California wildfires poised to drive up property insurance costs, Moody’s reports

Moody’s, a financial services company known for its credit ratings, research, and data solutions, has released an analysis highlighting the far-reaching financial impact of recent wildfires in California.

According to Moody’s, the wildfires in Los Angeles County are projected to be the costliest in the state’s history, with insured property losses estimated to reach up to $30 billion—more than double the losses caused by the 2018 Camp Fire.

Uninsured property losses are expected to add billions more to the total. Moody’s notes that this catastrophic event underscores California’s high exposure to physical climate risks, which continue to challenge the state’s property insurance market and disrupt its economy.

Moody’s research indicates that the escalating risks associated with wildfires are placing significant strain on California’s insurance sector. Recent legislative changes have aimed to address these challenges, but the increasing frequency and severity of wildfires have made it difficult for insurers to sustain operations in high-risk areas.

Historically, Proposition 103, passed in 1988, limited insurers from including catastrophe modelling, reinsurance costs, and capital expenses in their rate calculations. Although these restrictions were eased in late 2024, Moody’s highlights that insurers still face mounting pressures, with many having already scaled back policy renewals in wildfire-prone regions.

As traditional insurers reduce their presence in California, residents and businesses have turned to the state’s Fair Access to Insurance Requirements (FAIR) plan for coverage. According to Moody’s, the FAIR plan has become a critical safety net, now holding one of the largest shares of residential insurance in the state. Its total liability exposure surged from $153 billion in 2020 to $458 billion in 2024, with policies in force more than doubling during this period.

The plan operates as a consortium of insurers, with all participants sharing profits and losses based on their market share in California. However, Moody’s analysis reveals that the plan’s financial capacity remains a concern, as its surplus and reinsurance coverage may be insufficient to handle extensive claims from disasters such as the Los Angeles wildfires.

Moody’s reports that the state’s insurance commissioner has implemented new regulations allowing insurers to incorporate catastrophe modelling and reinsurance costs into premium rates, including those under the FAIR plan. These changes aim to stabilise the insurance market by encouraging insurers to renew policies and charge actuarially sound rates. However, Moody’s warns that the latest wildfires could still deter insurers from re-entering the market, even with greater pricing flexibility.

The FAIR plan’s financial stability is particularly uncertain in light of the Los Angeles wildfires. Moody’s notes that the plan’s reinsurance coverage begins after $900 million in claims, which is more than double the cash surplus it currently holds.

Additionally, the plan’s unique reinsurance structure splits claims above this threshold between the plan and reinsurers, creating further financial exposure. Moody’s highlights that assessments on member insurers to cover claims may be likely, which could in turn lead to higher premiums for residents and businesses.

To address potential deficits in the FAIR plan, Moody’s suggests that California could consider issuing bonds to finance claims, as proposed in Assembly Bill 226. This approach would spread costs over multiple years, reducing the immediate financial burden on insurers and policyholders.

Moody’s also notes that additional oversight and transparency for the FAIR plan may be introduced through proposed legislation, such as Assembly Bill 234, which seeks to add non-voting legislative members to its governing board.

Moody’s concludes that the rising costs associated with insuring properties in California will inevitably contribute to the state’s already high cost of living. Premium increases and potential assessments on policyholders are expected to have broad impacts, potentially affecting property values, consumer spending, and population trends.

Moody’s emphasises that while these changes may provide short-term relief to the insurance market, they could also hinder long-term economic growth and revenue expansion in the state.

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