How the 2025 California wildfires are reshaping the insurance landscape

Discover why the far-reaching impacts of the latest California fires make it harder for residents and businesses to get fire insurance on their property – and how insurers, retail and wholesale brokers can adapt to meet the challenges of natural catastrophes.

The devastating wildfires that swept through the Los Angeles area in January 2025 have also left an indelible mark on the insurance market. Insurers and brokers across the U.S. and beyond are grappling with the aftermath, reassessing risk models, and adapting coverage strategies. Lloyd’s alone is expecting $2.3B in losses from the California wildfires (Source: The Times). As the sector faces mounting claims and policyholder concerns, working with a specialist like Costero Brokers can provide vital expertise for creating robust and innovative wildfire and catastrophe insurance solutions.

Facing a fire catastrophe of overwhelming scale

From January 7 to January 31, 2025, a series of 17 wildfires raged across Southern California, affecting Los Angeles, Orange, Riverside, San Bernardino, San Diego, and Ventura counties. The fires, driven by drought conditions and hurricane-force Santa Ana winds, scorched an area of over 57,000 acres and resulted in the tragic loss of at least 29 lives, with tens of thousands of residents and local businesses displaced. (Source: The Guardian)

The two most destructive blazes were the Palisades Fire, which engulfed vast areas of Pacific Palisades, and the Eaton Fire in Altadena, both ranking among the most damaging wildfires in California’s history. These infernos collectively destroyed over 18,000 structures, with early loss estimates reaching over USD $250 billion, making it one of the costliest disasters in U.S. history. (Source: Wikipedia)

The evolving insurance landscape for California wildfires

In recent years, California’s wildfire insurance landscape has been fraught with challenges. Following the deadly 2018 Camp Fire, which caused $12.5 billion in insured losses, insurers have steadily withdrawn from the state, citing unsustainable risks. State Farm, Allstate, and other major insurers have either stopped issuing new policies in affected areas or raised rates to account for escalating wildfire threats. (Source: ABC News)

California’s regulatory restrictions on insurance premium increases, combined with rising construction costs and climate change-driven natural catastrophes, have placed immense strain on the market. Many homeowners and businesses are now forced to rely on California’s state-run ‘last-resort’ fire insurance scheme, the FAIR Plan (Fair Access to Insurance Requirements). The FAIR Plan now carries over $450 billion in exposure—far beyond its financial capacity. (Source: Vox)

Immediate and long-term insurance impacts of the 2025 wildfires

The January 2025 wildfires have significantly reshaped the insurance and reinsurance landscape in the following ways:

1. Soaring insurance loss estimates

Initial insured loss estimates ranged between $30 billion and $45 billion, with potential increases as claims continue to be assessed. Major reinsurers are now reassessing their appetite for wildfire-exposed risks in California, which could lead to even higher reinsurance premiums and reduced capacity. (Source: Harvard Business Review)

2. California’s FAIR Plan under strain

With its coverage limits capped at $3 million per structure, the FAIR Plan is proving inadequate for homeowners in high-value areas like Pacific Palisades. As claim volumes increase, the plan may be forced to levy assessments on participating insurers, adding financial stress across the market.

3. Rising rebuild costs and payout challenges

Rebuild costs are surging due to inflation, supply chain disruptions, and skilled labour shortages. Insurers face mounting pressures to balance fair settlements with policy caps that may no longer reflect actual replacement costs. (Source: Claims Journal)

4. The role of utilities and subrogation

Investigations are ongoing into whether the regional electricity supplier’s equipment played a role in sparking the Eaton Fire. If utility liability is established, subrogation claims may allow insurers to recover some payouts, but the legal battles could take years. (Source: New York Times)

5. The Additional Living Expenses (ALE) crisis

Many displaced residents now face years of uncertainty. Given the tight housing market, Additional Living Expenses (ALE) claims are expected to rise dramatically, further exacerbating insurers’ financial exposure. (Source: InsTech Catastrophe Risk TV)

6. Insurers Raising rates and exiting the market

In direct response to wildfire losses, leading California insurer State Farm has applied to state regulators to make a 22% rate increase on California homeowners’ policies, with other insurers likely to follow suit, or exit the region altogether. These rate hikes could push more policyholders toward the FAIR Plan, intensifying the crisis. (Source: The Independent)

Finding an expert partner to navigate wildfire insurance challenges

At Costero Brokers, we understand the complexities of wildfire risk. Our expertise in catastrophe insurance and reinsurance, combined with strong relationships at Lloyd’s of London and across the global reinsurance markets, enables us to develop tailored solutions for insurers and brokers protecting residential and commercial property in catastrophe-prone regions.

We can help you create innovative insurance solutions to meet the challenges, such as:

• Parametric insurance: Providing swift, pre-agreed payouts after natural catastrophes, based on measurable triggers, like wildfire-burned acreage or hurricane wind speeds within an agreed-upon area, ultimately helping insurers and policyholders manage losses more efficiently.

• Insurance structures: Leveraging structured solutions with multiple carriers to help your clients obtain desired limits, and insurers absorb shock losses while maintaining capacity.

• Mitigation-focused products: Encouraging policyholders to adopt fire-resistant materials and preventive measures, reducing claim severity over time. Utilising private fire defence companies, such as Ember is also becoming more and more beneficial when looking to secure property coverage in fire-prone areas.

• Customised risk transfer Strategies: Tailoring coverage to balance affordability with adequate protection, ensuring long-term market sustainability.

Discuss your way forward in the insurance landscape

The 2024 Hawaii wildfires, as well as the 2025 Southern California wildfires, serve as a stark reminder of the growing natural catastrophe risks in California and beyond. As insurers and brokers navigate an evolving and increasingly volatile insurance landscape, partnering with a specialist expert is more critical than ever.

Costero Brokers is committed to helping you develop strategic property insurance and reinsurance solutions that safeguard your business and policyholders. To explore how we can help you navigate the challenges ahead, get in touch with our expert, Cordelia Powell at Costero Brokers.