The devastating wildfires that swept through Los Angeles in January this year resulted in widespread property losses. More than 10,000 houses and other buildings were damaged, many being completely destroyed. Alarmingly, fewer than a quarter of these were insured against fire, highlighting a growing crisis in the property insurance industry.

Why such limited coverage? The main reason is insurers’ growing reluctance to write cover for a risk they view as uninsurable within the frameworks set by California’s highly regulated insurance market. In addition to several destructive fires in recent years, insurers are concerned that the areas consumed by summer wildfires in California each year are increasing dramatically and that the number of high-risk “fire weather days”, when the weather is hot, dry and windy, is also increasing.

Some major insurers left the Californian property insurance market well before the fires. Chubb and its subsidiaries stopped writing new policies for high-value homes with higher wildfire risk in Los Angeles County in 2021. Another major insurer, Allstate, stopped writing new policies the following year. California’s largest insurer, State Farm, stopped writing new policies in 2023, and AmGuard, Falls Lake, Travelers and Farmers Direct Property withdrew entirely. Tokio Marine America withdrew in 2024.

Especially heartbreaking for some homeowners only a few months before the fires, some major insurers chose not to renew thousands of home insurance policies in fire-prone areas such as Pacific Palisades and Altadena. This left a number of longstanding customers without cover only a few short months before they lost their homes. State Farm announced in March 2024 that it would not renew 72,000 policies across California. Over the summer, it also withdrew cover for more than 1,500 homes in Pacific Palisades and more than 2,000 policies elsewhere in Los Angeles, saying that its decision was a response to inflation and its rapidly growing catastrophe exposure. It was a prescient call; Pacific Palisades was the location of the first of the major fires of 2025 and many homes and buildings were destroyed there shortly after their insurance was withdrawn. 

The rising costs of premiums and insurance cancellations left many property owners without adequate cover, or “going bare”, highlighting a deepening crisis in California’s property insurance market.

The state-backed alternative

When a Californian homeowner cannot obtain private insurance, the Fair Access to Insurance Requirements (FAIR) plan provides a last resort. FAIR is organised by the government but is funded by private home insurers. FAIR will cover houses that private insurers will not, but the cover is limited, often requiring private top-up cover, and the cost is typically more than double that of private policies. 

Notwithstanding these drawbacks, the number of policies written by the FAIR Plan has more than doubled in the past four years. This has left it increasingly exposed to wildfire risk. FAIR Plan’s website reports that its exposure to the January fires is nearly USD6 billion in Pacific Palisades alone. Politicians have expressed concern that another bad fire season could result in its insolvency.

The role of regulation

So why did insurers not price in the risks? To some extent they did. Many people did not insure their properties simply because the premium cost was too high. 

However, there was also a regulatory problem which prevented insurers from pricing cover to reflect wildfire risks. Until California’s insurance regulations were revised last year, insurers were prohibited from using catastrophe models to forecast wildfires losses – they were only permitted to make assessments based upon historical losses, which was too restrictive in circumstances where wildfire risk was increasing. Compounding the problem, they were also barred from increasing premiums to reflect increased reinsurance costs. These interventions had a predictable effect. Prevented from increasing premiums to reflect increased risks and costs, insurers withdrew from the market.

Now, under a new Sustainable Insurance Strategy announced in January by California’s Insurance Commissioner, insurers will be required to offer cover to homeowners in wildfire risk areas. They will also be required to hold, in risk areas, a minimum market share equivalent to 85% of their state-wide market share, with that number increasing over time. 

This new rule is the latest legislative attempt to assist Californians to obtain insurance at a reasonable cost. A trade-off for the obligation to write cover in higher risk areas is that companies will now be permitted to recover increased reinsurance costs as well as using forward-looking catastrophe models to calculate and charge higher rates for high-risk areas. Cover will increase, but at the cost of rising premiums that reflect increased risks and costs.

Implications for New Zealand’s insurance industry

Since 2023, New Zealand has experienced a number of severe weather events, including major storms, flooding, and cyclones. While our fastest-changing insurance risk is coastal floods, we cannot be complacent about wildfire. Wildfire experts say that climate change is expected to make some areas of New Zealand higher risk. This may make it challenging to insure houses in the hottest and driest places. Property owners in areas such as Christchurch’s Port Hills are likely to face difficulty obtaining insurance in the first instance.

Some trends suggest that New Zealand could see insurance problems not entirely dissimilar to those in Los Angeles.

• Insurance premiums have surged in high-risk areas: Following Cyclone Gabrielle and other severe weather events, insurers have raised property insurance rates significantly, particularly for properties in flood-prone areas.
• Insurers have reduced participation: some property owners are reportedly finding it increasingly difficult to obtain coverage as insurers reassess risk models. There are indications that insurers are increasingly using risk-based pricing.
• Underinsurance: some reports indicate that around a third of damage from Cyclone Gabrielle and the Auckland Anniversary floods was uninsured. 

Given the parallels in natural disaster exposure, a scheme like the Californian approach may become necessary in New Zealand. New Zealand has the statutory Natural Hazards Commission – Toka Tū Ake (NHC) scheme, but cover for structures is limited to NZD300,000.

Addressing underinsurance and ensuring the availability of affordable property insurance in the face of increasing natural disaster losses will require coordinated efforts involving policy changes, public awareness campaigns and innovative insurance solutions.

Some potential solutions include:

• An enhanced national disaster insurance programme: The scope of NHC coverage may require expansion
• To provide a more useful limit and include broader weather-related risks: Government and private insurers may need to collaborate on shared-risk models to ensure widespread coverage while keeping costs manageable for homeowners.
• Public awareness campaigns: Some homeowners may not understand the risks they face or the limitations of their insurance policies. Government agencies and insurers could invest in education campaigns.
• Collaboration for resilience: The insurance industry may need to work with government bodies and communities to invest in mitigation and adaptation measures, enhancing overall resilience to natural disasters. Mandating flood-resilient and storm-resistant construction standards could help mitigate risks. This may include ‘managed retreat’ where the population withdraws from areas where no reliable remediation strategy is possible.
• Risk-based pricing: Insurers may continue to adjust premiums based on individual property risk assessments, leading to increased costs for high-risk areas.
• Insurance retreat: In some cases, insurers might withdraw coverage from areas deemed too high-risk, necessitating intervention or alternative solutions to ensure coverage availability. 

The underinsurance crisis revealed by the Los Angeles wildfires of 2025 highlights the growing challenge of securing property insurance in an era of climate change. As New Zealand grapples with increasingly severe weather events, similar issues are emerging, with rising premiums, reduced coverage availability and growing gaps in insurance protection. To avoid this, New Zealand will need to consider proactive measures such as extending the NHC insurance scheme, implementing resilient construction standards and making public awareness efforts.