Rising Homeowners Insurance Rates Due to LA Wildfires May Affect Nationwide Premiums

The recent wildfires in Southern California, along with hurricanes in the Southeastern United States, are expected to impact homeowners’ insurance rates across the country, even for those living far from the affected areas.

As insurance companies adjust their pricing models to account for the increasing costs of large-scale disasters, policyholders nationwide may face higher premiums.

Insurance regulators in many states have allowed companies to raise rates to cover losses incurred from catastrophic events like wildfires, hurricanes, and other severe weather. These rate hikes are often necessary to balance out the financial risks insurers face, including the rising cost of reinsurance—an insurance that companies purchase to protect themselves against large losses. According to experts, these costs are shared across the country, leading to price increases in states unaffected by the disasters themselves.

“In a world where we have persistently large shocks, you’re getting big cross-subsidies across the country,” explained Ishita Sen, a professor at Harvard Business School.

Sen was part of a 2022 study that examined the widespread effects of costly disasters on homeowners insurance premiums. The study indicated that after significant disasters like wildfires, residents in unaffected states could still face rate hikes as insurers spread the financial risk.

However, the Insurance Information Institute, a trade group for the insurance industry, has disputed these findings. Loretta Worters, a spokesperson for the organization, argued that insurance rates are not raised arbitrarily but are instead based on a broader risk assessment across various regions.

“Rates cannot be raised arbitrarily. Insurance is regulated by the states,” she noted.

The insurance industry is heavily regulated, but the rules vary by state, creating a complex landscape for policyholders. Some states allow insurance companies more flexibility to raise premiums, while others impose stricter controls. Jon Schneyer, director of research at CoreLogic, highlighted that the risk-sharing model is a fundamental aspect of the industry. He stated that although it may seem unfair for a homeowner in Nebraska to pay more due to fires in California, such sharing ensures that people in high-risk areas, like tornado-prone regions, also benefit from coverage when disaster strikes.

Carmen Balber, executive director of Consumer Watchdog, a public interest group, criticized the lack of uniformity across states, suggesting that stronger regulations could help reduce costs for consumers nationwide.

“If regulations were stronger across the country, we’d all have lower rates,” she said.

The frequency of severe weather events, fueled in part by climate change, has led to an uptick in insured losses. The Insurance Information Institute noted that five of the seven most expensive storms in US history occurred since 2017. The recent Southern California wildfires are expected to become one of the most costly disasters, with insured losses potentially reaching up to $45 billion, according to CoreLogic.

When combined with the damages caused by hurricanes Helene and Milton, which resulted in insured losses between $6 billion and $22 billion, the total cost of these events could range from $54 billion to $78 billion. These mounting losses will likely be reflected in homeowners’ insurance premiums in the coming months.

The rising costs of insurance are already being felt by many homeowners. Between 2018 and 2022, the average homeowners insurance rate increased by 8.7% per year, outpacing inflation. The Treasury Department’s climate counselor, Ethan Zindler, emphasized that “homeowners insurance is where many Americans are now feeling the financial effects of climate costs directly.”

The L.A. wildfires, in particular, are expected to lead to a rise in home insurance costs across the country, as insurers adjust to the increasing risks posed by climate change. Reinsurance costs and the overall financial impact of these disasters will likely contribute to future premium hikes.

Experts suggest that the increasing frequency of large, costly disasters could drive changes in both insurance coverage and homebuilding practices. Stronger building codes, particularly in areas at high risk for wildfires, tornadoes, and hurricanes, may become more common. In some states, lawmakers are already offering incentives to homeowners to fortify their properties against extreme weather.

Additionally, there may be a push for government-run insurance programs to cover risks associated with climate-related events. The National Flood Insurance Program, for example, provides coverage for flood risks, and some experts believe that a similar system could emerge for wildfire and other climate-related disasters.

With input from CNN and the Washington Post.