AM Best highlights strain on re/insurers from California wildfires and rising FAIR Plan policies

AM Best, a credit rating agency specialising in the insurance sector, reports that the recent surge of wildfires across Southern California has deepened existing challenges for insurers, worsening underwriting performance, increasing reinsurance exposure, and destabilising the market.

Since January 7, 2025, over 30 wildfires—including the Palisades and Eaton fires—have scorched the Los Angeles metropolitan area and surrounding regions.

The combination of severe drought, dry vegetation from the previous winter, low humidity, and intense Santa Ana winds created conditions ripe for widespread destruction. While these fires were reportedly contained by February 1, their financial and operational repercussions for insurers remain substantial.

For several years, underwriting homeowners and commercial property insurance in California has yielded poor results.

As noted by AM Best, the wildfire seasons of 2017, 2018, and 2020 were particularly devastating, resulting in heightened insured losses and prompting insurers to reassess their exposure in high-risk areas.

With an increasing number of carriers reducing or ceasing coverage in wildfire-prone regions, many policyholders have been forced to seek insurance through the California FAIR Plan—the state’s insurer of last resort.

FAIR Plan policies have skyrocketed in recent years, reflecting a growing protection gap in the private market. AM Best highlights that between 2018 and 2024, the number of FAIR Plan policies surged by 276%, with associated premiums increasing nearly tenfold.

In 2023 alone, the policy count rose by 22.6%. Leading insurers in the state have tightened underwriting criteria, restricted coverage for high-value properties, or focused exclusively on lower-risk areas, exacerbating the trend toward involuntary market reliance.

As admitted carriers implement stricter underwriting measures, surplus lines insurers have stepped in to provide coverage for California homeowners. According to AM Best, the percentage of homeowners insurance premiums written by surplus lines insurers nationwide increased from 0.4% in 2013 to 3.8% in 2023.

In California, this shift has been even more pronounced, with the state’s share of surplus lines homeowners’ premiums climbing from 4.6% in 2013 to 23.5% in 2023.

This shift underscores a broader movement of policyholders from the admitted market to the nonadmitted market, with surplus lines direct premiums written surpassing $2 billion for the first time in 2023. While still a small portion of the overall property/casualty homeowners market, the growth trajectory signals fundamental changes in how coverage is being accessed in high-risk regions.

Reinsurance exposure to the recent wildfires is expected to be substantial but, according to AM Best, remains manageable at this stage. However, concerns persist over how these events will impact pricing and availability of reinsurance coverage, particularly for the FAIR Plan.

The plan’s ceded reinsurance premium has climbed sharply, from $8 million in 2018 to $169 million in 2023, reflecting both increased risk exposure and rising reinsurance costs.

Catastrophe bonds, a key component of reinsurance financing, have also experienced negative price movement in the secondary market due to potential exposure to wildfire-related losses.

AM Best notes that bond prices have dropped by 10% to 20% on average, reflecting growing expectations that capital will be deployed to cover claims. The ultimate financial toll of these wildfires will hinge on final loss estimates, reinsurance structuring, and potential subrogation recoveries.

Liability concerns are also emerging, with lawsuits already filed against Southern California Edison alleging negligence in relation to the Eaton Fire. Insurers may pursue their own subrogation claims against energy providers, seeking to recover payouts made to policyholders.

However, AM Best cautions that such legal battles could take years to resolve, leaving primary insurers to bear the brunt of losses in the short term.

Further complexity arises from how insurers classify the wildfires—whether as a single catastrophic event or multiple distinct incidents.

This distinction has significant implications for claims payouts and reinsurance triggers. Historically, similar cases, such as the 2017 Thomas Fire and the 2018 Camp Fire, involved investigations into power infrastructure failures as potential ignition sources. The same scrutiny is now being applied to the current wildfires, with findings likely to influence future liability rulings.

The California homeowners insurance market remains in a precarious position, with insurers facing continued underwriting pressure, rising reinsurance costs, and legal uncertainties. AM Best emphasises that the impact of the 2025 wildfires will likely be felt for years to come, influencing pricing, availability, and the overall structure of the market.

As insurers, regulators, and policyholders navigate this evolving landscape, the role of alternative markets—such as surplus lines and catastrophe bonds—will be increasingly critical in maintaining financial stability and ensuring access to coverage in wildfire-prone regions.

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