The fires that raged through California in January 2025 are poised to shake up the insurance industry in ways we haven’t seen before. With economic damages projected to reach as much as $250 billion, these wildfires could rival Hurricane Katrina in financial impact, potentially costing insurers more than $30 billion. For a peril that wasn’t even on the industry’s radar as a major threat until 2016, this is a wake-up call.
So, what’s going on, and how might the insurance world respond? Let’s break it down.
Topics Covered
The Financial Fallout
The California wildfires claimed at least 27 lives, burned 45,000 acres and destroyed more than 15,000 structures. Early estimates peg the total economic damage at an eye-popping $250 billion to $275 billion. This has left insurers scrambling to adjust their business models, with some major players seeking premium increases of 30% to 50%.
Additionally, many insurers are declining to renew existing policies or write new ones in California, which they now rate as one of the riskiest markets in the country.
A Pattern of Disaster
The insurance industry has been increasingly rocked by extreme weather in recent years. In late 2024, hurricanes Helene and Milton dealt a $114 billion blow to Florida and neighboring states, killing 254 people in total. Helene alone caused $80 billion in damage, while Milton accounted for $34 billion. These back-to-back disasters left the industry reeling, and 2025 was supposed to be the year markets began to stabilize. The latest wildfires have upended those expectations.
The problem isn’t going away. A look back at 2024 reveals there were 27 confirmed weather/climate disaster events with losses exceeding $1 billion each that affected the US.
- 17 severe storms
- 5 tropical cyclones
- 2 winter storms
- 1 drought
- 1 flood
- 1 wildfire
How Natural Disasters Affect Insurance
Natural disasters can make home and business insurance more expensive for everyone, even those out of the path of a storm. If an insurer is dealing with widespread, expensive property damage claims, they will pass down the cost of those claims to their policyholders by raising premiums. That way, the insurer can recoup some of its losses and remain financially stable.
This is especially pertinent now, as insurers are facing massive net underwriting losses. For example, a report from AM Best showed that in the first six months of 2023, the home insurance industry had a net underwriting loss of $24.5 billion.
Insurance premiums are largely a calculation of risk: the higher a homeowner’s risk of filing a claim, the more likely it is that they will pay a higher premium. With the frequency and severity of natural disasters on the rise, homeowners and businesses can expect their insurance rates to rise to offset future losses.
Those impacted directly by an extreme weather event may find themselves in a financial bind when it is time to file a claim. Consider these findings from Bankrate’s Extreme Weather Survey:
- 15% of U.S. homeowners say they would be unable to pay their deductible without incurring debt if their homes sustained severe weather damage.
- More than 1 in 4 U.S. homeowners say they are unprepared for the potential costs associated with extreme weather events.
- 43% of U.S. homeowners have not done anything within the past five years to protect against property damage due to extreme weather events.
- Within the past five years, 10% of homeowners in the South and 12% of homeowners in the West invested in weather-proofing strategies as a precaution to protect their property against damage from extreme weather events. This is compared to 5% of Midwestern homeowners and 6% of Northeastern homeowners.
If you own a home or business, now is the time to review your insurance coverage with a local insurance expert to ensure you’re properly protected.
The Ripple Effect of California Wildfires on the Insurance Industry
California’s wildfires have once again brought the devastating impact of natural disasters to the forefront of public concern. Natural disasters like wildfires can have far-reaching implications for insurance rates, coverage availability, and the financial stability of insurers nationwide.
Rising Claims and Insurance Costs
Wildfires in California have been growing in frequency and intensity, fueled by prolonged droughts, rising temperatures, and shifting weather patterns. As a result, insurance companies face mounting claims for property damage, business interruptions, and even liability lawsuits. The sheer scale of payouts often reaches billions of dollars, forcing insurers to reevaluate their pricing models.
Homeowners in high-risk areas are particularly affected. Insurers often increase premiums or impose stricter underwriting guidelines for properties in fire-prone and high-risk zones. In extreme cases, some companies may decide to stop offering coverage altogether. This leaves homeowners scrambling for coverage through more expensive, high-risk insurance pools or state-backed programs like California’s FAIR Plan.
The Ripple Effect on Nationwide Rates
Although California is ground zero for wildfire-related claims, the financial strain on insurers can have nationwide repercussions. Insurance companies spread their risk across multiple states, meaning losses in one region can influence pricing in others. When an insurer’s financial reserves are depleted by large-scale disasters, they often offset the cost by raising premiums across their entire customer base.
In addition, reinsurance—insurance purchased by insurers to protect themselves from catastrophic losses—becomes more expensive following major disasters. These higher costs are typically passed down to consumers in the form of increased premiums, even in areas far removed from disaster zones.
Premiums on the Rise
Insurers are pricing disaster risks more aggressively than ever, and the costs are being passed on to home and business owners. Living in high-risk areas is becoming prohibitively expensive, with higher insurance premiums eating into property values.
For example, California’s insurance regulator introduced a reinsurance mechanism last December that requires insurers to provide more coverage in high-risk areas. While this aims to protect homeowners, it also raises costs, potentially creating a ripple effect across other states. Therefore, local insurers in less regulated markets might undercut national insurers by offering slightly lower premiums, but the long-term sustainability of such practices remains unclear.
Reduced Coverage Options
Beyond rising costs, natural disasters can lead to reduced coverage options. Many insurers now exclude wildfire damage from standard policies or require homeowners to take extensive mitigation measures, such as creating defensible space around their properties, before offering coverage. While these measures are effective at reducing risk, they place an additional burden on consumers and can price some people out of the market entirely.
Unequal Impact
The impact of rising premiums isn’t evenly distributed. Homeowners—especially those with access to state insurers of last resort—have more options than commercial property owners, who face fewer protections. Multifamily developers, for instance, are grappling with higher insurance premiums that make it costlier to build new apartment complexes, adding pressure to an already strained housing market.
Insurance regulation varies widely across the U.S., with more regulated states generally offering more affordable options. Tightly regulated markets can drive insurers to exit, further limiting choices for homeowners. There are essentially fifty different regulatory entities in the U.S. – one for each state – and they’re all grappling with the tension between access and affordability.
Rebuilding Smarter
As communities recover, the temptation to rebuild in the same locations is strong. Local governments want to restore their tax bases, and residents often feel a sentimental attachment to their homes. However, it’s important to consider smarter rebuilding strategies that prioritize safety and resilience.
For example, maintaining buffer zones and increasing density in safer areas can reduce future wildfire risks. Land-use policies also need to discourage development in wildfire-prone suburbs and exurbs, steering builders toward urban centers instead. Land-use policies have encouraged building in areas that are most prone to wildfires. States will benefit in the long-term from encouraging development in safer areas less prone to natural disasters and extreme weather events.
The Role of Climate Change
Climate change is a key driver of the increasing severity and frequency of natural disasters and extreme weather events like wildfires. As global temperatures rise, the insurance industry faces a growing challenge: how to accurately price risk in a world where historical data is no longer a reliable predictor of future events. Insurers must adopt new technologies and predictive models to assess risk in real-time, but these advancements come with their own costs, which are ultimately borne by consumers.
What’s the Insurance Industry’s Next Move?
This isn’t the first time a disaster has forced insurers to rethink their approach. Back in 1992, Hurricane Andrew devastated parts of Florida and cost insurers $15.5 billion, leading to the collapse of 16 insurance companies. In response, the industry got smarter—developing better analytics, using reinsurance (essentially insurance for insurers), and adopting more sophisticated risk management tools.
Now, the California wildfires could be the “Hurricane Andrew moment” for wildfire risk. And one solution that’s gaining traction is parametric insurance.
What Is Parametric Insurance?
Imagine you’re a business owner, and you’ve been unable to find adequate insurance for wildfire damage. Parametric insurance works differently than traditional coverage—it focuses on the event itself, not the specific damage it causes.
For example, let’s say you’re a small business owner concerned about earthquakes. With parametric insurance, your policy might pay out a predefined amount if an earthquake above 7.0 on the Richter scale strikes your area. It doesn’t matter if your business sustains $10,000 or $100,000 in damage—the payout is based on the magnitude of the disaster, not the repair costs.
This same concept can be applied to wildfires. If a wildfire reaches a certain size or intensity, the policyholder gets a payout to help them recover quickly, whether they’re dealing with physical damage or lost revenue due to business interruptions. The cost of parametric insurance coverage, or the premium you pay, depends on the specific event you’re insuring against, the chosen coverage limit, your exposure to that event, and the chosen parameter used to trigger the payout, meaning it can vary significantly depending on your situation.
The wildfires in Los Angeles are a stark reminder that natural disasters are becoming both more frequent and more severe, which means now is the time to start thinking differently about insurance. Parametric policies have been successfully used for hurricanes, earthquakes, and other perils around the world. With wildfire losses climbing to unprecedented levels, it’s clear that this innovative approach is ready to take center stage in the insurance landscape.
The Surprising Rise of Wildfire Risks
Not long ago, wildfires were considered a “secondary peril” in the insurance world—important, but not as financially devastating as hurricanes or earthquakes. That all changed in 2016 when the Fort McMurray wildfire in Canada caused a staggering $3 billion in losses. Just a year later, California wildfires caused $14.6 billion in damages, and by 2018, the infamous Camp Fire had racked up insured losses of $12.5 billion.
Fast forward to 2025, and the California fires could increase wildfire-related insurance losses by nearly 50% compared to previous years. Insurers are now realizing they’re facing a growing problem that their current models simply aren’t equipped to handle.
What Can Homeowners and Businesses Do?
Extreme weather events and natural disasters are becoming more destructive and harder to insure. Here are some things you should keep in mind:
- Review Your Current Coverage: Understand what your existing policy covers – and doesn’t cover – when it comes to events like fires and floods. Are there limits or exclusions that could leave you vulnerable?
- Think Beyond Physical Damage: Wildfires can disrupt operations even if your business isn’t directly in harm’s way. Roads may close, suppliers could face delays, or customers might be unable to reach your location. How will you cope with these types of circumstances?
- Be Prepared for Sticker Shock: Insurance costs are expected to rise, and parametric insurance can be pricey, especially in high-risk areas. But instead of focusing on the cost, think about the financial consequences of not having adequate coverage.
- Work with an Experienced Broker: Not all insurance agents are familiar with natural disaster coverage, so partnering with an agent who can customize your policies to meet your unique needs can make the process smoother and better protect your home or business.
- Invest in Risk Mitigation: Taking natural disaster and extreme weather precautions like using fire-resistant building materials or taking action to reduce flood damage can reduce your risk and improve insurability.
- Shop Around: Not all insurers assess risk in the same way. Homeowners and businesses should compare policies to find the best coverage for their needs.
- Shop Around: Not all insurers assess risk in the same way. Homeowners and businesses should compare policies to find the best coverage for their needs.
The Path Forward
The U.S. property insurance industry’s response to climate-driven disasters is a sobering reminder of the cost of inaction. As wildfires and other extreme events become more frequent, insurers, homeowners, and policymakers must work together to navigate a future where resilience is not just a choice but a necessity. The numbers don’t lie: the stakes are higher than ever.
The recent California wildfires are a stark reminder of the growing link between natural disasters and insurance rates. As climate change continues to intensify these events, the insurance industry will need to adapt to a new reality, and consumers must prepare for higher costs and fewer options. By understanding the ripple effects and taking proactive measures, homeowners can better navigate this challenging landscape while advocating for systemic solutions to mitigate future risks.
Homeowners, too, have a role to play. By embracing risk prevention measures like home hardening and maintaining defensible spaces, communities can reduce risks and losses when disaster strikes.
The road to recovery for California will be long and fraught with challenges. But one thing is clear: the way we approach building, insuring, and living in disaster-prone areas must change.
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*Disclaimer: We offer content for informational purposes; Co-operative Insurance Companies may not provide all the services or products listed here. Please get in touch with your local agent to learn how we can help with your insurance needs.
Sources
AM Best. Best’s Special Report: U.S. Property/Casualty Industry Records $24.5 Billion Underwriting Loss in the First Half of 2023. https://news.ambest.com/newscontent.aspx?refnum=252500&altsrc=177
Bankrate. Home insurance ‘crisis’: First Florida, now California — is my state next? https://www.bankrate.com/insurance/homeowners-insurance/insurance-crisis/#how-natural-disasters-impact-home-insurance
Bankrate. Survey: 1 in 4 Homeowners Feel Financially Unprepared for Costs of Extreme Weather Events. https://www.bankrate.com/insurance/homeowners-insurance/severe-weather-financial-impact-survey
Harvard Business Review. The LA Fires Could Change the Insurance Industry. https://hbr.org/2025/01/the-la-fires-could-change-the-insurance-industry
Insurance Journal. Hurricane Katrina: The Numbers Tell Their Own Story. https://www.insurancejournal.com/news/southcentral/2015/08/26/379650.htm
National Centers for Environmental Information. Billion-Dollar Weather and Climate Disasters. https://www.ncei.noaa.gov/access/billions
Northeastern Global News. California wildfire disaster: State’s insurance industry could see ‘catastrophic failures’ in the coming days. https://news.northeastern.edu/2025/01/10/california-fires-insurance-industry/
NBC News. Here’s where insurance companies see the most risk for disasters. https://www.nbcnews.com/business/business-news/california-wildfires-home-insurance-highest-risk-areas-map-rcna187577
PBS News. What the California wildfire destruction means for homeowners and insurance. https://www.pbs.org/newshour/show/what-the-california-wildfire-destruction-means-for-homeowners-and-insurance
Wharton School of the University of Pennsylvania. What the California Wildfires Mean for Insurers and Homeowners. https://knowledge.wharton.upenn.edu/article/what-the-california-wildfires-mean-for-insurers-and-homeowners/