Are we heading towards an uninsurable market? Impact of the LA wildfires on the insurance industry

Authors: Rona Evans, Richard Hoal, and Kajal Mulchandani

In addition to claiming a number of celebrity homes, the fires have caused widespread devastation to over 40,000 acres of land, as well as resulted in the loss of lives and displacement of more than 150,000 residents. More than 12,000 structures have been destroyed, including residential properties, commercial buildings and outbuildings. The result is damage estimated to be in the unprecedented region of $135bn to $150bn. Although some properties escaped structural damage, property owners are still expected to face considerable losses due to smoke-related damage.

Although the assumption may be that insurance cover for property damage of this nature is readily available in the market, and that the homeowners who lost their properties will be covered by insurers, that is not necessarily the case.

Impact of the occurrence of wildfires on the insurance industry

There is an undeniable upward trend in the occurrence of natural disasters worldwide, as a result of climate change. This has a material impact on the global insurance industry, and the available cover in the market – the result is a corresponding downward trend in policies providing indemnity for climate-related risks.

In “high-risk” areas such as Los Angeles, many homeowners seeking coverage against wildfires are increasingly confronted with insurers who are either reluctant to go on risk or will only do so subject to exceptionally high premiums. This creates what has been referred to as a “dual challenge” with wildfire insurance: the increase in insurance premiums and the growing number of non-renewals for policies in high-risk areas.

To illustrate, prior to the 2025 wildfires, property owners in the Pacific Palisades (one of the neighbourhoods that has been the most severely impacted) were already experiencing difficulty in finding insurers with an appetite to underwrite fire coverage, as thousands of policies were either cancelled or not renewed due to the area’s exposure to the fire-prone Santa Monica Mountains and the high value of the homes situated in the area.

As a consequence, it was no longer commercially viable for insurers to underwrite this risk, and cover was either unavailable or sold at exceptionally high premiums so as to essentially transfer some of the risks to the insureds.

State Farm, a leading property and casualty insurer in the US, notably discontinued coverage for almost 70% of the policyholders within the region of the Pacific Palisades in July 2024. The company decided to stop offering new policies and refused to renew existing ones, leaving many vulnerable homeowners with no choice but to turn to the California Fair Access to Insurance Requirements (“Fair Plan”).

The Fair Plan is a state-managed programme of last resort for California homeowners, which provides basic fire insurance coverage in high-risk areas where traditional companies won't. Securing coverage through the Fair Plan comes at a high premium for many homeowners, and the premiums are only expected to increase.

Coverage in terms of the Fair Plan is limited to $3m in damage protection for residential properties, despite the value of these properties often significantly exceeding this limit. Nevertheless, as at January 2025, the Fair Plan was estimated to have only $377m available to pay claims, compounding concerns that even a single wildfire could destabilise the program and leave property owners uninsured for the fire damage.

Accordingly, the Fair Plan could be faced with a similar scenario to that faced by South Africa’s special risk insurer, Sasria SOC Limited, following the 2021 looting and riots, where government had to intervene to ensure Sasria’s solvency.

What does this mean for South Africa? Unaffordable vs unavailable cover

The issue of damage caused by wildfires extends beyond Los Angeles – in the South African context, one of the most notable incidents of fire damage was caused by the 2017 Knysna fires. These wildfires resulted in indemnified losses in excess of R2bn, however the result was a steep increase in premiums in the following year.

This is, in part, due to global risk-sharing mechanisms involving both local insurers and reinsurers. A consequence of these risk-sharing mechanisms is that escalating losses from events such as the LA wildfires have a ripple effect and may result in higher reinsurance premiums and stricter terms for local insurers. The increase in reinsurance premiums ultimately drives up costs for policyholders, specifically for high-risk policies.

If this trend continues (whether it be due to an increased risk of fires, floods, or other natural disasters), the risk is that insurance may become unaffordable, or even unavailable. An example of a scenario where cover for high-risk perils becomes unavailable is seen in the context of grid exclusions imposed in the South African market following pressure by reinsurers.

Important takeaways

As the insurance industry adjusts to market trends and an evolving risk landscape, it is important that policyholders understand the nature and extent of their cover, both at the inception of their policy and at subsequent renewals, where exclusions and restrictive conditions may be introduced by insurers (typically as a result of pressure from reinsurers). Questions on coverage and policy conditions should be discussed with the broker. It is also important to understand the limits of indemnity and any policy exclusions or conditions for cover.

Although insurance is often considered to be a “grudge purchase” it is important that policyholders ensure they have adequate cover, specifically in the wake of increasing premiums where the reaction is typically to try and reduce premiums by lowering sums insured and limiting the scope of cover. The effect of under-insurance (due to an inadequate declared value) is that insurers could be entitled to apply average depending on the policy terms. Essentially, this means that insurers would only need to provide indemnity for a percentage of the loss, resulting in the insured only being paid out partially for the loss suffered.

Practically, an insured should always insure their property at replacement value and not market value at the time to ensure adequate coverage.