By Evie Liu

As wildfires burn through parts of Southern California causing devastating damage, many homeowners will rely on insurers to get back on their feet. In a state where the cost of homeownership is already high, they might find it even more difficult to get affordable coverage once the cleanup work has finished.

As of Wednesday afternoon, two people died and more than 1,000 structures burned, making the fire the most destructive in the history of Los Angeles, according to the Associated Press.

Many insurers paused coverage in parts of California or raised premiums sharply after the 2017 and 2018 wildfires led to huge losses for the industry. The companies have said they are concerned about outsize financial losses due to the growing risk of more frequent and severe wildfires. Rising costs of reinsurance, purchased by insurers to protect themselves, have made it worse.

Last spring, State Farm, one of the largest private insurers in California, said that it had canceled 72,000 policies in the state, about 40% of which covered homes. Many of those cancellations were in high-risk, upscale neighborhoods in Los Angeles, including Pacific Palisades, the area currently affected by wildfire.

Allstate stopped issuing new insurance policies for all business and personal property in California in 2023. The company said in April that it would insure California homes again if regulators adopt regulatory changes to make it easier for insurers to raise rates.

Standard homeowner insurance policies typically cover damage caused by wildfires, such as the cost of rebuilding the house, recovering personal belongings, and temporary relocations. However, in regions with frequent wildfires, insurers may limit their coverage or increase premiums to protect themselves from high risks.

While homeowners in California aren't required to have insurance, many mortgage lenders require an active policy before issuing a loan.

Homeowners in high-risk zones who can't find private insurance can turn to California's FAIR Plan, a state-run program that serves as a last-resort insurer. The number of policies in the program has more than doubled since 2020, even though it's often more expensive than the private market.

To address insurers fleeing the state, California issued a rule in December that requires insurance companies to write more policies to homeowners in wildfire-prone areas. In exchange, the state will allow insurers to raise rates based on their reinsurance costs and climate risks.

Consumer Watchdog, a nonprofit consumer protection group in California and opponent of the rule, said the new regulation could increase insurance premiums by up to 40%, even for neighborhoods and homes that have done wildfire prevention and fireproof work.

California is already one of the least affordable states in the country when it comes to housing costs. According to a recent Redfin report, the five most expensive metropolitan areas in the U.S. were all in the Golden State. Higher insurance costs would further add to homeowners' financial burden.

The median buyer in San Diego, San Jose, Anaheim, San Francisco, and Los Angeles spends as much as 77.6% of their income on monthly mortgage payments, much higher than the nationwide rate of 41.8% and the commonly recommended threshold of no more than 30%.

Write to Evie Liu at evie.liu@barrons.com

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January 08, 2025 17:02 ET (22:02 GMT)

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