Wildfires continued to rage in Los Angeles late Thursday, decimating neighborhoods and raising questions about the future of California’s already troubled property insurance market.

Insurers have backed away from doing business in California in recent years as the number and intensity of wildfires in the state—and across the country—have increased.

State Farm, the largest property insurer in California, last March announced that it would not renew 2% of its outstanding policies in California, citing “inflation, catastrophe exposure, reinsurance costs, and the limitations of working within decades-old insurance regulations.” That announcement came less than a year after the insurance provider said it would stop accepting new applications in California. In Pacific Palisades, the site of what is now the most destructive fire in the city’s history, the company dropped about 1,600 policies last year, the state insurance department told CBS News.

State Farm isn't alone in paring back its California business. Several other major insurers, including Allstate (ALL), Travelers (TRV), and Chubb (CB), have changed their offerings in the state to limit exposure to natural disasters. Insurers have said the difficulty of raising premiums under California regulations and their inability to include reinsurance costs in rate hikes have also played a part in the pull-back. 

Damage and Economic Loss Projected Above $50B

The total costs of this week’s fires are still unclear. A preliminary estimate from AccuWeather puts total economic losses between $52 billion and $57 billion.

CoreLogic estimates that there are nearly 200,000 homes in Los Angeles County at high or very high risk of wildfire damage. The total reconstruction value of those homes is estimated to be more than $145 billion.

As of late Thursday, the Palisades and Eaton fires, the two largest, had damaged or destroyed more than 9,000 structures, the Los Angeles Times reported.

Insurers won’t be estimating their costs until next week at the earliest, said Mark Friedlander, Director of Corporate Communications at the Insurance Information Institute. But he expressed confidence insurers could manage the damage. “Property insurers have managed their books of business responsibly” and are “ready to assist customers and pay claims,” he said in an email to Investopedia. 

Jasper Cooper, senior credit officer at Moody's Ratings, told S&P Global he expected insured losses would run into the billions of dollars.

State Insurance Reforms Improve Stability

Friedlander said a raft of recent reforms at the state’s insurance department, implemented by state insurance commissioner Ricardo Lara, should also improve the stability of the market. The Sustainable Insurance Strategy was designed to reverse the exodus of insurers from California by loosening some restrictions on rate increases in exchange for improved coverage in high-risk areas.

The reforms are also intended to reduce the number of homeowners relying on the FAIR plan, the state’s insurer of last resort. The number of FAIR plan policies has more than doubled in the past four years as private insurers have withdrawn from the state. The plan’s exposure nearly tripled over the same period, ballooning from $153 billion in 2020 to $458 billion as of September 2024.