The Truth About Insurances Role In CA Wildfires

 Summary Of Wildfires And Home Insurance in California And How It Will Affect Arizonans

Why Is Coverage Sporadic?

For sake of simplicity, I am going to outline three main issues as it relates to the challenges of privately  insuring homes in California.   They all work simultaneously to create a complex situation that requires a measured and nuanced solution.

1.0 Regulatory Oversight

California’s regulatory environment for insurance companies is notably strict, often hindering insurers from adjusting premiums to align with the evolving risks. For example, insurers must seek approval from state regulatory bodies for rate increases, and requests exceeding 6.9% are particularly scrutinized. Historical cases illustrate the risk insurers face in this process; ten years ago, State Farm requested a 10% increase but was instead forced to implement a 10% decrease—a 20-point swing.

This rigid oversight discourages insurers from operating in the state, as they struggle to maintain profitability amidst escalating claims from fires and other disasters. As a result, some companies, like State Farm, have opted to pause writing new policies in California, further reducing competition and limiting options for homeowners.

  1.1 Forecasting & Modeling

Some readers of this article may have experience with forecasting and modeling, so I apologize in advance for the simplistic nature.  When companies set prices, they have two methods to determine the probability (likelihood) of a wildfire occurring in a specific region: past occurrences and future occurrences.

Past Occurrences

Past occurrences are easy to solve for.  If two large fires happen each year in a specific area, then it is easy to extrapolate that two will happen the next year.  This was the old methodology used to account for the likelihood of a disaster occuring.  This outdated method does not take into account a new variable – climate change. 

Future occurrences

Future occurrences are trickier to account for. Advances in AI, computing simulations and forecasting have enabled insurance companies to project forward the probability of catastrophic fire events occurring.  These models are used by global reinsurance companies (insurance for large insurance companies) to predict how many claims would happen if a catastrophic event occurred.  In 2024, the California regulatory body approved the use of forward looking projections on a limited basis.  Prior to this, the past occurrence model was used.  The reason why forward looking projections were prohibited in the past was to protect the consumer against price increases. 

In 2024, after the loosening of restrictions and in response to escalating wildfire risks and associated financial losses, California has recently permitted significant increases in homeowners insurance premiums. Notable rate hikes include:

ASI Select: Granted a 30% rate increase for over 36,000 policyholders, effective in 2025. Insurify

Allstate: Approved for an average increase of 34.1% in homeowners insurance premiums, marking the largest rate hike by a major insurer in the state in recent years. Newsweek

State Farm: Received approval for a 20% rate increase, effective March 15, 2024. KPBS Public Media

For some homeowners, this premium increase was quite a shock and some opted to use the publicly funded FAIR system, (Free Access to Insurance Requirements). The unforeseen demand created stress on the FAIR system, resulting in process delays. Some homeowners simply went without, while others opted for “self-insurance”.

For reinsurance firms, it is a different story.  The largest companies are global in nature and are not beholden to any specific regulatory body. The prices they set are driven mainly by forecasting models.  Reinsurance firms play a key role in determining the size of funds available to insure homeowners in the state.

2.0 Rising Costs from Extreme Weather and Litigation

California’s susceptibility to wildfires and other extreme weather events has significantly increased claims. Reinsurance companies, which back insurers, have raised their rates to account for the growing frequency and severity of these events. Unlike primary insurers, reinsurers operate with fewer regulatory constraints and can adopt forward-looking models that predict escalating risks.

Additionally, the surge in litigation, often financed by private equity firms seeking to capitalize on large settlements, has added another layer of cost. Insurers face higher payouts and legal fees, compounding the financial strain on their operations and further pressuring them to raise rates or withdraw from the market.  If you wonder why every other billboard in Arizona is an attorney billboard, now you know. 

While the lawyer below does not participate in home related injuries, it speaks to the litigious spirit of the state.

3.0 Capacity Constraints in the Insurance Market

The insurance market in California is experiencing capacity limitations, particularly for policies requiring high coverage limits. What is capacity?  Think of it as excess reserve money that can be either set aside or invested into real estate insurance (mainly by reinsurers), to provide the funds necessary to cover catastrophic events. From an investment perspective, insurance returns are lower than the S&P 500, but are less volatile.  This works fine when interest rates are at historical lows and large investment companies can afford to allocate capital (money)  to insurance.  When interest rates rise, it is prudent for them to place that capital into short term U.S. Government Treasury Bills. 

Source BCG Global Reinsurance Performance

For individual homeowners, this lack of market capacity means fewer choices and higher premiums. Non-admitted insurance carriers—companies not regulated by California—are increasingly filling the gap. While these policies can be viable options, they offer fewer consumer protections and may pose risks during the claims process.

4.0 Impact On Arizona

Environmental

The CA wildfires may impact Arizona by creating increased wildfire risk due to smoke plumes traveling eastward, exacerbating existing dry conditions and potentially impacting air quality.  In addition to air quality, there is a growing risk of wildfire damage that is acute in several Arizona counties.

Counties At Risk

According to First Street, the standard for financial risk forecasting, 7 counties with large populations have a severe risk for fire damage.  

Yavapai 

 177,692 properties properties in Yavapai County that have some risk of being affected by wildfire over the next 30 years. This represents 99% of all properties in Yavapai County.

Coconino

77,415 properties properties in Coconino County that have some risk of being affected by wildfire over the next 30 years. This represents 98% of all properties in Coconino County.

Gila

35,528 properties properties in Gila County that have some risk of being affected by wildfire over the next 30 years. This represents 99% of all properties in Gila County.

Pinal

258,756 properties properties in Pinal County that have some risk of being affected by wildfire over the next 30 years. This represents 99% of all properties in Pinal County.

Mojave

 249,825 properties properties in Mohave County that have some risk of being affected by wildfire over the next 30 years. This represents 95% of all properties in Mohave County.

Pima

 378,405 properties properties in Pima County that have some risk of being affected by wildfire over the next 30 years. This represents 86% of all properties in Pima County.

Maricopa

 1,052,408 properties properties in Maricopa County that have some risk of being affected by wildfire over the next 30 years. This represents 62% of all properties in Maricopa County.

Financial

Arizona benefited initially from the CA wildfires with the relocation of the Vikings vs Rams game on January, 13 2025.  This unexpected gain is about muted as experts project an influx of residents from California to Arizona, which will place pressure on home prices and may increase home premiums. 

Get Involved

It is important that homeowners are active in understanding wildfire mitigation efforts in their community.  As such, Firewise USA is a community based government initiative designed to empower and enhance wildfire management programs at the local level.