More than 1,500 homes in Pacific Palisades, a posh hillside community in Los Angeles with homes perched above the canyon with views of the ocean and mature trees shading the driveways, had their coverage cancelled by State Farm last summer. The Palisades Fire started a few months later. By the time it was finished, it had grown to be one of the most destructive fires in California history, with insured losses ranging from $28 to $45 billion and estimated damages of up to $150 billion. No one who had been following California’s insurance market for a few years would have been particularly shocked by the timing, which was almost too cruel to be coincidental. The red flags had been building up for a while.
Even though the Los Angeles fires made it impossible to ignore, the insurance industry’s withdrawal from California is not a recent development. Since 2022, seven of the twelve biggest insurers in the state have reduced or ceased writing new home policies. In 2023, State Farm and Allstate announced that they would completely stop offering new property insurance policies.
State Farm cited “rapidly growing catastrophe exposure,” which sounds corporate until you realize what it really means: that there is no longer a mathematical relationship between what the company charges and what it expects to pay out. By the end of 2024, State Farm General, the company’s California subsidiary and the biggest homeowners insurer in the state, will have reduced its policyholder surplus from $4 billion in 2016 to about $1 billion. In early 2025, the company asked for a 22 percent emergency rate increase. The trajectory is clear, regardless of what comes next.
| Insurers Limiting/Exiting CA | 7 of the 12 largest California insurers have restricted or stopped new policies since 2022 |
| LA Wildfire Economic Damages | $135–$150 billion estimated; $28–$45 billion in insured losses |
| FAIR Plan Assessment (2025) | $1 billion levied on CA insurers due to FAIR Plan losses from LA wildfires |
| FAIR Plan Residential Exposure | $450+ billion in insured residential properties — triple the 2020 level |
| State Farm CA Surplus Decline | Dropped from $4 billion (2016) to $1.04 billion (end of 2024) |
| Avg. CA Homeowners Premium vs. National | $1,250/year in CA vs. $1,915 national average — artificially suppressed |
| Key Regulatory Cause | Proposition 103 (1988) — prior-approval rate controls, reinsurance cost bans, no forward-looking models |
| US Insurers Losing Money on Homes (2023) | 18 states — up from 12 five years ago, and 8 states in 2013 (NYT/Moody’s) |
| Annual US Insured Natural Disaster Losses | ~$100 billion/year now; compared to $4.6 billion in 2000 |
| Reference / Research | https://www.wlrn.org/business/2024-05-27/as-insurers-around-the-u-s-bleed-cash-from-climate-shocks-homeowners-lose |
The regulatory framework at the heart of this is intended to safeguard consumers, but it has, at least in hindsight, made their circumstances far riskier. California’s Proposition 103, which was passed in 1988 with only 51% of the vote, established a prior-approval system that mandates that any changes to insurance rates be approved by the state’s elected insurance commissioner before going into effect. This process can take months or even years, during which time rates remain unchanged. Additionally, until recently, the regulations prohibited insurers from pricing wildfire risk using forward-looking catastrophe models; instead, they were limited to using historical loss data from times when California’s fire seasons were less catastrophic.
Even as reinsurance costs increased sharply, they were unable to pass those costs on to clients. Reinsurance costs are the price they pay to larger international insurers in exchange for sharing risk. Despite being one of the most disaster-prone states in the nation, California’s average homeowners premium is $1,250 annually, while the national average is $1,915. This led to an insurance market where premiums were artificially kept below what the actual risk demanded.
The California FAIR Plan, a single, increasingly overburdened institution, is now bearing the brunt of the consequences of that pricing mismatch. The FAIR Plan was established as a last-resort insurer for homeowners unable to obtain coverage on the private market, and since late 2023 alone, the number of its policies has increased by over 40%. The value of the residential properties it currently covers is over $450 billion, which is three times the amount in 2020. Although actuaries suggested that a rate increase of 70 percent would have been more in line with what was actually required, the plan’s request for a 48.8 percent rate increase in 2021 was approved for 15.7 percent. The losses incurred by the FAIR Plan during the Los Angeles fires led to a $1 billion assessment of the state’s private insurers. Policyholders receive that assessment. The cycle of underfunding, loss, and assessment is not a flaw in the system; rather, it is the system as designed.
It’s difficult to ignore how all of this has repercussions that go well beyond the recipients of cancellation notices. Because banks won’t grant mortgages on uninsured properties, the relationship between insurance and homeownership is structural and unchangeable. Most buyers are unable to buy homes without mortgages. Property values decline in the absence of buyers. Declining property values result in lower property tax revenues, which means less money for emergency services, public schools, and road maintenance—exactly the services that communities in fire-prone areas most need. Former California insurance commissioner Dave Jones, who currently oversees the Climate Risk Initiative at UC Berkeley, has stated unequivocally that he thinks the state is headed toward an uninsurable future in many areas. For a former regulator to say that aloud is startling. It implies that the optimistic scenarios are not very convincing to those who are most familiar with this market.
Additionally, the events in California are becoming a national story with a California dateline. Insurance companies lost money on homeowners insurance in 18 states in 2023, up from 12 five years prior and just 8 ten years prior. Carriers are leaving or drastically raising premiums in Iowa, Arkansas, Ohio, and Utah due to intensifying hailstorms and wind events rather than wildfires. In areas where no one anticipated climate risk to be a financial concern, the insurance turmoil that started on the coasts has evolved into something more akin to a spreading condition, changing housing markets. When his carrier left the state, an independent insurance agent in eastern Iowa lost his own home coverage. It’s a tiny, precise detail, but it makes an impression.
Some actions have been taken by the state. In exchange for an agreement to write more policies in high-risk wildfire zones, California changed its regulations last year to permit insurers to use catastrophe models and pass reinsurance costs to customers. Before any of the expected stabilization could occur, the LA fires broke out almost immediately after those reforms were announced. It’s still unclear if the new regulations will restore significant market capacity or if insurer confidence has been sufficiently damaged that the policy changes won’t have much of an impact for years. Even if the reforms are sound, there is a valid argument that they are coming too late to spare California homeowners from a protracted period of disruption because they cannot afford to absorb what comes next.