers and find it hard to secure new coverage.
The bottom line: The market was already turbulent before the L.A. fires.
Commercial Property Rates
Commercial property rates have been increasing an average of 20% a year recently, but many property owners have seen their rates double or triple. Even those who are forced to go to the FAIR Plan for coverage face significantly higher premiums, particularly if they live in a wildfire-prone area.
Besides wildfires, a number of other factors have converged to drive insurance rates even for properties in areas not prone to wildfire, like urban, suburban and industrial areas. These include:
- Rising repair costs – Rebuilding costs have jumped more than 30% since 2020.
- Reinsurance costs – Insurance companies purchase their own insurance called reinsurance to manage risk, especially in catastrophe-prone regions. Reinsurers have raised rates and increased the thresholds for when they’ll start paying claims due to the increased risk in California.
Property owners may be in for more rate increases thanks to necessary new rules that just took effect in January. These rules, aimed at coaxing more insurers back into the state, will allow insurers to factor in expected future costs of natural catastrophes and the cost of reinsurance when pricing their property policies.
The Department of Insurance has also been expediting rate increase requests, which in the past sometimes have taken years to get approved. Moody’s has predicted that property rates will rise again as a result of the fires.
Risk to the FAIR Plan
As more property owners have lost their coverage, they’ve increasingly turned to the FAIR Plan, which has put it in precarious shape. As of Sept. 2024 (prior fiscal year-end), the FAIR Plan’s total exposure was $458 billion, a 61.3% increase from Sept. 2023.
Compare that to the FAIR Plan’s $200 million in reserves as of Sept. 30 last year, and $2.5 billion in reinsurance.
Current estimates are that the FAIR Plan will likely face more than $3 billion in claims from the fires, mostly from homeowners, but also the hundreds of businesses that were damaged or destroyed.
Under state law, if the L.A. wildfires exceed its reserves and reinsurance, the plan can charge all private insurers in the state based on their portion of the insurance market for the first $1 billion above what the FAIR Plan can pay — and they can collect half of that from their policyholders.
For any funds needed above $1 billion, the FAIR Plan can seek approval to assess all policyholders in the state.
Any of those surcharges would be on top of premiums policyholders pay. However, there is talk that the California Legislature may come to the rescue with some sort of bailout.
One other issue: For commercial properties, the most the plan will insure on any given property is $20 million (for homeowner’s insurance, it’s $3 million).
Don’t Lose Hope
New regulatory changes may bring more insurers back to the market.
- California’s property rates are still lower than in many other states. Current changes may reflect a market correction rather than an outlier spike in costs.
- If you can’t get coverage with a carrier that’s licensed in the state, we can help find coverage in the non-admitted insurer market. These insurers are reliable even though they’re not licensed in California, but that also gives them flexibility in how they write policies, which they can better tailor for your individual needs.
- The market is likely to stabilize as insurers adjust to the new risk environment, raise rates, change policy wording and regulatory changes are implemented. Those changes, along with efforts to mitigate risks (like improved fire safety measures) may restore balance.
Carriers That Have Left California or Curtailed Underwriting
Insurers that have pulled out, stopped taking on new clients, non-renewed policies or curtailed where they will cover business properties:
- Allstate – Allstate paused issuing new commercial property policies in the state in 2022. However, in May 2024, it indicated that it would resume business once recently initiated regulatory changes took effect, which they did last month.
- Farmers Insurance Group – After announcing a moratorium on new commercial policies, the company in July 2024 said that it would resume accepting new business commercial multi-peril applications for several sectors.
- State Farm – In May 2023, State Farm announced that it would stop accepting new business property policies in the state. A year later it non-renewed more than 72,000 property and commercial apartment policies.
- Liberty Mutual – In July 2023, the insurer said it would stop offering its business owner’s policies in California.
- AIG – AIG is selectively writing commercial property policies in the state.