Jan 11, 2025 12:39 PM IST
The losses would make the Los Angeles fires the most expensive in US history—nearly 4% of California’s annual GDP, according to JP Morgan analysts.
The devastating fires in Los Angeles are on track to become the costliest in US history, sparking an existential insurance crisis in California. Private meteorological firm AccuWeather estimates the damage could range between $135 billion and $150 billion, with the potential for even higher figures.
Questions are being raised about how millions of homeowners will secure coverage against future disasters.
While JP Morgan analysts predict insured losses of $20 billion, with uninsured losses potentially surpassing $100 billion. This would make the LA fires the most expensive in US history—close to 4% of California’s annual GDP.
“This will probably be the largest number of people uninsured or underinsured during a massive catastrophic event like this,” Diane Delaney, executive director of the Private Risk Management Association, told The New York Post.
JPMorgan analysts share a similar view, noting that most of the wildfire losses are likely concentrated in homeowners’ insurance, with a smaller impact on commercial fire and personal auto coverage.
Losses exceed those of the 2017 Tubbs fire and the 2018 Camp fire
According to AFP, the current damage from the fires far exceeds the destruction of the 2017 Tubbs fire and 2018 Camp fire. A key factor is the value of the homes involved: Over 10,000 buildings have been destroyed this week, most of which are homes valued at an average of $3 million. In comparison, the Camp fire in 2018 destroyed around 18,000 buildings, but the average home was worth about $500,000.
David Burt, founder of DeltaTerra, a consultancy focused on climate-related financial risks, estimates that the market value of homes in Pacific Palisades, totalling 15,400 properties, is close to $13.5 billion. Despite the high cost of the damage, experts believe insurance companies are well-positioned to compensate homeowners, as they are starting 2025 with healthy reserves due to strong financial performance over the past two years.
Insurers have also reduced their presence in high-risk fire areas and are well-diversified across other regions. California’s insurance commissioner, Ricardo Lara, announced that homeowners in fire-affected areas would be protected for a year from non-renewal and cancellation of their policies. This measure protected over a million contracts in 2024.
In 1968, California established the FAIR program, a public insurance scheme for homeowners unable to find private coverage. Initially intended as a temporary solution, the program has grown significantly, with its exposure rising from $50 billion in 2018 to over $450 billion today.
To attract insurers back to the market, Commissioner Lara has initiated reforms allowing companies to raise premiums, provided they do not apply geographical exclusions. Susan Crawford, a climate and geopolitics expert, emphasised the need for political adjustments in response to rapid climate change. “The acceleration in ferocious weather events… should trigger awareness that actually things do need to change,” she said.
With rising premiums likely, Californians, and possibly Americans nationwide, are preparing for higher costs. The previous year saw significant disasters, including hurricanes Milton and Helene, which caused damage estimated between $160-$180 billion and $225-$250 billion, respectively. The US State Department reported that climate-related disasters, such as winter storms and hurricanes, resulted in $182.7 billion in economic losses in 2024, double the amount in 2023.
(With inputs from agencies)
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