L.A. Is Burning. Will Insurance Companies Take Advantage?

Standard mainstream media accounts of California’s insurance market warn of a virtually existential “crisis” facing insurers that operate in the state, who are grappling with “profound financial strain” amid mounting losses from climate-fueled wildfires. Citing these pressures, AllState and State Farm both announced in 2023 that they would stop issuing new homeowners insurance policies, and move to shed existing policies. State Farm announced last March that it would not renew 72,000 existing California property insurance policies, including in some of the places worst hit by the fires still blazing in L.A. An investigation by the San Francisco Chronicle found that the company planned to scrap more than 69 percent of its policies in the well-heeled Pacific Palisades neighborhood, much of which now stands in ruins. Overall, California last year had the fourth-highest rate of nonrenewal in the country after Florida, Louisiana, and North Carolina.

Insurers in California did indeed face considerable losses due to wildfires in 2017 and 2018, when damages from the Camp, Tubbs, and Woolsey fires totaled $23 billion. California, however, has in recent years been among the country’s most lucrative states for companies that sell homeowners multi-peril insurance, a product that covers wildfire damages. Data collected by S&P Global Intelligence on statewide loss ratios—essentially, the percentage of premium income that insurers pay out to cover insured losses—shows that insurers offering homeowners multi-peril insurance in California had a loss ratio of 53.7 percent in 2022 and 61.3 percent in 2023. That’s compared to nationwide loss ratios of around 70 percent in each year. In other words, home insurers in California had a significantly larger share of their income from premiums left over after paying out policyholders. State Farm actually outperformed statewide average loss ratios in both years.

At the time that State Farm announced it was pulling out of California “to improve the company’s financial strength” in 2023, California was one of five states—including Texas and Florida—that buoyed the company’s performance nationally. A September 2024 article in the trade journal Property Insurance Reports notes that, in those markets, State Farm “posted a lower loss ratio than the industry in both 2022 and 2023. That advantage has been more than offset by trouble in other states, but it provides a solid foundation.”