The impact of the wildfires sweeping through the Los Angeles area on California homeowners insurers is expected to be manageable despite the projection of heavy economic losses.

Three fires that broke out Jan. 7, the Palisades fire, the Eaton fire, and the Hurst fire, had scorched almost 28,000 acres as of 7:30 a.m. ET Jan. 9 and had caused between $52 billion and $57 billion in preliminary damage and economic loss, according to AccuWeather.

Even with the expected heavy losses, carriers should be able to handle insured losses from the event considering the recent rate hikes approved in the state, said Janet Ruiz of the Insurance Information Institute.

"These losses are going to be manageable," Ruiz said in an interview. "The companies are getting the necessary increases [and] it's all about collecting adequate premium to be able to pay off the losses."

Insured losses

Piper Sandler analyst Paul Newsome said in a research note that while it is still too early to calculate total insured losses, they should be "rather manageable given the profitability and capital levels for most insurers."

Losses from the wildfires have the potential to rise significantly as CoreLogic said in a news release that there are over 456,000 homes with nearly $300 billion in reconstruction costs within the Los Angeles and Riverside metropolitan areas.

Jasper Cooper, vice president and senior credit officer for Moody's Ratings, said in an email that insured losses are expected to run in the "billions of dollars given the high value of homes and businesses in the impacted areas," adding that commercial property losses could be significant.

The Palisades fire has devastated the suburb of Pacific Palisades, home to many celebrities, and is already the most destructive blaze in Los Angeles' history with 2,000 structures destroyed. The bulk of the 130,000 residents under evacuation orders from the fires are from Pacific Palisades.

Main players

State Farm Mutual Automobile Insurance Co. and Farmers Insurance Group of Cos. were the top two California insurers in 2023 in terms of market share, with respective shares of 20% and 15%. CSAA Insurance Exchange was third with 7%, while Liberty Mutual Holding Co. Inc., Mercury General Corp., The Allstate Corp. and Auto Club Exchange Group each had a 6% market share.

State Farm has maintained that lead despite initiating nonrenewals of homeowners policies in high-risk areas of the state, including Pacific Palisades.

The Bloomington, Ill.-based insurer in a March 20 rate filing indicated that it planned to nonrenew 1,626, or 69.4%, of the 2,342 policies held within the suburb's ZIP Code. The nonrenewals, which totaled 30,000 homeowners, rental dwelling and residential communities statewide, began on a rolling basis on July 3.

State Farm spokesman Steve Baldwin did not comment on the non-renewals in an emailed statement, saying that the insurer's "number-one priority right now is the safety of our customers, agents and employees impacted by the fires and assisting our customers in the midst of this tragedy."

Insurance Commissioner Ricardo Lara said in a news release that once the fire's perimeter is determined, he will declare that areas near the fires will be protected for one year from homeowners’ insurance non-renewal or cancellation due to wildfire risk.

The wildfire outbreak comes on the heels of the Golden State enacting a series of reforms designed to shore up its struggling insurance market, including the allowance of forward-looking catastrophe models and changes to the rate-approval process.