Rebuilding Coverage, Restoring Confidence: A Path Forward for California Wildfire Risk

“Wildfires are now regarded as a primary peril, given their increasing frequency, severity, and multi-billion-dollar loss potential,” says Lindsey Frase, California resident and Managing Director at Howden Re. “This means insurers and reinsurers must re-evaluate underwriting models, capital allocation, and pricing assumptions, putting wildfire risk on the same footing as hurricanes.”

KEY POINTS:
Wildfire now a primary peril
Regulation and reform essential
Capacity needed to close gap

Historic January Fires and Growing Protection Gap

In the wake of the devastating California wildfires of January 2025, Howden Re’s report “2025 Los Angeles Wildfires: A Path Forward” highlighted the state’s growing insurance protection gap. 

Since 2015, the state has seen 15 of its most destructive wildfires, culminating in what may now be the costliest wildfire event in U.S. history. Insurers had already paid out roughly $20 billion in insured wildfire losses prior to this latest event, and many major carriers had scaled back or stopped writing new business altogether. “Homeowners were scrambling to find coverage, and the ‘loss gap,’ the difference between total economic losses and what is actually insured, was growing wider,” Frase explains. 

 “If we align regulation, capital, and innovation, we can rebuild a market that doesn’t just react to wildfires but actively reduces risk.” 

Insured losses from the January 2025 Los Angeles wildfires were projected at $20–45 billion, yet a significant share of economic losses remained uninsured, leaving both homeowners and the state financially exposed. Over the preceding decade, insurers had incurred roughly $10 billion in underwriting losses, and restrictions on risk-based pricing had forced major carriers to withdraw from the market. This drove a growing reliance on the California FAIR Plan, whose resources were already under considerable strain.

Howden Re’s Call for Reform

Howden Re’s January 2025 report called for urgent regulatory reform, including approval for catastrophe modelling and recognition of reinsurance costs in rate-setting. It also recommended a $6 billion investment in risk mitigation, covering forest management, stricter building codes, and infrastructure upgrades, with the potential to cut economic losses by half. “Public-private partnerships, premium incentives for resilient construction, and the adoption of innovative solutions such as parametric insurance are all part of the equation if we want to restore capacity and build a sustainable long-term market,” says Frase.

Regulatory Shifts and Market Developments

Ten months on, California’s regulatory landscape is shifting. Bulletin 2025-1 imposed a one-year moratorium on policy cancellations in fire-affected ZIP codes, requiring insurers to reinstate coverage. Alongside this, a wave of state and federal measures is targeting wildfire mitigation, safety upgrades, insurance affordability, and consumer protections, while encouraging closer public-private collaboration. Although some proposals, like the INSURE Act, have drawn industry criticism, this evolving environment offers an opportunity to shape reforms that attract sustainable capacity and restore market stability. 

In the last year, substantial rate increases have finally been approved in California. However, many insurance companies still view these rates as not fully adequate, leaving them hesitant to return to writing new business at scale. Despite growing interest from capital eager to enter what is viewed as a highly opportunistic and dislocated market, actual new entrants remain scarce given barriers to entry such as the state’s challenging regulatory environment.

California has also finalised rules allowing insurers to use catastrophe models in rate filings for wildfire risk, subject to a “pre-application required information determination” (PRID), provided insurers commit to expanding coverage in high-risk ZIP codes. The new “sustainability” regulations adopted by the California Department of Insurance are a step forward, but at a steep cost: in order to use modelling in their filings, carriers must also agree to operate in the riskiest areas of the state. At this stage, some filings have been submitted under the new framework, but none have been approved.

This year also marked the first FAIR Plan assessment in more than three decades, underscoring the strain on California’s backstop mechanism. Assembly Bill 226, now awaiting the Governor’s signature, would allow the Plan to issue bonds to strengthen its claims-paying capacity. At the same time, Commissioner Lara has taken legal action against the FAIR Plan over smoke damage claims, highlighting the growing regulatory scrutiny on the system’s ability to respond to wildfire losses. 

Restoring Coverage Where It’s Needed Most

“At the centre of these efforts, we seek to narrow the protection gap by bringing new capacity into California through both traditional reinsurance channels and innovative structures,” Frase says. 

While the E&S market is indeed growing materially in California, particularly for higher-value homes, it remains only a small fraction of the overall insurance market. Meanwhile, the cost of homeownership continues to rise, driven not just by higher insurance premiums but also by elevated interest rates and inflationary pressures. These combined forces are contributing to one of the more muted real estate markets California has experienced in recent years.

“By leveraging London’s specialty market, MGAs, and technology-driven pricing tools, we are focused on getting coverage where it is most needed, particularly in the admitted market where most homeowners buy insurance. The goal is not just short-term relief but a more sustainable market that combines public policy reform, private capital, and alternative risk transfer solutions like ILS.” 

Wade Gulbransen, Divisional CEO, North America commented: “The January wildfires in Southern California caused widespread devastation, deeply affecting local communities. From an insurance standpoint, these events reshaped perceptions of wildfire risk in urban areas, prompting a reassessment of pricing and coverage strategies. This shift will continue to influence the primary insurance market as providers strive to balance cost with return. Meanwhile, the reinsurance sector remains well-capitalized to absorb such events, underscoring the industry's ongoing efforts to accurately price and manage natural disaster risk.”

Lessons from Elsewhere

California’s situation mirrors challenges seen elsewhere in the United States, most notably in Florida, where repeated hurricane losses have driven insurers out of the market and swelled the state-backed Citizens Property Insurance Corporation. Louisiana and Texas have faced similar strains after major hurricane and flood years, relying on state windstorm or last-resort insurers to maintain coverage. By contrast, states like Oregon, Washington, Colorado, and Utah have so far avoided a full-blown crisis, partly due to lower population density and more proactive wildfire mitigation measures.

What does this mean going forward

“Looking ahead, the focus must be on restoring both confidence and capacity in California’s insurance market,” said Gulbransen. “That means creating the conditions for sustainable capital to return and remain committed, so the market can move from short-term fixes to long-term stability.” 

“At stake are not just balance sheets, but communities,” Frase says. “The real test is whether we can turn this crisis into an opportunity. If we align regulation, capital, and innovation, we can rebuild a market that doesn’t just react to wildfires but actively reduces risk, setting a global benchmark for climate resilience.” 

Lindsey Frase is managing director at Howden Re. She can be contacted at:  lindsey.frase@howdenre.com

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