California Wildfires 2025: Impact on Property and Casualty Insurance Industry

In commemorating the one-year mark since January 2025's devastating wildfires in Los Angeles, Morningstar DBS Research highlighted it as a severe test for California’s property and casualty insurance industry. Although the sector has shown resilience with regulatory changes and approved rate increases, it remains vulnerable to future catastrophic events. The increasing dependency on the California FAIR Plan exacerbates this exposure, as noted in Morningstar’s findings.

The state’s insurance industry has shouldered over $22.4 billion in claims related to the fires, according to the California Department of Insurance. The report suggests that the U.S. property and casualty insurance market stabilized after the wildfire losses, aided by premium hikes and a relatively quiet catastrophe season for the rest of the year.

Underwriting Challenges and Regulatory Reactions

State Farm General Insurance Company, which underwrites California property risks for State Farm, remains in a delicate position despite securing a 17% rate increase. This adjustment was crucial after the severe financial impacts of the wildfires prompted a temporary halt in issuing new policies in the area.

The destruction of 11,000 homes during the fires spotlighted continued challenges in the local homeowners insurance market. While stakeholders call for political intervention concerning the California Insurance Commissioner's decisions, industry experts praise regulatory reforms that enable quicker premium adjustments and improved use of catastrophe modeling. Nonetheless, the California FAIR Plan's reliance presents a substantial risk.

Regulatory Compliance and Sector Stability

Post-wildfires, several insurers chose to decrease or cease their participation in fire-prone regions of California’s homeowner insurance market. In response, regulatory compliance adjustments were made to encourage swift rate approvals and implement advanced risk management models, helping incentivize insurers to re-enter the market.

Reflecting on the past year, Patrick Douville, Morningstar’s Vice President of Global Insurance and Pension Ratings, noted that the U.S. property and casualty sector remains generally stable following the 2025 L.A. region wildfires, with no major insurance carriers in California facing collapse. He highlighted that State Farm General Insurance Company reported $7.6 billion in losses from catastrophic events, reflecting a vulnerable yet stable financial state. Additionally, the California FAIR Plan required a $1 billion contribution from the insurance industry to cover claims, underscoring the program’s financial burden and the significant risk as its total exposure has grown to $696 billion.