We Will All Be Paying For L.A.’s Wildfires

Over a year before Los Angeles’ uncontrollable wildfires burned through neighborhoods once considered safe, the office of California Insurance Commissioner Ricardo Lara quietly shared a potential regulatory plan with insurance company lobbyists. It was a draft of reforms that would allow insurers to raise rates and pass costs on to consumers, among other industry-friendly changes, in exchange for little more than the companies’ word that they would cover homes in wildfire-prone areas.

“What do you think of the language below,” one lobbyist responded, according to records obtained by The Lever, along with a detailed edit. “I am really trying to get them to a happy place,” she wrote, referring to her insurance-industry client.

The changes the lobbyist suggested appeared to be included in legislation floated in September 2023, although the potential bill was dropped after an advocacy group leaked a recording of industry lobbyists loudly bragging about their role in the bill’s development. Several weeks later, Lara announced a package of executive actions that covered similar ground. 

“The current system is not working for all Californians, and we must change course,” said Lara, a Democrat elected in 2018 with the help of significant donations from the insurance industry. “I will continue to partner with all those who want to work toward real solutions.” Lara did not respond to repeated requests for comment. 

The emails are just one example of the conflicts of interest behind the reforms the commissioner has made to address California’s insurance crisis. As record wildfires flare up all over California, homeowners have faced skyrocketing prices, and many have found they can no longer find insurance at all. Meanwhile, insurers claim California’s regulations have kept premiums artificially low, and many are leaving the state. 

The clock is ticking to find a solution, since L.A.’s fires, estimated to cost $250 billion in total economic damage, may bring the situation to a breaking point — with repercussions far beyond California. 

Many homeowners in the state have turned to an insurance program called the Fair Access to Insurance Requirements (FAIR) Plan. Created for people who can’t find insurance through the market and run by insurance companies under the commissioner’s oversight, FAIR Plan policies are often more expensive and provide less coverage than traditional plans. As private insurers fled California, the program swelled over 60 percent in the last year. It now has $450 billion in liabilities, though it only has about $385 million in funds to handle them. 

The outstanding balance, thanks to Lara’s recent deals with the industry, can now be passed on to homeowners. 

It’s a predicament that will likely soon occur all over the country. When state last-resort insurance programs can’t afford to cover mounting climate disasters, the recovery costs will be shifted from insurers to the general public, with potentially disastrous consequences. “These states are putting our national economy at risk,” says Susan Crawford, a senior fellow at the Carnegie Endowment of International Peace. 

The FAIR Plan’s vast liabilities are “a big gamble,” Victoria Roach, president of California’s insurer of last resort, told the state legislature last spring. The program, she warned, was just one major event away from insolvency. 

“Are these wildfires that disaster?” asked Ben Keys, an economist and professor of real estate and finance at the Wharton School at the University of Pennsylvania. As L.A. continued to burn, the FAIR Plan had an estimated $5.85 billion worth of policies in the Pacific Palisades neighborhood decimated by the fires — an area that plan administrators considered among its top five exposures to wildfire risk anywhere in the state. Preliminary estimates of the insurance losses total over $10 billion — although Keys expects the total to be far higher.

How the FAIR Plan will cope is a warning for the rest of the country, where these kinds of state insurance programs have grown over 200 percent in the last five years. Many don’t have enough set aside to pay claims while taking on enormous risks. 

In the scorched concrete of the Pacific Coast Highway, where the flames ran all the way to the sand, the limits of what can be insured and what can be rebuilt are emerging with aching clarity. It’s an unwelcome, overdue reckoning.

A Buffet Of Bad Choices

When the wind began on what was still an ordinary Tuesday, Jess Miller tried to reassure herself. She had lived all her life in Altadena, California, a diverse and picturesque suburb north of the city. Her mind instinctively jumped to fire, but she wasn’t especially worried about her own neighborhood. “I figured it would be like always,” she says, “something that would stay up in the mountains, and we’d be OK.” 

But around dinner, Miller looked out her window and was shocked to see orange flames. 

The heat rose to meet her when she stepped outside, thick and pressing against her face like a warning. “It’s like the fire could do anything,” she said. They weren’t in an official evacuation zone, but “we knew that it was just time.” She and her husband grabbed their five-year-old daughter and a few essentials and fled, swerving through choking smoke around cars that had been abandoned in place. 

That night, the house and a studio containing all of Miller’s art burned to the ground. Only the chimney remained. “There’s nothing left,” she says. “You don’t even think about the kinds of things that you grab until it’s too late.”

Losing her house is not the end, but the beginning of a frightening financial journey. Miller rented from her father, who had purchased only nominal insurance coverage. Not only is he unlikely to be able to recoup his own full losses, but as a policyholder in the state, he’s on the hook to help bail out insurers themselves.

In 2024, Lara made a big change to how the FAIR plan covered its vast liabilities. Previously, if a massive wildfire depleted the program’s funds, it could force private insurance companies operating in the state to cover the gap. But last July, Lara announced that in the “extremely unlikely event” this occurred, insurance companies could shift most of the costs to consumers — a tactic states like Florida and Louisiana have also turned to as their insurer-of-last-resort programs swell. Now, California insurers are allowed to charge half of the first billion dollars of any residential damages they’re asked to pay to policyholders — along with unlimited losses beyond that.

With over 12,000 structures destroyed by L.A.’s fires so far, that “extremely unlikely event” is looming. The last time the FAIR Plan assessed insurers was after a 1994 earthquake that rocked L.A. — and almost all the insurers that provided earthquake coverage subsequently left the state. 

Lara has received significant contributions from the insurance industry, including $270,000 during his initial campaign for insurance commissioner as well as after he took office in 2019. During his reelection bid, he also accepted $125,000 from two LGBTQ groups after they received similar amounts from the insurance industry. (He previously accepted $65,000 of campaign donations from oil and gas companies over the course of his career as a state senator before rejecting efforts to require insurers to disclose their investments in fossil fuels.)

According to emails obtained by advocacy group Consumer Watchdog and reviewed by The Lever, in August 2023, Lara’s office shared preliminary ideas for passing insurance costs onto consumers with lobbyists representing the insurers that had backed his campaigns. The emails’ recipients included the American Property Casualty Insurance Association, the California Personal Insurance Federation, and lobbyists representing insurance agents and brokers, which together have contributed at least $21,000 to Lara’s political coffers.

“He’s made no qualms about developing his plan with the industry and being proud of that,” says Carmen Balber, executive director of Consumer Watchdog. 

Lara says the FAIR Plan changes are a necessary part of a series of regulatory reforms designed to help keep insurance companies operating in the state. Other reforms included permitting insurers to set rates by using private “catastrophe models” that factor in climate trends and in some cases walking back wildfire-mitigation discounts he’d previously introduced.

In return, Lara promised that insurance companies would significantly expand their coverage areas in the state, insuring 85 percent of homeowners in wildfire areas. 

“For the first time in history, we are requiring insurance companies to expand where people need help the most,” Lara said in a December 2024 statement. “With our changing climate, we can no longer look to the past.” 

But the regulation’s fine print shows insurers actually have the option to increase their coverage by as little as 5 percent — and even that requirement can be excused if the companies claim they are unable to meet the condition after two years. Advocacy groups say the catastrophe models are expected to increase rates for many property owners, but the state’s Department of Insurance itself failed to conduct a cost analysis.

California has hired just one person to oversee the accuracy of the new climate catastrophe models. Florida, in comparison, has a multidisciplinary team of experts to review catastrophe models and compare them to a public version developed by the state. “Administering the FAIR plan properly” would be just one reason for California to develop a more robust analysis, “rather than simply relying on not publicly transparent private-vendor modeling,” says Madison Condon, a professor of law at Boston University who researches climate risk in financial institutions.

One of the first catastrophe models filed with the state this winter came from Moody’s RMS, a company that rates the financial stability of insurance companies. Moody’s largest shareholder is the massive holding company Berkshire Hathaway. Moody’s other top shareholders include financial services companies like The Vanguard Group and BlackRock, Inc. — who control substantial investment portfolios for insurance companies and who’ve both left a global agreement to fight climate change. 

“It creates a bit of financial conflict when the ratings company is selling the tools it wants insurers to use to set rates,” says Consumer Watchdog’s Balber.

Insurance companies may feel pressure to buy and use Moody’s model because they are dependent on the company for good credit ratings. If the model overpredicts risks, insurance companies can justify raising rates, increasing profits as well as management fees for BlackRock. “It’s an unvirtuous circle,” Balber says.

Commissioner Lara has a history with Berkshire Hathaway. In 2019. Lara held a “relationship building” lunch with company executives benefiting his reelection campaign; after the meeting came to light, Lara was forced to return donations from executives of Berkshire Hathaway-owned companies. Lara later intervened multiple times — including overruling a judge — on behalf of one of those donors, the executive of an underwriting company then owned by Berkshire Hathaway. 

Not even the fiercest consumer advocates dispute that the climate crisis has radically reshaped the landscape of risk. Scientists say rapidly growing fires like the ones torching Los Angeles have increased almost 250 percent over the past 20 years. But “what the industry has done in California is take those real costs,” Balber says, and “used them to try and leverage deregulation.” 

Catastrophe Price Gouging

There’s a lot of money at stake. Unaccounted-for wildfire and flood risk threatens as much as $2.7 trillion dollars in the U.S. housing market, says David Burt, founder and CEO of DeltaTerra Capital. He estimates that just under one in five homes nationwide are at risk. 

What to do about all of that unpriced risk would be much easier to figure out with more information. “What we’re missing is the kind of granular, localized data that would allow us to see the impacts on insurance premiums and claims in particular communities,” says Carly Fabian, policy advocate at Public Citizen, a nonprofit consumer advocacy group. 

To understand potential disruptions in insurance markets, the Biden administration issued an executive order in 2021 tasking the Treasury Department and the Federal Insurance Office with collecting data on the problem. Insurance companies pushed back, calling it an “unreasonable burden.” The Treasury reversed course, accepting an anonymized subset of the data from state insurance offices — and even that has yet to be made public. 

“Right now, we actually have less information on insurance than we did about mortgages prior to the 2008 financial crisis,” says Fabian.

Just how much insurers are currently losing responding to catastrophes is hard to pin down. There were 27 different billion-dollar disasters in the U.S. in 2024, trailing a record set just the year before. However, according to the National Association of Insurance Commissioners, the insurance industry still made a record $87.6 billion in profits in 2023 thanks to higher premiums — and was on track to make even more in 2024.

When asked if California’s fires might result in higher homeowner premiums nationally, Fabian explained that insurers already regularly distribute costs. Because the industry is overseen by state governments, there are different rules for rate-setting across the country. Some researchers have found this leads to higher premiums in states with weaker oversight, regardless of the location’s actual risk. 

“If there isn’t strong regulation,” Fabian says, states are “just relying on a pinky promise that these companies aren’t going to price gouge a product that’s fundamental to the American economy.” She says greater transparency is essential to address the costs of an increasingly perilous world.

Nowhere is that information scarcity more obvious than in reinsurance, or the insurance that insurers buy to reduce their own risk. An insurer that covers thousands of homes in a hurricane-prone region like Florida, for example, might take out a reinsurance policy that agrees to pay some of the claims if a storm triggers widespread damage.

Starting this month, Lara announced insurance companies would be allowed to pass the costs of their reinsurance on to consumers. Records requests reveal the commissioner’s office hired a consultant from Milliman, a firm that works for the insurance industry, to draft the policy. The change also allows companies to increase their premiums through a calculation that includes catastrophe bond pricing, a volatile security market. There was no opportunity for public comment.

In a study last year, Benjamin Keys of the Wharton School used mortgage data to compare insurance premiums across states, a workaround to the persistent information gaps that he says have “allowed a very opaque market.” He found premiums had increased by 33 percent since 2020, mostly due to higher reinsurance costs, along with inflation.

Reinsurance is a largely unregulated global market, and insurance companies usually don’t disclose the terms of their contracts. But even with large payouts, reinsurers like Swiss Re and the Berkshire Hathaway Reinsurance Group made huge profits in 2023 and 2024, with the industry’s total capital hitting a record $695 billion last year. That’s nearly five times more than the world’s largest oil company made in 2023.

Passing on reinsurance costs has already contributed to the homeowners’ affordability crisis. Last year, a month after State Farm canceled 70 percent of its policies in the Pacific Palisades neighborhood, the company sought to raise its remaining premiums by 30 percent. While Commissioner Lara said the request raised “serious questions about its financial condition,” the company had quietly been buying hundreds of millions worth of reinsurance it didn’t need from its own parent company, State Farm Mutual Automobile Insurance Co. 

According to calculations by Consumer Watchdog, State Farms’s reinsurance costs were markedly worse than other large home insurers in the state. “The company is blaming reinsurance for its pullbacks in the market when we have clear evidence that it’s overpaying,” says Consumer Watchdog’s Balber. State Farm did not respond to interview requests.

Nevertheless, in September, Lara approved State Farm’s request to reduce the discounts it offers homeowners for wildfire mitigation and absolved the company from explaining to consumers what factors it uses to determine rates or how it decides whether to cover properties. 

Yet unlike private insurers like State Farm, the state’s FAIR Plan isn’t required to have the same reserves to cover claims. In public testimony last year, the FAIR Plan’s president told the legislature the program had only about $2.5 billion in reinsurance — which Los Angeles’ fire damage is almost guaranteed to exceed, many times over. 

Since insurers now have a cap on their obligations, homeowners will be stuck with the difference. If those costs balloon, Crawford asks, “Does the state bail out the FAIR Plan? Does the federal government get asked to come and bail out the states?” As last resort programs metastasize across the country, who’s on the hook to pay for climate damage, and under what conditions, should be decided before the eventual emergency arises. 

Dave Jones, California’s insurance commissioner from 2011 to 2019, suggests one solution would be a federal reinsurance program, which could provide lower-priced nonprofit reinsurance for last-resort programs. It could be paired, Jones suggests, with federal low-income subsidies similar to the health benefit exchanges under the Affordable Care Act. 

California Sen. Adam Schiff (D) introduced an even more ambitious bill in Congress last year that would develop a national reinsurance program for all hazards, including for private insurers, in exchange for writing flood coverage that would eventually replace the troubled National Flood Insurance Program. 

Some kind of major shift in national policies is unavoidable, Jones says. “I do think that we are continuing to march towards an uninsurable future in this country,” he adds, “because we’re not dealing with the root cause of this problem, which is climate change.”

“Homesick For The Life I Used To Have”

It’s increasingly clear the center cannot hold: The odds of floods or fires are already driving down home values in the most vulnerable areas. Meanwhile, rising insurance costs have started to slow sales and cause price declines in risky regions, potentially leading to an escalating financial crisis.

Markets like reinsurance may be repricing rapidly, Carnegie’s Crawford says, but other elements of the financial system, like mortgages and credit ratings, may not yet have adequately taken these risks into account. “These places of concentrated risk may, as in the subprime mortgage crisis, be places of concentrated defaults,” she says. Unlike foreclosed condos in Las Vegas, however, the effects of climate change aren’t going to be reversed.

Altogether, Crawford says 17 percent of the country’s $48 trillion housing market may be at serious risk of fire or flood, putting the national economy itself at peril. Just this week, the Consumer Financial Protection Bureau found that 400,000 mortgages in the South are underinsured against flood risk. 

As a result, Crawford is advocating for major changes in how the National Flood Insurance Program considers future risks and strengthening the program by making flood insurance an opt-out element of obtaining a mortgage, broadening the pool of people paying in. She also recommends incorporating insurance costs into buyers’ mortgage eligibility, which Freddie Mac started doing last year. 

Government-sponsored enterprises like Fannie Mae and Freddie Mac help stabilize the housing market by buying and guaranteeing mortgages. Privatizing them, as conservative advocates pushed for in Project 2025, could quickly change how climate risks are priced. 

Currently, neither enterprise directly accounts for regional differences in climate risk, effectively subsidizing credit in vulnerable areas. That’s in part because Fannie Mae and Freddie Mac have historically prioritized expanding housing opportunities. But privatization could lead to stricter lending standards in areas prone to disasters, like higher loan costs or more substantial down payments — making it cost more to get a mortgage in vulnerable places like California and Florida.

Whatever happens to the country’s mortgage market, accurately pricing insurance may mean accepting that home values will decline as a result, Wharton’s Keys says. “The climate is just changing so much faster than policymakers are keeping up with,” Keys says, “and certainly than the pace at which the built environment can adapt.” 

Though many people in California live in unprotectable areas, a property value collapse there would likely have substantial effects on a cornerstone of the U.S. economy. 

“There are similar problems in Florida, Louisiana, coastal Carolinas,” Keys says, pointing to a December Senate report finding climate change is now driving a drop in insurance coverage nationwide, leading to higher prices.

Any efforts to address these problems will have to balance short-term disaster relief with the unflinching reality that the climate risks are only going to grow. On Jan. 12, California Gov. Gavin Newsom (D) suspended the state’s environmental rules for rebuilding in the areas damaged by the L.A. wildfires to hasten reconstruction. But the move does nothing to address perpetuating unsafe land use practices or future climate hazards. 

“No matter what we do with emissions today, many of these changes are baked in,” Crawford says. 

Crawford grew up in Santa Monica, and even given her research into climate’s financial impacts, she was shocked to see that her childhood home was under an evacuation warning area during the L.A. fires. “Human beings are masters at self-deception,” she says wryly. “It is unthinkable that your neighborhood would go up in flames, that the place where you just walked your dog no longer exists.” 

But for Miller — who’s spending the shell-shocked days since losing her house trying to find a place for her family to live — and the other 180,000 people who were displaced in the fires, that unimaginable reality is here. 

Many of those who return to find their homes damaged but still standing are about to discover that their insurance won’t cover their repairs, says Dylan Schaffer, a partner at Oakland, California-based law firm Kerley Schaffer, which specializes in representing insured homeowners. Schaffer filed a class-action lawsuit last July against the FAIR Plan, alleging it has illegally limited coverage since 2012, denying thousands of families’ claims because it refused to pay for what administrators considered smoke damage.

California law requires insurance companies to compensate property owners for “all loss by fire.” But Schaffer says the FAIR plan has been settling claims based on illegally restricted policies. In 2022, the California Department of Insurance itself concluded that FAIR plan policies weren’t meeting state requirements, identifying 418 violations of its insurance code where claims were improperly denied or coverage was impacted. In the two years since then, Schaffer says Lara hasn’t done anything to address the problem. 

Houses after fires are toxic, Schaffer explains: “Your neighbor’s house, with all its paint cans and televisions and toxins, burns down, and all that debris lands in your house, and the FAIR Plan’s position is, ‘We don’t cover this.’” 

Los Angeles was already facing a serious housing shortage. The city said in 2021 that it would need to add almost 500,000 units of housing stock, even before the fires wiped out thousands of structures. Without a functional insurance system to help people rebuild, the crisis will only deepen as displaced residents compete for a shrinking supply of affordable homes. “This is the point of the sword,” Schaffer says, “where climate change, economics, politics, and law all meet.” 

Though many of the houses lost in these fires were palatial — with values far exceeding the FAIR Plan’s $3 million coverage limits — historic Black and working-class neighborhoods were also destroyed. “Folks experiencing homelessness get lost in natural disaster,” says John Maceri, the CEO of the nonprofit The People Concern, an advocacy group working to help unhoused people find temporary housing and stay abreast of evacuation orders. Safe parking areas where people living in vehicles have access to restrooms have been burned out, he explains. Some of the people he helped this week find shelter off the street had been previously displaced by other catastrophic wildfires.

Insurance, with its backstop of reinsurance, is a fragile scaffold on which lives are rebuilt, the mechanism that allows people to try to move forward and begin again. But while companies will eventually be spurred by bottom lines to account for climate risks, they are unlikely to consider equity in their response. That’s a problem, Crawford says, because “adaptation is a public good that won’t be adequately provided by the private sector.”

While development prospectors may be drawn to cheap lots with a view of the Malibu hills, as homes become less insurable and services disappear, communities will weaken. In the scorched remains, property tax collection will crater, and municipalities won’t have the capital to rebuild infrastructure. It’s unclear how much even the houses still standing in neighborhoods like Altadena will be worth because of the destruction around them.

Miller, for one, isn’t sure if she wants to come back to her burned-out home. She doesn’t ever want to be in that sort of situation again. Seeing the charred remains of the neighborhood she grew up in, “I’m homesick for the life I used to have,” she says, choking back tears. “I have to start all over.”