Insights into the LA Wildfires and Implications for Insurance

As of Tuesday 14th January 2025, over 12,000 structures are estimated to have been destroyed, most of them in the two major Palisades and Eaton fires, and tragically many people have lost their lives (https://www.fire.ca.gov/incidents), and the situation is continuing to develop. The fires broke out in north-west Los Angeles last Tuesday and burned out of control for several days under very severe fire weather conditions, despite the best efforts of firefighting forces from California and further afield who have joined the response efforts. Over the weekend, firefighters made progress in containing the fires, as winds dropped, but red flag warnings for winds gusting up to 70mph have been issued again today. This is therefore an ongoing event. 

The areas affected are known to be at risk from wildfires. It’s not clear how the fires started, but they originated in the canyons above the residential areas, and were rapidly swept down into the residential areas by winds over 80mph. These winds, known as the Santa Ana winds, are strong, extremely dry, and hot winds that originate from the inland deserts and blow towards the coastal areas of Southern California, down through the canyons in the hills, gaining speed on their way to the coast. They are common in winter months. 

Normally, winter rains would reduce the fire risk from October onwards. However, this winter, drought means those rains haven’t materialised. In addition, there was above average rainfall in Southern California the previous two years, which resulted in growth of vegetation, which is now very dry, providing plenty of fuel for the fires.  

There are lots of other factors involved too, such as the ongoing development of housing into wildland areas, known as the wildland-urban interface. Its also not clear what the ignition sources were, as there were no storms or lightning at the time, and investigations are underway into this. 

Whilst there are lots of factors that influence wildfire risk, the consensus is that climate change is making wildfire risk worse, and that risk will also spread to areas not used to wildfires in the past. Community awareness and preparedness is crucial in efforts to prepare for and manage risk, and hopefully prevent such terrible scenes in the future.

There has been a trend of reducing insurance availability in the state of California in recent years, as major carriers have been non-renewing certain policies for a multitude of reasons including inflation, escalating costs of claims, regulatory costs and increasing risk. Action has just been taken at the end of 2024 by the California Department of Insurance to improve availability by allowing the use of catastrophe models – together with the cost of reinsurance – to be factored into insurance rates, which previously could only be set using historical data, bringing it into line with other states and perils. 

It’s very early to be talking about what the losses could be from the event. The impact of the LA fires on primary insurers, and how much flows through to reinsurance layers will depend on the ultimate size of the loss, deductibles in place and coverage levels in the affected areas. 

Coverage levels provided by the private market have been changing, and the California FAIR plan –  the insurance of last resort has expanded in recent years. The California FAIR plan is understood to have a high penetration in Palisades area in particular. The FAIR plan is essentially a fire insurance pool comprised of all insurers licensed to conduct property/casualty business in California. Each member company participates in the profits, losses and expenses of the Plan in direct proportion to its market share of business written in the state. If the plan doesn’t have sufficient funds to cover its losses, it can issue assessments requiring insurers in the voluntary market to pay for its losses. 

There are some early estimates that insured losses could be $20bn+, but we must be aware this event is potentially not over yet, the property damage assessments are yet to be completed in the affected areas, which remain under mandatory evacuations and heavy guard from the National Guard. 

The losses will not just be driven by structural damage to some of the most expensive property on the West Coast, but also significant alternative living expenses claims can be expected. The total devastation will mean many months and years before people can start to rebuild, although there are already declarations by authorities that they will speed up the process of issuing permits to rebuild. Rebuilding the town of Paradise after the Camp Fire in 2018 is still underway, with just over 2,500 homes of the 18,000 which were destroyed being rebuilt so far. 

In addition, a catastrophic event like this will probably have significant post event loss amplification, and claims settlements will take a long time. However, there is likely to be relatively limited commercial or business-related impacts, as the area affected is primarily residential. 

From a wildfire perspective it’s clear it will be a big loss. For context, Aon ranks the Camp Fire in Paradise, California, in 2018 as the costliest in U.S. history at $12.5 billion, adjusted for inflation. The Camp Fire killed 85 people and destroyed about 18,000 homes according to the California Department of Forestry and Fire Protection. Hurricane Katrina in 2005 is the costliest event in the U.S. which destroyed more than 200,000 homes, cost just over $100bn in insured losses in today’s values, and an economic loss of around $200bn+ (again in today’s values).

Wildfire modelling is very complex and has been less well developed to date than for example hurricane models. There are lots of factors involved, such as the status of the vegetation and fuel availability, the winds – their strength and direction, ignition sources, the role of embers in spreading fires, the role of smoke damage in overall loss, the role of individual properties characteristics on the risk to neighbouring properties, the ability of firefighters to contain fires, the presence or absence of community resilience measures, and so on. Private fire-fighters have been evident in LA, hired by wealthy property owners and developers. If you live next door to one of these protected properties, your risk could be very different to someone else’s.  

Despite these challenges, we’ve seen the development of several new models in recent years that take these factors into account, along with the emergence of new specialist modelling companies focusing on this problem. The topic is already planned to be on the agenda at the upcoming Exponential Risk 2025 conference in March.