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Initial assessments suggest that the Los Angeles wildfires are likely to become the fourth most expensive natural disaster in over a century.
The LA wildfires have already set the record as the costliest wildfire in history, with projected insured losses estimated to range between $35 billion and $45 billion, according to CoreLogic, a risk modeling and catastrophe data company. This is almost 3.6 times more than the 2018 Camp Fire in Northern California.
This accounts for approximately 22 per cent of the total estimated losses exceeding $200 billion, leaving a significant uninsured gap of about 78 per cent, the organisation noted.
CoreLogic mentioned that their estimate covers fire and smoke damage, expected rises in labor and building material costs, and costs for debris removal, cleanup, and temporary housing.
“Many of the affected properties are high-value homes, meaning even moderate fire or smoke damage could lead to substantial claims,” said Tom Larsen, senior director, CoreLogic.
Thus, the LA wildfires are likely to rank among the 10 costliest natural disasters in global history, according to data compiled by the Insurance Information Institute.
The estimated insured loss ofthe January 2025 LA wildfires surpassed the previous record set by the 2018 Camp Fire in Northern California's Butte County. The insured losses from the recent Los Angeles wildfires are nearly 3.6 times higher than the $12.2 billion incurred during the Camp Fire.
Statistics indicate that the 10 most expensive wildfires, based on insured losses, have all taken place in the United States. The wildfires in Los Angeles have sparked major worries regarding their effects on the US insurance industry and other sectors.
California is already grappling with upheaval as at least a dozen major insurers, accounting for 80 per cent of the market, have either dropped out or restricted the issuance of new policies. “Losses from the fires could push insurance markets over the brink in California,” warned Michael Wara, a senior researcher on climate and energy at Stanford University and expert on wildfires in Pacific Palisades, a Los Angeles neighbourhood devastated by the latest fire.
According to media reports, State Farm cancelled around 1,600 policies in July. As a result, more homeowners in the region have started using the FAIR Plan. By 2024, about 1,400 out of the neighbourhood's 9,000 homes were insured under the plan, which is over four times the amount in 2020, based on insurer data.
The FAIR Plan acts as a safeguard for California residents and businesses, whether located in urban or rural regions, who cannot obtain insurance through conventional providers. Since 2019, the demand for the FAIR Plan has increased by 164 per cent, reaching almost half a million policyholders by June 2024.
However, the California FAIR Plan caps payouts for natural disasters at $3 million per residential policyholder, leaving a significant portion of losses uninsured.
As insurance companies withdraw from high-risk regions and the gap in coverage expands, the increasing cost of insurance has become a significant worry throughout the US in recent years. Although inflation plays a role, the climate crisis is becoming a significant cause of what researchers are identifying as a new insurance crisis.
A study published in June 2024 by the National Bureau of Economic Research, a US-based nonprofit research organisation, highlighted this trend. According to the study, counties in the top fifth for climate-driven disaster risk experienced a 22 per cent increase in home insurance premiums between 2020 and 2023, compared to a national average increase of 13 per cent in real terms.
The study, which analysed mortgage payment information, highlighted how the expenses in the global reinsurance market are being transferred to household finances, substantially increasing the cost of handling climate-related risks.
Research conducted by Benjamin J Keys and Philip Mulder forecasted that increasing disaster risks will cause households exposed to climate threats to incur an extra $700 in yearly premiums by 2053. It also warned that as climate-driven disasters become more frequent and severe, lower-income areas will be disproportionately affected by rising premiums.