Insurance experts issue ominous warning for homeowners across the whole of America after LA fires

Insurance experts have warned that the wildfires in Los Angeles could end up raising premiums for homeowners – even for Americans who live thousands of miles away from the natural disaster.

As states in the southern US also rebuild from the disastrous hurricanes from last year, regulators in many states are allowing insurance companies to raise rates to cover costs of events that happened elsewhere, CNN reported.

Regulators also allow this so insurers can pay for reinsurance, which they buy to insulate themselves from expensive claims, like those filed by customers during major catastrophic events.

‘In a world where we have persistently large shocks, you’re getting big cross-subsidies across the country,’ Harvard Business School professor Ishita Sen told CNN. ‘The past suggests that after big wildfires, other states have ended up paying for it.’

Sen was part of a team that conducted a study in 2022 that looked at the effects of natural disasters on home insurance rates nationwide.

After studying the insurance rates of 34,000 different US zip codes from 2011 to 2020, Sen and her team concluded that companies in states with harsher insurance regulation adjust rates less frequently and by a lower magnitude after experiencing major losses.

Insurance companies make up for this by jacking up rates in less-regulated states, which leads to a ‘decoupling of rates from risks,’ according to the study.

The cost of home insurance have been on the rise for years across the US. An S&P Global report found that premiums jumped 34 percent from 2017 to 2023.

The Insurance Information Institute, an insurance industry trade group, disagrees with the findings of Sen’s study.

The institute argues that insurance rates increase based on the greater risks and costs across the entire country, not because of one area that is experiencing a disaster.

‘Rates cannot be raised arbitrarily. Insurance is regulated by the states,’ said Loretta Worters, a spokesperson for the trade group.

‘If you look at a state like Nebraska, which was mentioned (in the study), their rates are commensurate with the risks. Nebraska experiences frequent severe weather, including tornadoes, strong winds, hail, and wildfires,’ Worters added.

Also in California, where the risks are extremely high, insurers have been green lit to raise rates and even cancel policies they deem too precarious.

Prior to the wildfires, the California Department of Insurance approved Allstate’s request to increase rates by an average of 34 percent. 

And in March last year, State Farm was allowed to stop offering insurance to 72,000 homes across California, a decision it partially reversed last week after facing public pressure.

Some Californians, particularly those who are retired, can’t afford to insure their homes at all.

‘I’m on a fixed income and I can’t afford homeowners insurance,’ Laurie Bryant, who lives in central California, told ABC30 this week. ‘It’s so expensive to live around here anymore it seems like.’

‘I live by myself and I’m on disability so, I’d be out of luck if anything ever happened,’ Bryant added.

Cala Carter with CCIS Bonding and Insurance Services, a Fresno-based company, said homeowners insurance prices are ‘four times higher’ than they were ‘a few years ago.’

Despite that she recommends that people get whatever little amount of insurance they can afford. 

There is no federal framework that regulates home insurance, according to Jon Schneyer, director of research and content for research firm CoreLogic.

‘What one state does can be very different from what other states do,’ Schneyer added.

This is essentially what Sen and her colleagues found in their study: Different states allow rate hikes based on what insurers argue are their costs.

Carmen Balber, executive director of Consumer Watchdog, said the state-by-state patchwork of regulations leads to higher costs for customers.

‘In states where regulators apply less scrutiny, insurers are able to charge whatever they want,’ Balber said. ‘If regulations were stronger across the country, we’d all have lower rates.’

Schneyer argued that large, national insurers should be able to shift costs and risk assessment just as they already do.

When asked what he thought about a hypothetical person in the Midwest having to pay more because of hurricanes in the Gulf and East Coasts or because of the LA fires, he said: ‘they should hope if they need a new home because their home is destroyed by a tornado, or need a new roof that is damaged by large hail, their insurer would pay for that.’

‘That’s risk-sharing. That’s how risk works in the insurance industry,’ he added.

What has become apparent to industry watchers is that extreme weather events have become more common, making it a necessity for insurers to adjust their strategies more frequently.

Three of the most costly hurricanes in US history have come since 2017, according to the National Centers for Environmental Information.

The wildfires in Southern California are set to become the third most expensive disaster in US history, behind 2005’s Hurricane Katrina and 2022’s Hurricane Ian, which caused inflation-adjusted damages of $102 billion and $56 billion, respectively.

The fires are on top of last year’s Hurricane Helene, which cost private insurance companies as much as $11 billion. Two weeks later, Hurricane Milton caused losses of $13 billion to $22 billion.

The final cost tally on LA’s wildfires hasn’t been made yet, largely because the disaster isn’t over and insurance claims will take months or even years to go through.

The Hughes Fire ignited late Wednesday morning in the Castaic Lake area of Los Angeles County, which has scorched more than 10,000 acres of land by Thursday evening. It is only 36 percent contained, according to CalFire.

Two other smaller fires, one in Ventura and one in San Diego, started on Thursday and have burned nearly 300 acres. Neither fire is contained.

The Palisades Fire, which broke out on January 7, has blazed more than 23,000 acres and is 72 percent contained.