As actuaries, it’s all too easy to lose sight of the bigger picture. Too often pricing analyses or catastrophe risk projections are just numbers in a spreadsheet. It takes intentional effort to keep in mind the real-world implications of our decisions. Events like the Southern California wildfires highlight the critical role of property insurance in our society. On the other end of that spreadsheet is a family who has lost everything. People woke up one morning to witness an apocalyptic inferno raging around them. Those people depend on the insurance industry to be there during their time of need. Each of us should keep in mind the human element of this catastrophe as we move into the future.

In January 2025, a series of wildfires raged across Southern California. Fueled by drought conditions and hurricane-force Santa Ana winds, these wildfires have killed at least 29 people, damaged or destroyed at least 16,000 structures and forced the evacuation of more than 200,000 people. Two of these fires, the Palisades Fire and the Eaton Fire, are thought to be the third and second most destructive fires, respectively, in the history of the state. But how did we get here, and what can be done moving forward?

The property insurance marketplace in California has faced significant pressure in recent years as rising loss ratios and more frequent catastrophes plague insurers’ balance sheets. Furthermore, lengthy approval timelines at the California Department of Insurance (CDI) make it difficult for insurance companies to take appropriate corrective action via rate filings. As a result, seven out of the top 12 insurers by market share have made efforts to reduce their exposure in California over the past four years, in part due to increased wildfire risk. State Farm General, the largest insurer in the state, announced in 2023 that it would stop writing new business in California due to increased costs. In the summer of 2024, it began non-renewing 72,000 policies statewide, with 1,600 located in Pacific Palisades. This reduction in coverage by market leaders has corresponded with a steep increase in exposure for the FAIR plan, the state-sponsored insurer of last resort. From 2020 to 2024, residential exposure has nearly tripled from $153 billion to $458 billion.

In response to these pressures, the CDI issued a new regulation on January 15, 2025, that for the first time allows companies to use catastrophe models in pricing. It also permits them to include the net cost of reinsurance in the calculation of insurance premiums. However, it also requires the companies to offer coverage in certain high-risk ZIP codes. Permitting the use of catastrophe models will allow insurers to be more forward-looking in their rates, and allowing for the cost of reinsurance to be reflected in premiums should result in more price stability. However, the CDI has also announced a mandatory moratorium on cancellations and non-renewals in regions affected by the fires. This includes non-renewals issued by insurers up to 90 days prior to the start of the fires. The net impact of these rule changes remains to be seen. However, on February 3, 2025, State Farm General filed for an emergency rate increase of 22% on homeowners policies.

Such a rate increase would only be justified if it passes scrutiny under California Proposition 103. This ballot initiative, passed in 1988, requires that the Department of Insurance review and approve rates submitted by insurers before they take effect. It also made the California Insurance Commissioner an elected position, rather than a governor-appointed position. Under the proposition, rate hearings can be held to review a proposed increase, which are open to the public. This regulatory structure makes rate increases particularly controversial. An LA-based consumer watchdog group disputed that the rate increase was necessary, pointing to the financial strength of State Farm General’s parent company State Farm Mutual. They note State Farm Mutual’s $134 billion policyholder surplus and point to State Farm General’s $1.4 billion of underwriting profit from 2020 to 2023. In a statement on the proposal, State Farm noted the deterioration of its capital base after paying out over $1 billion in recent wildfire claims. It also pointed out that over a longer time horizon of nine years, State Farm General has actually accumulated over $5 billion in cumulative underwriting losses.

While rate adjustments help insurers manage financial risk, they do little to address the underlying factors driving wildfire loss. To create a more sustainable insurance market, efforts must also focus on reducing the actual exposure to fire damage. As such, risk reduction and mitigation efforts are important ways for California to manage its exposure to wildfire risk going forward. These efforts require coordination across all levels of government, working hand in hand with private entities, including insurers.

At the local level, urban planning and community-level engagement are critical for getting serious risk reduction efforts off the ground. Mandating changes to zoning or building codes can significantly reduce the potential damage to a structure. Home hardening efforts at the community and individual level can significantly reduce the potential damage to an individual structure as well as the spread of flames to other structures. This involves taking proactive steps to create a more fire-resilient space in and around the home. Examples include:

• Removing small combustibles within five feet of the residence.
• Replacing shingle roofs with Class A fire-rated roofs.
• Replacing combustible fencing with noncombustible options (particularly the first five feet).
• Installing aluminum metal mesh window screens to increase ember resistance and reduce radiant heat exposure.

At the state level, laws have been passed concerning vegetation management and assisting communities in home hardening, but more can be done to streamline full adoption. Coming up with innovative programs such as grants for home hardening and community preparedness can do a great deal to mitigate the impact of future fires. Then, in partnership with insurers, the state could offer expedited approval of rates that provide discounts for these structural enhancements, which will further entice homeowners to make a change.

Collaboration between the private and public sectors will be paramount to making the most of mitigation efforts. While the cause of these recent fires is still being determined, the Camp Fire in 2018 was caused by faulty power lines. Modernization of power lines and other components of the electrical grid has a part to play in reducing ignition risk. Ensuring that firefighters are trained in early detection and deployment can improve response time and reduce the chance of spread. Even technology companies have a role to play through the development of aerial imagery and AI-assisted early detection. Looking to the future, it’s clear that wildfire risk, exacerbated by climate change, threatens the long-term future of the California marketplace. Successful strategies to mitigate and price for wildfire risk will be the key in determining whether insurers can regain profitability in the state. As such, actuaries have an important role to play in influencing the direction of this marketplace. The changing landscape underscores the need for cross-disciplinary knowledge to ensure that we make the best possible decisions for our policyholders.