Wildfire-related losses are driving up premiums, making homeownership even more expensive
California’s housing market has long been defined by high prices, a shortage of supply, and growing wildfire risks. Now, the state’s latest move, a $1 billion bailout of the FAIR Plan – its insurer of last resort – has introduced a new financial burden that could push homeownership even further out of reach.
The bailout, triggered by the staggering $75 billion in insured losses from the recent Palisades and Eaton wildfires, will force private insurers to cover half of the FAIR Plan’s immediate shortfall. But beyond that, insurers can pass additional wildfire-related costs onto policyholders, setting the stage for higher premiums across the state.
That could be bad news for homeowners and buyers alike. With California already facing a 2.5-million-unit housing shortage, higher insurance costs are another factor making homeownership more expensive.
“[Higher insurance rates] are going to make the affordability challenges we already have, owing to chronic undersupply, even more challenging,” said Jordan Levine, chief economist of the California Association of Realtors.
Rising insurance costs
The impact of this bailout likely won’t be spread evenly. Homeowners in wildfire-prone areas will probably feel the biggest squeeze as private insurers continue to pull back from high-risk zones, forcing more people onto the FAIR Plan.
That Plan, established in 1968, was designed as a last-resort option for homeowners unable to secure private insurance. But in the last four years alone, the number of FAIR Plan policies has more than doubled to 450,000 – a sign that private insurers have been retreating from the market at an alarming rate.
Even in lower-risk areas, homeowners may see their insurance costs rise, as all private insurers in California must contribute to the FAIR Plan’s financial stability. A state Assembly committee warned last year that these assessments could end up forcing low-income communities to subsidize insurance costs for high-risk areas, including luxury vacation homes.
Meanwhile, State Farm, California’s largest home insurer, has already filed for a 22% emergency rate increase, which could take effect as soon as May 1, pending approval
“The assessment will likely lead to increased premiums or reduced coverage availability in the private market as insurers adjust to offset their increased liabilities from FAIR Plan contributions,” Fitch Ratings reported last month.
California’s median home price rose 5% last year to $861,000, more than twice the national median. In Los Angeles County, where median prices exceed $900,000, only 11% of households can afford to buy a home.
Mortgage payments in California now average $5,550 per month, including taxes and insurance.
While insurance costs typically make up only a small fraction of mortgage payments, averaging about $65 per month, the new FAIR Plan bailout is expected to add at least $60 per household for the 8 million Californians with fire coverage. That may be just the beginning: long-term premium increases will depend on how insurers continue to adjust for wildfire risks.
Insurers leave California
This escalating insurance crisis is not a new trend. Major insurers have been retreating from California for years.
After the 2018 Woolsey Fire, which burned nearly 100,000 acres in Los Angeles and Ventura counties, companies like Chubb and AIG stopped insuring homes in fire-prone areas. That forced many high-value homeowners to piece together multiple policies to meet the FAIR Plan’s $3 million cap for rebuilding, lost possessions, and temporary housing.
Some homeowners have even opted to sell their single-family homes and move into condos, where insurance is typically bundled into homeowners’ association fees, a workaround that’s becoming increasingly common in wildfire-prone areas.
“It’s a big sticking point for all sellers and buyers,” said Beverly Hills real estate agent Tomer Fridman. “It’s affecting decisions.”
Read more: California insurance crisis set to intensify as LA wildfires blaze
At the same time, consumer watchdog groups argue that insurers are deliberately offloading high-risk homes onto the FAIR Plan while continuing to insure lower-risk properties.
“Homeowners across California should not have to pay a penalty to repair the damage from home insurance companies’ predatory behavior,” said Carmen Balber, executive director of Consumer Watchdog.
Officials try to stabilize market
California leaders know they need to keep private insurers in the market, but the challenge is balancing that with affordable rates for homeowners.
Governor Gavin Newsom and Insurance Commissioner Ricardo Lara have been working on a new strategy to encourage insurers to expand coverage in high-risk areas. Lara recently finalized a Sustainable Insurance Strategy, which allows insurers to raise rates in exchange for broadening coverage in wildfire zones—a controversial move aimed at stabilizing the market.
Read next: California's homeowners' insurance crisis and its impact on mortgages
“Thirty years of stagnant regulations have placed more people at risk,” Lara said Tuesday. “We will move people away from the FAIR Plan, and insurance companies will write more policies under the Sustainable Insurance Strategy I finalized last year.”
But whether that plan will work remains to be seen. Some experts warn that higher rates could drive even more homeowners toward the FAIR Plan, accelerating the insurance crisis instead of solving it.
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
