The Palisades Fire and Implications on the California Insurance Market

A Brief History

It’s important to set the context for the top news story of 2025, the Palisades Fire in Southern California. Many of the resulting issues that have been thrust into the spotlight have existed for years but have largely been ignored. Government negligence and ineptitude, policies being non-renewed and dropped, and more are nothing new.

We’ve been sounding the alarm for years on the perilous environment that is California property insurance. Our first public written piece was in August of 2018 as the Carr and Ranch fires burned hundreds of thousands of acres in Northern California. AAA and other companies began dropping “high-risk” zip codes in 2017. American Reliable Insurance and others decided to leave California completely in 2018. Companies like Geico, who doesn’t write home insurance in California, has sat out this disaster and looks brilliant in hindsight.

It’s now 2025, and the nation is horrified at the devastating result of the state’s incompetence. What’s to be expected in the fallout of the Palisades Fire? There are some knowns, but we are still left with many questions.

Damage Estimate from the Palisades Fire

The estimates of total damages have been all over the place so far. While hard to predict at the moment, we’d expect the total figure to exceed Hurricane Harvey’s total of $125 billion.

Unfortunately, with freshly burned land, heavy rainfall would add insult to injury as much of the hillsides would be washed out. This second-order effect hasn’t been discussed yet, but is likely to occur in the near future and cause a second wave of losses.

The California Fair Plan (CFP) Problem

At the end of September 2024, the Fair Plan had $5.9 billion dollars of exposure in Pacific Palisades. The most recent financial disclosures for the CFP show $200 million in cash and $2.5 billion in reinsurance. There is a significant shortfall of funds, and the implications will be far-reaching.

A disclaimer: The federal government could step in and provide some near-term relief to all involved parties.

Back to the funding deficit. Private insurance companies in the state are the first on the hook to help with it. They will be assessed a fee proportional to their overall exposure up to a total of $2 billion. State Farm will face the heaviest assessment and has been trying to reduce their exposure to this exact risk since May of 2023.  With the private insurers helping out, that still only gets to $4.7 billion in available funds for what is likely in excess of $6 billion or more in losses. Where the remainder of the funding shortfall comes from is unknown, and this situation is unprecedented.

Now that the entirety of the Fair Plan’s resources have been used up in the Palisades Fire, where will the money come from for future claims? The implications are grim and require immediate action to address.

Future Impact and What’s Needed

The Department of Insurance must prioritize addressing the insurance companies’ requests to use fire modeling and future projections in calculating their rates. The DOI has hemmed and hawed for years, and this should serve as a line in the sand. California can’t stomach losing more insurers. Consumer Watchdog and others of the sort must be cast aside, and severe pressure must be applied to Sacramento.

Until significant legislative change is made, expect insurance companies to expedite dropping larger amounts of policies in faster than we’ve seen to date.  This will force even more policies to the Fair Plan and further exacerbate its fragility. The Fair Plan was always intended to be a “last resort,” but it’s become the first resort for a growing chunk of the state’s property risk. This trend must be curbed as soon as possible.

Again, the concerns being faced are not new and were known. In 2023, many lawmakers expressed concern over the Fair Plans risks, but nobody put forth a bill or formal course of action to address or do anything about it. The result is that some of the financial burden will almost certainly be borne to some extent by all Californians. Households throughout the state of California face a very real risk of footing some of the catastrophe’s expense via Bill 1754. It’s important that we collectively hold the government accountable for their failures.