Billions in insurance losses expected from LA wildfires, Moody’s reports

Wildfires currently affecting the Los Angeles area are expected to lead to significant financial losses for insurers, according to Moody’s Ratings, a provider of credit ratings, research, and risk analysis.

As of January 9, 2025, the Palisades and Eaton fires remain uncontained, causing property damage and evacuations. The California Department of Forestry and Fire Protection (CAL FIRE) attributes the rapid spread of the fires to dry conditions and strong Santa Ana winds, which have made containment efforts challenging.

Moody’s projects insured losses to run into the billions of dollars due to the high property values in the impacted areas. While the full extent of the damages may take weeks or months to quantify, these wildfires are anticipated to be among the most costly in California’s history.

Although the exact causes of the fires are yet to be determined, an unusually dry winter in Southern California has increased the risk of wildfire activity. Typically a rainy season, the current dry conditions have facilitated the fires’ spread. Firefighting efforts have faced additional challenges due to limited water availability and low hydrant pressure in some areas.

The financial impact of the fires will be distributed across multiple sectors of the insurance market, including standard homeowners insurers, high-value excess and surplus lines (E&S) insurers, the California FAIR Plan, and commercial property insurers. Reinsurers will also be exposed through quota share agreements, per-risk policies, and excess of loss contracts.

According to Moody’s, the extent of losses for individual insurers will depend on their market share within the affected regions, which may differ from their statewide market share. Leading homeowners and commercial property insurers are likely to be significantly impacted.

Insurers have implemented measures to mitigate wildfire risks, such as geographic diversification, comprehensive reinsurance programmes, and maintaining strong capital reserves.

Officials have reported that the LA wildfires have now destroyed over 10,000 structures, with insured losses expected to fall between $10 billion and $20 billion.

The California FAIR Plan, a state-mandated insurance pool for high-risk properties, has expanded in recent years as more homeowners face difficulties obtaining private market coverage. Moody’s notes that the Pacific Palisades area is among the FAIR Plan’s largest wildfire exposures, with approximately $5.9 billion in insured assets.

The wildfires reflect ongoing challenges in the California homeowners insurance market. In response to increasing wildfire risks, insurers have adjusted underwriting practices, conducted inspections, and implemented rate increases. Some major carriers, including State Farm, Allstate, and Farmers, have scaled back their operations in the state or limited new business, raising concerns about insurance availability in high-risk areas.

High-net-worth insurers, such as Chubb and AIG, have moved portions of their homeowners insurance business into the E&S market. This shift allows for greater flexibility in setting rates and policy terms, enabling insurers to better align premiums with risk.

Moody’s reports that beyond property damage, insurers are likely to face additional claims for living expenses and business interruption. Living expense claims are typically capped at 30% of a home’s insured value and are contingent on property damage or mandatory evacuation orders. Rising costs for construction materials and labour, as well as increased demand for reconstruction, may further elevate insured losses.

Recent legislation introduced by the California Department of Insurance allows insurers to factor catastrophe-modelled losses and reinsurance costs into their pricing, provided they continue offering coverage in high-risk areas. The effect of these changes on the market remains uncertain, but Moody’s indicates that the ongoing wildfire losses will likely influence insurers’ pricing strategies and reinsurance arrangements.

California has experienced several significant wildfires in recent years, with most of the costliest events occurring in the northern part of the state.

However, the 2018 Woolsey Fire in Los Angeles and Ventura counties underscored the risks posed by wildfires in Southern California, driving insured losses of $5.5 billion. As the current fires continue, Moody’s highlights the challenges insurers face in managing claims, maintaining market stability, and addressing the financial pressures associated with large-scale wildfire losses.

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