The fires that have ravaged large swaths of homes and businesses in Los Angeles are likely to significantly alter the California commercial property insurance market. Policyholders may need to brace themselves for surging premiums, policy non-renewals and uncertainty.
These wildfires will result in record payouts by insurers. Moody’s RMS estimates insured property losses from the fires will be up to $30 billion, and uninsured property losses will be billions of dollars more.
So many insurers have in recent years already left the state or drastically curtailed the number of policies they write due to the wildfire threat, that the scale of these fires could push more of them to do the same.
Besides the hit to insurers, the L.A. fires are likely to have severe consequences for the state’s market of last resort for home insurance, the California FAIR Plan, which said it may see more than $3 billion worth of claims from the fires.
The FAIR Plan does not have the resources to cover damages above $2.3 billion at this stage. If its ultimate claims exceed that, all property insurers in the state will be surcharged — and likely will pass those fees on to policyholders.
Here’s a look at the current state of the market and how commercial property policies may be affected.
The state of the market
The homeowner’s and commercial property insurance market in California is in a state of crisis.
Dozens of insurers have pulled out of the state and the ones who have opted to stay have dropped policies in high-risk areas or they have gotten more selective about the properties they are willing to insure.
Mainstays like State Farm, Farmers and Allstate have stopped taking on new customers and have been shedding others they deem too risky. State Farm has dropped more than 100,000 policyholders in the last year alone.
Some common factors that can prompt a carrier to refuse coverage are the age of the roof (10 years for composite) or the age of the property (some insurers won’t insure a home older than 25 years).
Commercial property owners who have recently filed claims are often dropped as well by their insurers and find it hard to secure new coverage.
Besides the wildfire risk, the cost of repairs and rebuilding has skyrocketed in the last few years, which has driven rates higher.
The bottom line: The market was already turbulent before the L.A. fires.
Commercial property rates
Commercial property rates have been increasing an average of 20% a year recently, but many property owners have seen their rates double or triple. Even those who are forced to go to the FAIR Plan for coverage face significantly higher premiums, particularly if they live in a wildfire-prone area.
Besides wildfires, a number of other factors have converged to drive insurance rates even for properties in areas not prone to wildfire, like urban, suburban and industrial areas. These include:
- Inflation and rising repair costs — Rebuilding costs have risen more than 30% since 2020.
- Reinsurance costs — Insurance companies purchase their own insurance called reinsurance to manage risk, especially in catastrophe-prone regions. Reinsurers have raised rates and increased the thresholds for when they’ll start paying claims due to the increased risk in California.
While you’ve already experienced rate hikes for your commercial property policy, the size of rate increases over the past few years has been tempered by laws that restrict the factors insurers can use when calculating future rates.
New rules that just took effect in January 2025 will allow insurers to factor in expected future costs of natural catastrophes and the cost of reinsurance when pricing their commercial property policies.
The Department of Insurance has also been expediting rate increase requests, which in the past sometimes have taken years to get approved.
Moody’s has predicted that property rates will rise again as a result of the fires.
Risk to the FAIR Plan
As insurers leave the Golden State or refuse to cover properties in areas like the Pacific Palisades, Big Bear, Truckee and other wildfire-prone areas, more property owners have been forced to get coverage with the FAIR Plan, which has put it in precarious shape. As of Sept. 2024 (prior fiscal year-end), the FAIR Plan’s total exposure was $458 billion, a 61.3% increase from Sept. 2023.
Those sums are astounding, considering that the FAIR Plan’s annual written premium is $1.26 billion. Also, the plan had just $200 million in reserves as of Sept. 30 last year, and $2.5 billion in reinsurance.
Current estimates are that the FAIR Plan will likely face more than $3 billion in claims from the fires, mostly from homeowners, but also the hundreds of businesses that were damaged or destroyed.
Under state law, if the L.A. wildfires exceed its reserves and reinsurance, the plan can charge all private insurers in the state based on their portion of the insurance market for the first $1 billion above what the FAIR Plan can pay — and they can collect half of that from their policyholders.
For any funds needed above $1 billion, the FAIR Plan can seek approval to assess all policyholders in the state.
Any of those surcharges would be on top of premiums policyholders pay. However, there is talk that the California Legislature may come to the rescue with some sort of bailout.
One other issue: Property owners with the FAIR Plan must contend with its policy limits. For commercial properties, the most the plan will insure on any given property is $20 million (for homeowner’s insurance, it’s $3 million).
What you can do
Don’t lose hope if you have business property in California. Consider the following:
California’s property rates are still lower than in many other states. The current changes may reflect a market correction rather than an outlier spike in costs.
There is still insurance capacity with surplus insurers. If you can’t get coverage with a carrier that’s licensed in the state, we can help you find coverage in the non-admitted insurer market. These insurers are reliable even though they’re not licensed in California, but that also gives them flexibility in how they write policies, which they can better tailor for your individual needs.
The market is cyclical and will change. The current challenges are likely to stabilize as insurers adjust to the new risk environment, raise rates, change policy wording and regulatory changes are implemented. Market corrections, along with efforts to mitigate risks, such as improved fire safety measures, may restore balance.
Tags: L.A. Fires, Leaders' Choice Insurance Services