By Mia MacGregor

Feb 11 - (The Insurer) - A $6bn investment in wildfire risk mitigation could have reduced the economic losses caused by the Los Angeles wildfires by nearly 50 percent, according to Howden Re, which has called for regulatory reforms and strategic investments to stabilise the Golden State’s insurance market.

In the report, entitled '2025 Los Angeles Wildfires: A Path Forward', Howden Re emphasised that the $6bn investment would pay for itself many times over in saved damage costs alone, with even greater savings when accounting for preserved economic output.

The report highlighted that insured loss projections from modeling companies for the recent devastating wildfires range from $20bn to $45bn, with an average of $31bn — more than double the previous record for wildfire losses.

As Howden Re noted, the losses are heavily skewed toward residential properties, but commercial assets will also present significant claims due to property damage and business interruptions, as well as secondary impacts such as smoke damage, access denial, and event cancellations.

Beyond the immediate challenges of California's insurance market, rising inflation has also driven up claims costs, according to the report.

Other variables contributing to potential loss escalation, or "loss creep", include demand surges, additional living expenses, housing stock shortages, updated building codes, substantial auto losses and the threat of litigation.

Howden Re noted that subrogation recoveries from the California Wildfire Fund could help alleviate industry losses over time.

Underinsurance and protection gaps

The spate of recent high-profile carrier withdrawals from the California market mean that underinsurance is likely to be more severe for the 2025 wildfires than in prior events, the report said.

An estimated 80 percent of homes in the state are underinsured to some extent, with annual policy renewal adjustments of around 5 percent failing to keep pace with higher inflation, according to the report.

The protection gap is further aggravated by the limited coverage offered by California’s residual insurer the Fair Plan, which caps residential property protection at $3mn and commercial coverage at $20mn per location, Howden Re noted.

Over a third of homes in the Palisades area have no mortgage and therefore no mandated insurance requirements, which the company said is contributing to a wider protection gap for the 2025 fires.

Recommendations for mitigation

The report outlined several key strategies to mitigate wildfire exposure and improve the resilience of California's insurance market, such as disaster planning, forest management, infrastructure maintenance and updating building codes.

Additionally, collaboration between insurers, regulators, and policymakers through public-private partnerships is essential for more effective risk distribution and ensuring adequate insurance availability, the report stated.

Howden Re has recommended incentivising risk mitigation, noting that homeowners who invest in fire-resistant upgrades should receive premium reductions to encourage better resilience.

The report also said new models, including parametric insurance and MGA-backed solutions, can provide additional protection in high-risk areas.

“As climate risks continue to evolve, insurers must be more agile and innovative in how they approach risk.

“However, this change cannot happen in a vacuum and collaboration is needed to restore balance and ensure long-term insurability,” said Julian Alovisi, head of research at Howden.

“This is not just an insurance issue – it’s an economic and social imperative,” Alovisi added.