In early 2025, Southern California experienced one of the worst natural disasters in US history. The LA wildfires claimed the lives of 28 people, destroyed over 17,000 structures, scorched 35,000 acres, and displaced more than 150,000 residents. According to AccuWeather, the total economic impact—including damages, loss of life, healthcare costs, business disruptions, and other economic factors—is estimated between $250 billion and $275 billion.
As climate change continues to intensify extreme weather events, the LA wildfire serves as a case study for what this means for insurers and policyholders.
Perspective on Damage Estimates
To grasp the magnitude of this disaster, consider this: the 2018 Camp Fire—the next most expensive wildfire in U.S. history—caused around $12.4 billion in damages. Even accounting for inflation, the LA wildfire eclipses this figure and is set to surpass Hurricane Katrina (2005), which caused over $200 billion in damages, making it the single most expensive natural disaster in U.S. history.
What Insurance Is (and Isn’t)
To understand the broader implications of the LA wildfires, it’s essential to revisit what insurance is. Insurance is, at its core, the business of managing risk. While insurance won’t prevent wildfires or other natural disasters, it can offer financial protection to policyholders after these events occur.
Insurance is best suited for covering events that are low in probability but carry a high financial impact—such as a house fire. However, as the frequency and severity of these high-impact events rise due to climate change, insurance companies face greater challenges. When risks increase, coverage becomes more expensive, more limited, or, in some cases, unavailable. This is precisely the situation unfolding in California.
The Challenges of the California Insurance Market
California’s heavily regulated insurance market is overseen by the Rate Regulation Branch (RRB). This body ensures that insurance rates are not excessive, inadequate, or unfairly discriminatory. While this regulation helps keep insurance premiums affordable, it has also made the California market unprofitable for many insurers.
In 2023, reports indicated that for every dollar collected in home insurance premiums, insurers were paying out $1.17 in claims—excluding administrative costs. As a result, several major insurers including Falls Lake Insurance, Farmer Direct Property, and Nationwide have all left the market and nearly a dozen more have limited coverage or stopped writing new property insurance policies altogether.
California’s FAIR Plan: A Last Resort
California’s FAIR Plan was introduced as an insurer of last resort. This industry-funded plan offers minimal coverage for high-risk properties, including protection against wildfires, lightning strikes, and explosions, with a maximum limit of $3 million per claim.
The FAIR Plan has seen a dramatic increase in policyholders, rising 40% from 2023 to 2024. In areas affected by the LA wildfire, usage of the plan has spiked by 85%. However, this has created new challenges. Current insured property losses for the FAIR Plan are estimated at $8 billion, but the plan’s available funds are $377 million and $5.78 billion in reinsurance, totaling only $6.12 billion. The $1.88 billion shortfall will be absorbed by private insurers based on their market share, further straining the insurance market.
What the California Wildfires Signal for Insurance Consumers
The California wildfires highlight a growing issue: as climate change drives more severe and frequent weather events, insurance markets are facing unprecedented pressures. When the risk of high-impact events increases, the cost of insurance follows. In extreme cases, coverage may become unaffordable or unavailable altogether.
This poses broader societal challenges, as insurance is often a requirement for obtaining a mortgage or driving a car. Without affordable and accessible coverage, ripple effects can extend into housing markets and the wider economy.
Comparing California to Alberta’s Auto Insurance Market
Similar challenges are evident closer to home. In Alberta, the auto insurance market has struggled with rising costs and capped rate increases. Like California, insurers in Alberta have reported unprofitability, with some paying out $1.17 to $1.40 in claims for every dollar collected in premiums.
These challenges have led some insurers, such as Sonnet and Aviva Direct, to exit the Alberta auto insurance market entirely. However, Alberta’s government has announced sweeping reforms to address these issues, with changes expected to take effect over the next two years. Time will tell if California’s government takes similar steps to stabilize its property insurance market.
A Stronger Outlook for Canadian Property Insurance
While the U.S. insurance market faces significant strain, Canada’s property insurance market remains comparatively stable. Canadian insurers are major investors in climate change mitigation, new technology, and forecasting tools, which has helped them adapt to changing risks and maintain a strong appetite for growth.
Conclusion
The LA wildfires underscore the growing risks associated with climate change and the impact of extreme weather events on insurance markets. As climate change accelerates, disasters like this are expected to become more frequent and severe, creating challenges for both insurers and policyholders.
Canadian insurers recognize these risks and are taking proactive steps to address them, from investing in climate resilience to improving risk assessment tools. By staying ahead of these challenges, the Canadian insurance industry aims to provide stability and protection for policyholders in an increasingly unpredictable world.
If you're looking for property insurance from one of Canada's top insurance providers, Armour Insurance can help.
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