The fire in LA happened after nearly nine months without a rainstorm.
This happens because of La Niña, a climate phenomenon characterized by cooler-than-average sea surface temperatures in the central and eastern tropical Pacific Ocean. These cooler waters intensify atmospheric circulation patterns, pushing the Pacific jet stream—an upper-level wind current that guides storms—northward. As a result, Southern California is left drier than usual, while regions like the Pacific Northwest experience heavier rainfall.
The cause of the fires is unknown, but embers and building materials played a major role. Windblown embers can travel miles ahead of the fire, landing on rooftops, in vents, or near flammable materials, igniting homes even in areas seemingly safe from the fire front. This is particularly problematic when majority of construction involves wood.
Some homes in LA survived the fires — those built or retrofitted with materials like stucco siding (which is made from cement, sand, limestone), fire-resistant "Class A" roofs, and double-paned tempered glass windows were far more likely to withstand the flames. Also, newer homes constructed under California’s Chapter 7A building codes, which require fire-resistant materials and designs, fared significantly better than older homes.
Selling Insurance in California Means Sharing Risk Twice. The California FAIR Plan acts as a safety net for homeowners in wildfire-prone areas who cannot secure coverage from private insurers. While the FAIR Plan provides essential insurance for high-risk properties, it operates with minimal reserves to keep premiums affordable.
When claims from disasters like the 2024 wildfires exceed its financial resources—likely surpassing $2.5 billion—private insurers are required to cover the shortfall through "assessments," contributing proportionally to their market share.
- For insurers, selling insurance in California means not only managing idiosyncratic risks for individual policyholders but also underwriting aggregate catastrophic risks by funding the FAIR Plan’s shortfalls after disasters.
Similar systems exist in other disaster-prone states. Florida’s "Citizens Property Insurance Corporation" and Texas’s "Windstorm Insurance Association" operate on comparable principles, requiring insurers and policyholders to absorb costs from large-scale losses.
Recent rule changes shift costs to homeowners. In 2023, California Insurance Commissioner Lara introduced a significant rule change allowing private insurers to pass some FAIR Plan assessment costs onto homeowners. Under the new rules, insurers can charge policyholders for 50% of the first $1 billion in FAIR Plan assessments and 100% of any additional costs, with approval from the commissioner.
Thus, buying insurance in California effectively means:
- Sharing Idiosyncratic Risk: Homeowners pool their individual risk, protecting themselves against events like a fire destroying their property. This is the traditional role of insurance.
- Writing Aggregate Risk Insurance: Homeowners indirectly shoulder the financial burden of large-scale disasters through increased premiums. When the FAIR Plan requires assessments to cover statewide losses, those costs are redistributed across all policyholders, even if their homes were not directly affected by the disaster.
New bill goes after oil companies by allowing (i) wildfire victims and (ii) insurers to sue oil & gas companies [link]. Here’s an excerpt from Senate Bill 222, which is the bill in question.
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This bill would authorize a person to bring a civil action, if specified criteria are met, including damages of $10,000 or more, against a party responsible for a climate disaster or extreme weather or other events attributable to climate change due to the responsible party’s misleading and deceptive practices or the provision of misinformation or disinformation about the connection between its fossil fuel products and climate change and extreme weather or other events attributable to climate change.
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On the one hand, this could shift financial responsibility to those contributing to climate change, potentially stabilizing insurance markets and providing relief to affected individuals. On the other hand, it may lead to protracted legal battles, with costs ultimately passed to consumers through higher energy prices. In addition, establishing direct causation between specific companies and individual wildfires could prove challenging.
Wildfire risk is priced into the housing market. In earlier decades, being near a wildfire didn’t significantly affect home values — but since the late 2010s, it does [source].
Source: https://www.frbsf.org/research-and-insights/publications/economic-letter/2024/08/wildfires-and-real-estate-values-in-california
In fact, from 2018–2021, homes farther from recent fire zones commanded about a 2% higher value (on average) than similar homes closer to burn areas. Interestingly, insurance availability did little to shore up home values in fire-prone areas.
Insurance costs impact borrower eligibility. Wildfires have indirectly made it tougher to qualify for a mortgage by driving insurance costs higher. Higher premiums raise a household’s monthly expenses, which lenders factor into debt-to-income (DTI) ratios. For example, some buyers in 2024 saw their DTI shoot up once an expensive fire insurance policy was added, forcing them to take a smaller loan or even abandon the purchase. [source]
Lenders are now keenly aware that insurance affordability is part of loan underwriting – a pricey policy in a high-risk fire zone can make a marginal borrower ineligible for a mortgage. As a result, wildfire risk is translating into stricter lending standards or lower loan amounts in the most hazard-exposed areas.
Insurance payouts after wildfires can be used for either mortgage prepayments or rebuilding. This paper argues that about 40% of affected homeowners receive settlements lower than their coverage limits, leaving them with deficits of $200,000 to $300,000. Instead of using the funds to rebuild, many homeowners use them to pay off their mortgage. For mortgage lenders, this is an issue since they expect insurance to reduce default risk rather than wipe out their loan book through early repayment. Investors in MBS also get a hit, since they lose out on expected interest income when borrowers prepay. Local communities may also experience slower rebuilding as some residents choose not to reinvest in the area.
On the other hand, this paper shows that house prices and square footage increase in wildfire-affected areas five years post-fire and the payouts lead homeowners to rebuild, often with larger homes. In the end, insurance payouts may act as a sorting mechanism: allowing some homeowners to exit while incentivizing others to invest more heavily in the community.
Government responded with an “all hands on deck” approach financially. President Biden approved a Major Disaster Declaration for California, unlocking FEMA programs for individuals and public infrastructure. For homeowners and renters, FEMA can provide grants for temporary housing (e.g. paying for a motel if you lost your home) and emergency home repairs (to make a damaged home safe and livable).
Alongside FEMA, the U.S. Small Business Administration (SBA) offered low-interest disaster loans to both homeowners and businesses. These loans (which can extend to hundreds of thousands of dollars at low rates) help cover losses not fully paid by insurance – for example, a homeowner underinsured by $100k could borrow that amount to rebuild, or a small business that lost inventory could get a loan to restock.
In addition, it’s announced that for the first 180 days of the disaster, FEMA will cover 100% of the costs for debris removal and other emergency measures [source]. Typically, FEMA requires a 25% state/local match for such costs, but here the feds waived that.